1、Chapter 12Monopolistic Competition and Oligopoly1Chapter 1Topics to be DiscussedMonopolistic CompetitionOligopolyPrice CompetitionCompetition Versus Collusion: The Prisoners Dilemma2Chapter 1Topics to be DiscussedImplications of the Prisoners Dilemma for Oligopolistic PricingCartels3Chapter 1Monopol

2、istic CompetitionCharacteristics1)Many firms2)Free entry and exit3)Differentiated product4Chapter 1Monopolistic CompetitionThe amount of monopoly power depends on the degree of differentiation.Examples of this very common market structure include:ToothpasteSoapCold remedies5Chapter 1Monopolistic Com

3、petitionToothpaste Crest and monopoly powerProcter & Gamble is the sole producer of CrestConsumers can have a preference for Crest-taste, reputation, decay preventing efficacyThe greater the preference (differentiation) the higher the price.6Chapter 1Monopolistic CompetitionQuestionDoes Procter & Ga

4、mble have much monopoly power in the market for Crest?7Chapter 1Monopolistic CompetitionThe Makings of Monopolistic CompetitionTwo important characteristicsDifferentiated but highly substitutable productsFree entry and exit8Chapter 1A Monopolistically CompetitiveFirm in the Short and Long RunQuantit

5、y$/QQuantity$/QMCACMCACDSRMRSRDLRMRLRQSRPSRQLRPLRShort RunLong Run9Chapter 1Observations (short-run)Downward sloping demand-differentiated productDemand is relatively elastic-good substitutesMR MC - some monopoly powerA Monopolistically CompetitiveFirm in the Short and Long Run11Chapter 1Deadweight

6、lossMCACComparison of Monopolistically CompetitiveEquilibrium and Perfectly Competitive Equilibrium$/QQuantity$/QD = MRQCPCMCACDLRMRLRQMCPQuantityPerfect CompetitionMonopolistic Competition12Chapter 1Monopolistic CompetitionMonopolistic Competition and Economic EfficiencyThe monopoly power (differen

7、tiation) yields a higher price than perfect competition. If price was lowered to the point where MC = D, consumer surplus would increase by the yellow triangle.13Chapter 1Monopolistic CompetitionMonopolistic Competition and Economic EfficiencyWith no economic profits in the long run, the firm is sti

8、ll not producing at minimum AC and excess capacity exists.14Chapter 1Monopolistic CompetitionQuestions1)If the market became competitive, what would happen to output and price?2)Should monopolistic competition be regulated?15Chapter 1Monopolistic CompetitionQuestions3)What is the degree of monopoly

9、power?4)What is the benefit of product diversity?16Chapter 1Monopolistic Competitionin the Market for Colas and CoffeeThe markets for soft drinks and coffee illustrate the characteristics of monopolistic competition.17Chapter 1Elasticities of Demand forBrands of Colas and CoffeeColas:Royal Crown-2.4

10、Coke-5.2 to -5.7Ground Coffee:Hills Brothers-7.1Maxwell House-8.9Chase and Sanborn-5.6BrandElasticity of Demand18Chapter 1Questions1)Why is the demand for Royal Crown more price inelastic than for Coke?2)Is there much monopoly power in these two markets?3)Define the relationship between elasticity a

11、nd monopoly power.Elasticities of Demand forBrands of Colas and Coffee19Chapter 1OligopolyCharacteristicsSmall number of firmsProduct differentiation may or may not existBarriers to entry20Chapter 1OligopolyExamplesAutomobilesSteelAluminumPetrochemicalsElectrical equipmentComputers21Chapter 1Oligopo

12、lyThe barriers to entry are:NaturalScale economiesPatentsTechnologyName recognition22Chapter 1OligopolyThe barriers to entry are:Strategic actionFlooding the marketControlling an essential input23Chapter 1OligopolyManagement ChallengesStrategic actionsRival behaviorQuestionWhat are the possible riva

13、l responses to a 10% price cut by Ford?24Chapter 1OligopolyEquilibrium in an Oligopolistic MarketIn perfect competition, monopoly, and monopolistic competition the producers did not have to consider a rivals response when choosing output and price.In oligopoly the producers must consider the respons

