REVIEW Firm Behavior In Different Market Structures
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CHAPTER 23 MONOPOLISTIC COMPETITION AND OLIGOPOLY FOUR MARKET MODELS Pure Competition Market Structure Continuum FOUR MARKET MODELS Imperfect Competition All Markets that are Not Purely Competitive Pure Competition Market Structure Continuum FOUR MARKET MODELS Pure Monopoly Pure Competition Market Structure Continuum FOUR MARKET MODELS Monopolistic Competition Pure Competition Pure Monopoly Market Structure Continuum FOUR MARKET MODELS Oligopoly Pure Competition Monopolistic Competition Pure Monopoly Market Structure Continuum FOUR MARKET MODELS Monopolistic Competition: - Relatively Large Number of Sellers - Differentiated Products - Easy Entry and Exit Pure Competition Monopolistic Competition Oligopoly Pure Monopoly Market Structure Continuum FOUR MARKET MODELS Oligopoly: - A Few Large Producers - Homogeneous or Differentiated Products - Control Over Price, But Mutual Interdependence - Strategic Behavior - Entry Barriers Pure Competition Monopolistic Competition Oligopoly Pure Monopoly Market Structure Continuum Comparing the Four Market Forms • Perfect competition and pure monopoly are uncommon in reality. • Many monopolistically competitive firms exist. • Oligopoly firms account for the largest share of the economy’s output. Comparing the Four Market Forms • In equilibrium, MC = MR for the profitmaximizing firm under any market form. • In the equilibrium of the oligopoly firm, MC may be unequal to MR. Comparing the Four Market Forms • Perfectly competitive firm and industry theoretically have efficient allocation of resources. • Monopoly and monopolistic competition are likely to have inefficient allocation of resources. • Under oligopoly, almost anything can happen, it is impossible to generalize about its vices or virtues. Price and Costs PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION MC Expect New Competitors ATC P1 AC1 Short-Run Economic Profits D MR Q1 Quantity PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Price and Costs MC ATC AC2 P2 Short-Run Economic Losses D MR Q2 Quantity Price and Costs PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Long-Run Equilibrium MC Normal Profit Only ATC P3 = AC3 D MR Q3 Quantity KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price The firm’s demand and marginal revenue curves D1 Quantity MR1 KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price The rival’s demand and marginal revenue curves D2 D1 Quantity MR1 MR2 KINKED DEMAND THEORY: Price NONCOLLUSIVE OLIGOPOLY Rivals tend to follow a price cut D2 D1 Quantity MR1 MR2 KINKED DEMAND THEORY: Price NONCOLLUSIVE OLIGOPOLY Rivals tend to follow a price cut or ignore a price increase D2 D1 Quantity MR1 MR2 KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price Effectively creating a kinked demand curve D2 D1 Quantity MR1 MR2 KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price Effectively creating a kinked demand curve D Quantity KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Effectively creating a kinked demand curve Price MC1 MR2 MC2 D Quantity MR1 KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Profit maximization MR = MC occurs at the kink Price MC1 MR2 MC2 D Quantity MR1 KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY This behavior can set off a price war. Price MC1 MR2 MC2 D Quantity MR1 Price and costs CARTELS AND OTHER COLLUSION Colluding Oligopolists Will Split the Monopoly Profits Economic Profit MC P0 ATC A0 D MR = MC MR Q0 Using Game Theory • Game theory can be used to describe a game when: – There are rules which govern actions; – There are two or more players; – There are choices of action where strategy matters; – The game has one or more outcomes; – The outcome depends on the strategies chosen by all players, i.e., there is strategic interaction. Advertising Game COMPANY Y Don’t Adv. COMPANY X Advertise Don’t Adv. 10,10 2,15 Advertise 15,2 7,7 ď‚·Dominant strategies: Strategy 1 dominates Strategy 2 if every payoff from 2 is dominated by the respective payoff from 1. Nash equilibrium: a set of strategies, one for each player, such that no player has an incentive (in terms of improving his own payoff) to deviate from his strategy, i.e., each player can do no better given what the opposing player(s) does.
