Chapter 23 - McGraw Hill Higher Education
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Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms 8 Monopolistic Competition and Oligopoly End Show 8-1 Copyright 2011 The McGraw-Hill Companies Chapter Objectives Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show 8-2 • Characteristics of Monopolistic Competition • Why Monopolistic Competitors Earn Only a Normal Profit in the LongRun • Characteristics of Oligopoly • How Game Theory Relates to Oligopoly • Why the Demand Curve of the Oligopolist May Be Kinked • Incentives and Obstacles to Collusion Among Oligopolists • Potential Positive and Negative Effects of Advertising Copyright 2011 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show 8-3 • Characteristics –Small Market Shares –No Collusion –Independent Action • Differentiated Products –Product Attributes –Service –Location –Brand Names and Packaging –Some Control Over Price Copyright 2011 The McGraw-Hill Companies 8.1 Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Monopolistic Competition • Easy Entry and Exit • Advertising 8.1 –Nonprice Competition • Monopolistically Competitive Industries Key Terms End Show 8-4 Copyright 2011 The McGraw-Hill Companies Price and Output Determination In Monopolistic Competition Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms • The Firm’s Demand Curve • The Short Run: –Profit or Loss • The Long Run: –Only a Normal Profit –Profits: Firms Enter –Losses: Firm’s Leave • Complications –Product Variety 8.1 End Show 8-5 Copyright 2011 The McGraw-Hill Companies Price and Output Determination In Monopolistic Competition Short-Run Profits MC Price and Costs Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word P1 A1 Economic Profit D1 MR = MC MR Key Terms 0 End Show Q1 Quantity 8-6 ATC Copyright 2011 The McGraw-Hill Companies Price and Output Determination In Monopolistic Competition Short-Run Losses MC Price and Costs Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word A2 P2 Loss D2 MR = MC MR Key Terms 0 End Show Q2 Quantity 8-7 ATC Copyright 2011 The McGraw-Hill Companies Price and Output Determination In Monopolistic Competition Long-Run Equilibrium MC ATC Price and Costs Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word P3= A3 D3 MR = MC MR Key Terms 0 End Show Q3 Quantity 8-8 Copyright 2011 The McGraw-Hill Companies Monopolistic Competition and Efficiency Recall: P=MC=Minimum ATC MC Price and Costs Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word ATC P3= A3 P4 Price is Higher D3 MR = MC Excess Capacity at Minimum ATC 0 Key Terms MR Q3 Q4 Quantity Monopolistic Competition is Not Efficient End Show 8-9 Copyright 2011 The McGraw-Hill Companies Oligopoly Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word • Characteristics –A Few Large Producers –Homogeneous or Differentiated Products • Homogeneous Oligopoly • Differentiated Oligopoly –Control Over Price, But Mutual Interdependence • Strategic Behavior –Entry Barriers –Mergers Key Terms End Show 8-10 Copyright 2011 The McGraw-Hill Companies Game Theory Key Terms RareAir’s Price Strategy • 2 Competitors • 2 Price Strategies • Each Strategy Has a Payoff Matrix • Greatest Combined Profit • Independent Actions Stimulate a Response High Uptown’s Price Strategy Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Game Theory Model to Analyze Behavior A R12 Low B R15 High R12 C R6 R6 D R8 Low R15 R8 End Show 8.2 8-11 Copyright 2011 The McGraw-Hill Companies Game Theory Key Terms RareAir’s Price Strategy • Independently Lowered Prices in Expectation of Greater Profit Leads to the Worst Combined Outcome • Eventually Low Outcomes Make Firms Return to Higher Prices High Uptown’s Price Strategy Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Game Theory Model to Analyze Behavior A R12 Low B R15 High R12 C R6 R6 D R8 Low R15 R8 End Show 8.2 8-12 Copyright 2011 The McGraw-Hill Companies Game Theory Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word •Role of Mutual Interdependence •Collusive Tendencies – Collusion •Incentive to Cheat 8.2 Key Terms End Show 8-13 Copyright 2011 The McGraw-Hill Companies Three Oligopoly Models Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show 8-14 • Kinked Demand Curve • Collusive Pricing • Price Leadership • Diversity of Oligopolies • Complications of Interdependence Copyright 2011 The McGraw-Hill Companies Kinked-Demand Curve