Chapter 14 Imperfect Competition © 2006 Thomson Learning/South-Western Imperfect Competition Pricing in these markets falls between perfect competition and monopoly. Three topics considered: 2 Pricing of homogeneous goods in markets with few firms. Product differentiation in these markets. How entry and exit affect long-run outcomes in imperfectly competitive markets. 表 14.1 台灣的領導性寡佔產業 產業經濟學—陳正倉、林惠玲、陳忠榮、莊春發著 3 表 14.2 台灣的油品供應市場 單位:KL/日 資料來源:亞證投顧91年6月底資料。 產業經濟學—陳正倉、林惠玲、陳忠榮、莊春發著 4 Pricing of Homogeneous Goods Market where a relatively few firms produce a single homogeneous good. 5 Assume demanders are price takers. Assume there are no transactions or informational costs. These assumptions result in a single equilibrium price for the good. Initially, assume a fixed, small number of identical firms. Competitive Outcome 6 In Figure 14-1, the equilibrium of the Bertrand game occurs at point C. This equilibrium also corresponds to the perfectly competitive outcome. FIGURE 14-1: Pricing under Imperfect Competition Price P C C MC D MR 0 7 Q C Quantity per week Perfect Cartel Outcome A model of pricing in which firms coordinate their decisions to act as a multiplant monopoly is the cartel model. Assuming marginal costs are constant and equal across firms, the cartel output is point M (the monopoly output) in Figure 14-1. 8 The plan would require a certain output by each firm and how to share the monopoly profits. FIGURE 14-1: Pricing under Imperfect Competition Price P P P M M A A C C MC D MR 0 9 Q M Q A Q C Quantity per week The Cournot Model The Cournot model of duopoly is one in which each firm assumes the other firm’s output will not change if it changes its own output level. Assume 10 A single owner of a costless spring. A market demand curve for water has the equation Q = 120 - P. Nash Equilibrium in the Cournot Model For a pair of quantities, qA and qB, to be a Nash equilibrium, qA must be a best response to qB and vice versa. A’s total revenue equals: 14.3 qA (120 qA qB ) A’s marginal revenue equals 120 2qA qB 11 14.4 FIGURE 14-2: Cournot BestResponse Functions Firm B’s 120 price(qB) Firm A’s bestresponse function 0 12 60 120 Firm A’s price(qA) Nash Equilibrium in the Cournot Model 13 Equating marginal revenue with the marginal cost of 0, and solving for qA gives A’s bestresponse function 120 q B 14.5 qA 2 B’s best-response function would then be 120 q A 14.6 qB 2 Nash Equilibrium in the Cournot Model In this Nash equilibrium each firm produces 40 units of output. q A 40 14 qB 40. Total output is 80, and the market price is $40. Total industry profit is $3,200, $1600 for each firm. FIGURE 14-2: Cournot BestResponse Functions 120 Firm B’s price(qB) Firm A’s bestresponse function 60 Nash equilibrium 40 0 15 40 60 Firm B’s bestresponse function 120 Firm A’s price(qA) Comparisons and Antitrust Considerations 16 As shown in Figure 14-2, the Nash equilibrium is somewhere between perfect competition and monopoly. Perfectly competitive firms would set P = 0 and Q = 120 with profit = 0. On the other hand, the monpoly would maximize profit by producing Q = 60 with a price = $60 and profits (revenue) = $3600. The Bertrand Model 17 Bertrand Model: An oligopoly model in which firms simultaneously choose prices for a homogeneous product. Bertrand Paradox: result that the Nash equilibrium in the Bertrand model is the same as in perfect competition. FIGURE 14-3: Bertrand Model with Differentiated Product 18 Figure 14-3 shows what the graphical solution tends to look like in the typical Bertrand game with differentiated products. Best-response functions show the profitmaximizing price for each firm given a price charged by its competitor. The upward-sloping best-response functions are in contrast to the Cournot case. FIGURE 14-3: Bertrand Model with Differentiated Product Firm B’s price (PB) Firm A’s best-response function P*B Nash equilibrium 0 19 Firm B’s best-response function P*A Firm A’s price (PA) FIGURE 14-4: Increase in Product Differentiation Softens Price Competition 20 In Figure 14-4 two firms produce moderately differentiated products. If the differentiation between the firms’ products increases, the best-response functions shift out to BR’A and BR’B. The Nash equilibrium shifts to one involving higher prices. FIGURE 14-4: Increase in Product Differentiation Softens Price Competition BRA Firm B’s price (PB) BR’A BR’B P**B BRB P*B Shift in Nash equilibrium 0 21 P*A P**A Firm A’s price (PA) Product Selection 22 There are two offsetting effects at work in the first-stage product-characteristics game. One effect is that firms prefer to locate near the greatest concentration of consumers because that is where demand is greatest. There is an offsetting strategic effect. Firms realize that if their products are close substitutes, they will compete aggressively in the second-stage price game. An increase in product differentiation between the two firms shifts their best-response functions out and leads to a Nash equilibrium with higher prices for both. Search Costs 23 Prices may differ across goods if products are differentiated. Prices may differ even across homogeneous products if consumers are not fully informed about price. A search cost is the cost to the consumer in terms of time, effort, telephone or Internet tolls, and/or fuel costs to contact a store to learn the price it changes for the good. There are many possible outcomes, depending on exactly how search costs are specified. Advertising 24 Advertising can be classified into two types. A first type, informative advertising, provides “hard” information about prices, product attributes, and perhaps store locations and hours of operation. A second type of advertising, persuasive advertising, attempts to convince consumers to buy one product rather than another close- perhaps perfect-substitute. 