Business Economics: Seminar 6a
Business Economics
Seminar 6a: Market Structure: Monopolistic Competition & Oligopoly
Note: You should complete this seminar sheet before the seminar and bring along your
answers to discuss in the session.
Seminar Questions:
1. From the list of points below select those which distinguish a monopolistically competitive
industry from a perfectly competitive industry.
(a) There are no barriers to the entry of new firms into the market. ..................................... Yes/No
(b) Firms in the industry produce differentiated products. ................................................... Yes/No
(c) The industry is characterised by a mass of sellers, each with a small market share. ...... Yes/No
(d) A downward sloping demand curve means the firm has some control over the
product's price. ................................................................................................................... Yes/No
(e) In the long run only normal profits will be earned. .......................................................... Yes/No
2.
(f)
Advertising plays a key role in bringing the product to the attention of the consumer. . Yes/No
The
following
diagram
illustrates
a
firm
under
monopolistic
competition.
(a) Label the curves.
Curve I ......................................................
Curve II ............................................................
Curve III ....................................................
Curve IV ..........................................................
Business Economics: Seminar 6a
(b) Does the diagram represent the short-run or long-run position?.................................................
(c) What are the profit maximising output and price? ......................................................................
(d) On the diagram, shade in the amount of profit made at the maximum-profit output.
3. Which of the following are characteristics of oligopoly?
(a) There are just a few firms that dominate the industry. ..................................................Yes / No
(b) There are few if any barriers to the entry of new firms into the industry. ....................Yes / No
(d) The firms face downward sloping demand curves. .......................................................Yes / No
(e) There is little point in advertising because there are so few firms. ...............................Yes / No
(f)
Oligopolists tend to take into account the actions and reactions of other firms. ..........Yes / No
4. What is meant by non-price competition? What are the various potential sources of nonprice competition? Why is non-price competition important within oligopolistic markets?
5. The following diagrams illustrate an industry under oligopoly consisting of 10 equal-sized
firms and a particular firm in that industry. Each of the firms produces an identical product.
Business Economics: Seminar 6a
(a) Assuming that the firms form a cartel, what price will the cartel choose if it wishes
to maximise overall profits for the cartel? ...............................................................................
(b) What total output must the cartel produce in order to maintain this price? .............................
(c) To what output will an individual firm be restricted if this price is to be maintained
(assume all firms are permitted to produce the same level of output)? ...................................
(d) If an individual firm decided to undercut the cartel price, what price and output
would maximise its profit (assuming that the other members did not retaliate)? ....................
6. A firm operating under oligopoly is currently selling 4 units per day at a price of £40. By
conducting extensive market research its chief economist estimates that, if it raises its price,
its rivals will not follow suit and that, as a result, it will face an average revenue curve given
by:
P = 50 – 5Q/2 (where P = AR)
On the other hand, if it reduces its price, its rivals will be forced to reduce theirs too. Under
these circumstances its average revenue curve will be given by
P = 60 – 5Q (where P = AR)
(a) What will be the equation for the firm's demand curve if the firm raises its price?
...............................................................................................................................................
(b) What will be the equation for the firm's demand curve if the firm reduces its price?
...............................................................................................................................................
(c) How much will be demanded at the following prices?
£50 .................................................................
£45 ...............................................................
£40 .................................................................
£30 ...............................................................
£20 ................................................................
£10 ..............................................................
60
Revenue and costs (£)
50
40
30
20
10
0
0
1
2
3
4
Quantity
5
6
7
8
Business Economics: Seminar 6a
(d) Plot the two demand curves on the above diagram, marking in bold the portion of
each that is relevant to the firm.
(e) Plot two marginal revenue curves corresponding to each of the demand curves.
(Remember that the MR curve lies midway between the AR curve and the vertical
axis.) Mark in bold the portion of each MR curve that is relevant to the firm.
(f)
Over what range of values can marginal cost vary without affecting the profitmaximising price of £40? .............................................................................................................
7. The table below shows the annual profits of two paint manufacturers. At present they both
charge £10.00 per litre for gloss paint. Their annual profits are shown in Box A. The other
boxes show the effects on their profits if one or the other, or both firms reducing their price
to £8.00.
Durashine’s price
£10.00
£8.00
£6 million each
C
£2 million for Supasheen
£8 million for Durashine
A
£10.00
Supasheen’s
price
B
£9 million for Supasheen
£8.00
£3 million for Durashine
D
£4 million each
(a) What is the Nash Equilibrium in this game?
(b) Why is this known as a dominant strategy game?
..........................................................................................................................................
(c) Assume now that the ‘game’ between Supasheen and Durashine has been played for
some time with the result that they both learn a ‘lesson’ from it. What are they likely
to do?
..........................................................................................................................................
Business Economics: Seminar 6a
(Optional Question)
8. The Pirate Game: There are 5 rational pirates, A, B, C, D and E. They find 10 gold coins.
They must decide how to distribute them. The pirates have a strict order of seniority: A is
superior to B, who is superior to C, who is superior to D, who is superior to E. The pirate
world's rules of distribution are thus: that the most senior pirate should propose a distribution
of coins. The pirates, including the proposer, then vote on whether to accept this distribution.
If the proposed allocation is approved by a majority or a tie vote, it happens. If not, the
proposer is thrown overboard from the pirate ship and dies, and the next most senior pirate
makes a new proposal to begin the system again. Pirates base their decisions on three
factors. First of all, each pirate wants to survive. Second, given survival, each pirate wants to
maximize the number of gold coins he receives. Third, each pirate would prefer to throw
another overboard, if all other results would otherwise be equal. The pirates do not trust each
other, and will neither make nor honor any promises between pirates apart from the main
proposal. Find the Nash equilibrium in this situation.