Noncollusive Oligopoly Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word • Strategies –Match Price Changes –Ignore Price Changes • A Combined Strategy • Price Inflexibility • The Kinked-Demand Curve Graphically… Key Terms End Show 8-15 Copyright 2011 The McGraw-Hill Companies Kinked-Demand Curve Noncollusive Oligopoly Competitor and Rivals Strategize Versus Each Other Consumers Effectively Have 2 Partial Demand Curves and Each Part Has Its Own Marginal Revenue Part e P0 f D2 Rivals Match g Price Decrease 0 Q0 MR1 Quantity MR2 Price and Costs Rivals Ignore Price Increase Price Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word MC1 D2 P0 e MR2 f MC2 g D1 D1 0 Q0 MR1 Quantity Resulting in a Kinked-Demand Curve to the Consumer – Price and Output Are Optimized at the Kink Key Terms End Show 8-16 Copyright 2011 The McGraw-Hill Companies Kinked-Demand Curve Noncollusive Oligopoly Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word • Criticisms of the Model –Doesn’t Explain How Price Gets to the Kink (P0) –Oligopoly Prices Are Not As Rigid During Instability as the Model Indicates –Possibility of Price Wars Key Terms End Show 8-17 Copyright 2011 The McGraw-Hill Companies –Collusion and Tendency Toward Joint-Profit Maximization MC Price and Costs Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Cartels and Other Collusion • Price and Output P0 ATC A0 MR=MC Economic Profit Key Terms Effectively Sharing The Monopoly Profit D MR Q0 End Show Quantity 8-18 Copyright 2011 The McGraw-Hill Companies Cartels and Other Collusion • Overt Collusion Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show –Cartels –The OPEC Cartel GLOBAL PERSPECTIVE The 11 OPEC Nations Daily Oil Production, May 2006 Country Saudi Arabia Iran Venezuela UAE Nigeria Kuwait Iraq Libya Indonesia Algeria Qatar Barrels of Oil 9,099,000 4,110,000 3,83,000 2,444,000 2,306,000 2,247,000 1,903,000 1,500,000 1,451,000 894,000 726,000 Source: OPEC 8-19 Copyright 2011 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms Cartels and Other Collusion • Covert Collusion –Tacit Understandings • Obstacles to Collusion –Demand and Cost Differences –Number of Firms –Cheating –Recession –Potential Entry –Legal Obstacles: End Show 8-20 Copyright 2011 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms Price Leadership Model • Leadership Tactics • Infrequent Price Changes • Communications • Limit Pricing • Breakdowns in Price Leadership: –Price Wars End Show 8-21 Copyright 2011 The McGraw-Hill Companies Oligopoly and Advertising Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show 8-22 • Advertising Prevalent in Monopolistic Competition and Oligopoly • Positive Effects of Advertising • Potential Negative Effects of Advertising Copyright 2011 The McGraw-Hill Companies Oligopoly and Advertising Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word World’s Top 10 Brand Names GLOBAL PERSPECTIVE Coca-Cola Microsoft IBM General Electric Intel Nokia Toyota Disney McDonalds Mercedes-Benz Key Terms End Show Source: Interbrand 8-23 Copyright 2011 The McGraw-Hill Companies Oligopoly and Efficiency Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show 8-24 • Productive and Allocative Efficiency P = MC = Minimum ATC – Neither Exists • Tendency to Share the Monopoly Profit • Qualifications –Increased Foreign Competition –Limit Pricing –Technological Advance Copyright 2011 The McGraw-Hill Companies Oligopoly in the Banking Industry Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word • Four big ones • Market share – 92% of Mortgage Loans – 89% of bank financed installment sales • Supply Side Changes – High levels of entry • R250 million start up capital • Licence granting by Registrar of banks • Consolidation of Firms into Oligopoly Key Terms End Show 8-25 Copyright 2011 The McGraw-Hill Companies Key Terms Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms • monopolistic competition • product differentiation • nonprice competition • excess capacity • oligopoly • homogeneous oligopoly • differentiated oligopoly • strategic behavior • mutual interdependence End Show 8-26 Copyright 2011 The McGraw-Hill Companies • game-theory model • collusion • kinked-demand curve • price war • cartel • tacit understandings • price leadership Next Chapter Preview… Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Labour and Money Key Terms End Show 8-27 Copyright 2011 The McGraw-Hill Companies
