Chapter 11
Price Searcher Markets with High
Entry Barriers
1
Overview







Causes of high barriers to entry
Monopolies
Analyzing the monopoly graph
Oligopolies
Game theory (collusion vs. cheating)
Problems of markets with high barriers to
entry
Problems with regulation
2
High Barriers to Entry
What causes high barriers to entry:
1. Economies of scale
2. Government licensing and other legal
barriers to entry
3
High Barriers to Entry
3. Patents
4. Control over an essential resource
4
Monopoly
A monopoly is a market characterized by:
1. High barriers to entry
2. A single seller of a well-defined product
that has no good substitutes
5
Monopoly
The demand curve for a monopolist is the
market demand curve (D).
A monopolist maximizes profits by producing
where MR=MC.
6
Monopoly
*With high barriers to entry, a monopoly can
continue to make an economic profit*
Is it possible for a monopoly to make an
economic loss?
7
Oligopoly
Oligopoly: a market that consists of a small
number of sellers
Ex. automobiles, crude oil, tennis balls, etc.
8
Oligopoly
The characteristics of an oligopoly are:
1.
A small number of rival firms
2.
Interdependence among the sellers
3.
High barriers to entry in the market
(Substantial economies of scale)
9
Prisoner’s Dilemma
The Prisoners Dilemma….
10
Prisoner’s Dilemma
Dominant Strategy: A strategy that is
best for a player in a game regardless of
the strategies chosen by other players
11
Game theory
Game theory: the analysis of strategic
choices made by competitors in a conflict
situation.
Real life applications:
Ex. Group work for classes
Ex. Shoveling a communal driveway
12
Classic Example of Game Theory
13
Repeated Games
Over time and repeated play, people are
more likely to cooperate
Tit-for-tat: cooperate for the first 2 rounds,
and then do whatever the other player did
in the last round
14
Collusion
Collusion: the agreement among firms to
avoid competitive practices.
Firms will agree to limit output and keep
prices high.
15
Oligopoly Prices and Profits
Competitive Price ≤ Oligopoly Price ≤ Monopoly Price
1. Firms collude: price will be closer to monopoly
price.
2. Firms cheat: price will be closer to competitive
price.
16
Obstacles to Collusion
1.
2.
3.
Collusion is more difficult the more firms
there are in the market.
It is difficult to detect and eliminate price
cuts
Low barriers to entry
17
Obstacles to Collusion
4. Unstable Demand Conditions
5. Antitrust laws
A. Sherman Antitrust Act (1890)
B. Clayton Act (1914)
18
Problems with High Barriers to
Entry
1. The discipline of market forces is
weakened
2. Reduced competition results in
inefficiency
3. Resources will be wasted by firms
attempting to maintain grants of
protection
19
Potential Solutions to High Barriers
to Entry
1. Antitrust legislation
2. Reduce artificial barriers that limit
competition
20
Potential Solutions to High Barriers
to Entry
3. Regulate the price and output of firms in
the market
Does not work because:
A. Lack of Information
B. Cost Shifting
C. Regulators may become biased
21
Potential Solutions to High Barriers
to Entry
4. Government produces the goods and
services instead of the private sector
22
Review
1.
2.
3.
4.
5.
Know what we mean by high barriers to
entry and how it relates to a monopoly.
Understand the monopoly graph and
what happens in the long-run.
Understand the characteristics of an
oligopoly.
Know the concept of the prisoner’s
dilemma game and game theory
Understand the obstacles to collusion
23
Review
6. Know why high barriers to entry can be
problematic.
7. Understand the potential solutions for
high barriers to entry.
24