principles of microeconomics: econ102. monopolistic competition: a market structure in which...
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Principles of Microeconomics:
Econ102
Monopolistic Competition: A market structure in which barriers to entry are low, and many firms compete by selling similar, but not identical, products.
Oligopoly: A market structure in which a small number of firms compete.
Demand and Marginal Revenue at a Starbucks
CAFFÈ LATTES SOLD PER WEEK
(Q)PRICE
(P)
TOTAL REVENUE
(TR = P x Q)
AVERAGEREVENUE
(AR – TR/Q)
MARGINAL REVENUE
(MR = ΔTR/ΔQ)
0
1
2
3
4
5
6
7
8
9
10
$6.00
5.50
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
$0.00
5.50
10.00
13.50
16.00
17.50
18.00
17.50
16.00
13.50
10.00
-
$5.50
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
-
$5.50
4.50
3.50
2.50
1.50
0.50
-0.50
-1.50
-2.50
-3.50
A firm’s profits will be eliminated in the long run only if the firm stands still and fails to find new ways of differentiating its
product or fails to find new ways of lowering the cost of producing its product.
Allocative Efficiency: The situation where every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it. For allocative efficiency to hold, firms must charge a price equal to marginal cost.
Productive Efficiency:
The situation where every good or service is produced at the lowest possible cost. For productive efficiency to hold, firms must produce at the minimum point of average total cost.
The profit-maximizing level of output for a monopolistically competitive firm comes at a level of output where MR=MC, and
where price is greater than marginal cost and the firm is not at the minimum point of its average total cost curve.
Excess Capacity under Monopolistic Competition
Consumers benefit from being able to purchase a product that is differentiated and more closely suited to their tastes.
How Consumers Benefit from Monopolistic Competition
Oligopoly:
A market structure dominated by a few large producers with considerable control over prices.
Homogeneous (standardized) or differentiated
Strategic behavior Self-interested behavior that takes into
account the reactions of others.
Mutual Interdependence A situation in which each firm’s profit
depends not just on its own price and sales strategies but also on those of other firms in its highly concentrated industry.
RETAIL TRADE MANUFACTURING
INDUSTRY FOUR-FIRM CONCENTRATION RATIO
INDUSTRY FOUR-FIRM CONCENTRATION RATIO
Warehouse Clubs and Superstores
90% Cigarettes 99%
Discount Department Stores 88% Beer 90%
Hobby, Toy, and Game Stores
70% Aircraft 85%
Radio, Television, and Other Electronic Stores
62% Breakfast Cereal 83%
Athletic Footwear Stores 62% Automobiles 80%
College Bookstores 58% Dog and Cat Food 58%
Pharmacies and Drugstores 47% Computers 45%
Economies of Scale Help Determine the Extent of
Competition in an Industry
In addition to economies of scale, other barriers to entry include:
Ownership of a key input
Government–Imposed Barriers
Patent: The exclusive right to a product for a period of 20 years from the date the product was invented.
Kinked-demand curve
Collusive pricing
Price leadership
Reasons for 3 modelsDiversity of oligopolies
Tight & loose oligopolyDifferentiated & standardizedCollusive & non-collusive (independently)Strong and not so-strong barriers
Complications of interdependence Inability to estimate demand & MR data because of
uncertainty of rivals’ reactions.
11-15
P0
MR2
D2
D1
MR1
e
f
g
Rivals Ignore
Price Increase
Rivals Match
Price Decrease
Q0
MR2
D2
D1
MR1Q0
MC1
MC2
P0e
f
g
Pri
ce
Pri
ce
Quantity Quantity
0 0
11-16
CriticismsExplains inflexibility, not pricePrices are not that rigid when macroeconomy
is unstable.Price wars
During downturns, some firms cut prices setting off price wars in attempt to maintain market share.
D
MR=MC
ATC
MC
MR
P0
A0
Q0
Economic
Profit
11-17
Obstacles to CollusionDemand & cost
differencesNumber of firms CheatingRecessionNew entrantsLegal obstacles
Price LeadershipDominant firm initiates price changesOther firms follow the leader
Use limit pricing to block entry of new firms
Possible price war
11-18
Game theory: The study of how people make decisions in situations where attaining their goals depends on their interactions with others; in economics, the study of the decisions of firms in industries where the profits of each firm depend on its interactions with other firms.
Payoff matrix: A table that shows the payoffs that each firm earns from every combination of strategies by the firms.
Collusion: An agreement among firms to charge the same price, or to otherwise not compete.
A Duopoly Game
Dominant Strategy: A strategy that is the best for a firm, no matter what strategies other firms use.
Nash equilibrium: A situation where each firm chooses the best strategy, given the strategies chosen by other firms.
Cooperative Equilibrium:
An equilibrium in a game in which players cooperate to increase their mutual payoff.
Non-cooperative Equilibrium: An equilibrium in a game in which players do not cooperate but pursue their own self-interest.
Prisoners’ Dilemma: A game where pursuing dominant strategies results in noncooperation that leaves everyone worse off.
If Coca-Cola wants to maximize profits, will it advertise? Explain.
If Pepsi wants to maximize profits, will it advertise? Explain.
Is there a Nash Equilibrium to this advertising game? If so, what is it?
Cartel: A group of firms that colludes by agreeing to restrict output to increase prices and profits.
Does a cartel guarantee that collusion would be successful?
The equilibrium of this game will occur with Saudi Arabia producing a low output and
Nigeria producing a high output.
Does a cartel guarantee that collusion would be successful?