公平交易法 第十四條(聯合行為之禁止、例外許可及其核駁期限 ) 事業不得為聯合行為。但有左列情形之一,而有益於整體經濟與公共利益,經申 請中央主管機關許可者,不在此限: 一、為降低成本、改良品質或增進效率,而統一商品規 格或型式者。 二、為提高技術、改良品質、降低成本或增進效率,而 共同研究開發商品或市場 者。 三、為促進事業合理經營,而分別作專業發展者。 四、為確保或促進輸出,而專就國外市場之競爭予以約 定者。 五、為加強貿易效能,而就國外商品之輸入採取共同行 為者。 六、經濟不景氣期間,商品市場價格低於平均生產成本, 致該行業之事業,難以 繼續維持或生產過剩,為有 計畫適應需求而限制產銷數量、設備或價格之共 同 行為者。 七、為增進中小企業之經營效率,或加強其競爭能力所 為之共同行為者。 中央主管機關收受前項之申請,應於三個月內為核駁之決定;必要時得延長一次。 25 Tacit Collusion with Indefinite Time Horizon 26 If firm A continues with collusive equilibrium, it earns its share of monopoly profit (M/2) forever. Because the present value of the stream of profits in the collusive equilibrium is given by: M 1 14.12 2 r Cheating will be unprofitab le if M 1 14.13 M 2 r Generalizations and Limitations Extending the analysis to allow for any number of firms, N, the profit from deviating would be the same as before M. The present profit from continuing with the collusive equilibrium becomes: M 1 14.14 N r The new condition for cheating to be unprofitab le becomes M 27 M 1 N r 14.15 First-Mover Advantages Using the Cournot model where market demand is given by Q = 120 – P and using backward induction solves for B’s best-response function: 120 q A qB . 2 And solving for P allows A to compute the net demand for its own product: qA P 60 . 2 28 [14.16] [14.18] FIGURE 14-5: Stackelberg Equilibrium and Entry Deterrence 120 Firm B’s price(qB) Firm A’s bestresponse function Firm B’s bestresponse function 60 Nash equilibrium of Cournot game 40 Stackelberg equilibrium Entry-deterring output 0 29 40 60 120 Firm A’s price(qA) Figure 14-6: Entry Game with Incomplete Information . Nature Probability ½ A high cost . 30 Probability ½ A low cost . B No entry Entry No entry 4, 0 1, 3 6, 0 B Entry 3, -1 個案研究---掠奪性定價 民國69年時,景泰玻璃公司進入台灣壓花玻璃市 場,帶給台灣玻璃公司與新竹玻璃公司兩家主要 玻璃廠商很大的壓力。為了保有市場,台玻與新 玻與景泰從民國70年開始了價格戰,每箱壓花玻 璃由約新台幣800元降至約700元。結果迫使新進 的景泰玻璃公司停工,最後於72年台玻及新玻以 新台幣1億5千萬元收購景泰玻璃公司。而在景泰 玻璃公司退出市場後,壓花玻璃的價格每箱即暴 漲至新台幣900餘元。 資料來源:產業經濟學,蕭峰雄著。 31 Price Leadership Model 32 A model in which one dominant firm takes reactions of all other firms into account in its output and pricing decisions is the price leadership model. A formal model assumes the industry is composed of a single price-setting leader and a competitive fringe which is a group of firms that act as price takers. 表 14.3 91年1月至92年2月中油與台塑 調整油價情形 產業經濟學—陳正倉、林惠玲、陳忠榮、莊春發著 33 Price Leadership Model 34 This model is shown in Figure 14-7. The demand curve D represents the total demand curve for the industry’s product. The supply curve SC represents the supply decisions of all the firms in the competitive fringe. Price Leadership Model The demand curve (D’) for the dominant firm is derived as follows: 35 For a price of P1 or above the competitive fringe will supply the entire market. For a price of P2 or below, the dominant firm will supply the entire market. Between P2 and P1 the curve D’ is constructed by subtracting what the fringe will supply from the total market demand. FIGURE 14-7: Formal Model of Price-Leadership Behavior Price SC P1 D’ P 2 D 0 36 Quantity per week Price Leadership Model 37 Given D’, the leader’s marginal revenue curve is MR’ which equals the leader’s marginal cost (MC) at the profit maximizing level QL. Market price is PL and equilibrium output is QT (= QC + QL). The model does not explain how the leader is chosen. FIGURE 14-7: Formal Model of Price-Leadership Behavior Price SC P1 D’ P P L 2 MC MR’ 0 38 Q C Q Q L T D Quantity per week Monopolistic Competition 39 Monopolistic competition is a market in which each firm faces a negatively sloped demand curve and there are no barriers to entry. This type of market is illustrated in Figure 14-8. FIGURE 14-8: Monopolistic Competition Price, costs d mr MC AC P* 0 40 q* Quantity per week Monopolistic Competition 41 Initially the demand curve is d, marginal revenue is mr, and q* is the profitmaximizing output level. If entry is costless, the entry shifts the firm’s demand curve inward to d’ where profits are zero. At output level q’, average costs are not minimum, and qm - q’ is excess capacity. FIGURE 14-8: Monopolistic Competition Price, costs d mr MC AC d’ P* P’ mr’ 0 42 q’ q* qm Quantity per week Barriers to Entry The existence of barriers to entry change the type of analysis. In addition to those previously discussed, barriers include brand loyalty and strategic pricing. 43 Firms may drive out potential entrants with low prices followed later by price increases or they may buy up smaller firms.