14、e of competitors when choosing output and price.25Chapter 1OligopolyEquilibrium in an Oligopolistic MarketDefining EquilibriumFirms doing the best they can and have no incentive to change their output or priceAll firms assume competitors are taking rival decisions into account.26Chapter 1OligopolyNa

15、sh EquilibriumEach firm is doing the best it can given what its competitors are doing.27Chapter 1OligopolyThe Cournot ModelDuopolyTwo firms competing with each otherHomogenous goodThe output of the other firm is assumed to be fixed28Chapter 1MC150MR1(75)D1(75)12.5If Firm 1 thinks Firm 2 will produce

16、 75 units, its demand curve is shifted to the left by this amount. Firm 1s Output DecisionQ1P1What is the output of Firm 1if Firm 2 produces 100 units?D1(0)MR1(0)If Firm 1 thinks Firm 2 will produce nothing, its demandcurve, D1(0), is the market demand curve.D1(50)MR1(50)25If Firm 1 thinks Firm 2 wi

17、ll produce 50 units, its demand curve is shifted to the left by this amount. 29Chapter 1OligopolyThe Reaction CurveA firms profit-maximizing output is a decreasing schedule of the expected output of Firm 2.30Chapter 1Firm 2s ReactionCurve Q*2(Q2)Firm 2s reaction curve shows how much itwill produce a

18、s a function of how much it thinks Firm 1 will produce. Reaction Curves and Cournot EquilibriumQ2Q1255075100255075100Firm 1s ReactionCurve Q*1(Q2)xxxxFirm 1s reaction curve shows how much itwill produce as a function of how much it thinks Firm 2 will produce. The xs correspond to the previous model.

19、In Cournot equilibrium, eachfirm correctly assumes howmuch its competitors willproduce and therebymaximize its own profits.CournotEquilibrium31Chapter 1OligopolyQuestions1)If the firms are not producing at the Cournot equilibrium, will they adjust until the Cournot equilibrium is reached?2)When is i

20、t rational to assume that its competitors output is fixed?32Chapter 1OligopolyAn Example of the Cournot EquilibriumDuopolyMarket demand is P = 30 - Q where Q = Q1 + Q2MC1 = MC2 = 0The Linear Demand Curve33Chapter 1OligopolyAn Example of the Cournot EquilibriumFirm 1s Reaction CurveThe Linear Demand

21、Curve34Chapter 1OligopolyAn Example of the Cournot EquilibriumThe Linear Demand Curve35Chapter 1OligopolyAn Example of the Cournot EquilibriumThe Linear Demand Curve36Chapter 1Duopoly ExampleQ1Q2Firm 2sReaction Curve3015Firm 1sReaction Curve15301010Cournot EquilibriumThe demand curve is P = 30 - Q a

22、ndboth firms have 0 marginal cost.37Chapter 1OligopolyProfit Maximization with Collusion38Chapter 1OligopolyContract CurveQ1 + Q2 = 15Shows all pairs of output Q1 and Q2 that maximizes total profitsQ1 = Q2 = 7.5Less output and higher profits than the Cournot equilibriumProfit Maximization with Collu

23、sion39Chapter 1Firm 1sReaction CurveFirm 2sReaction CurveDuopoly ExampleQ1Q230301010Cournot Equilibrium1515Competitive Equilibrium (P = MC; Profit = 0)CollusionCurve7.57.5Collusive EquilibriumFor the firm, collusion is the bestoutcome followed by the CournotEquilibrium and then the competitive equil

24、ibrium40Chapter 1First Mover Advantage-The Stackelberg ModelAssumptionsOne firm can set output firstMC = 0Market demand is P = 30 - Q where Q = total outputFirm 1 sets output first and Firm 2 then makes an output decision41Chapter 1Firm 1Must consider the reaction of Firm 2Firm 2Takes Firm 1s output

25、 as fixed and therefore determines output with the Cournot reaction curve: Q2 = 15 - 1/2Q1First Mover Advantage-The Stackelberg Model42Chapter 1Firm 1Choose Q1 so that:First Mover Advantage-The Stackelberg Model43Chapter 1Substituting Firm 2s Reaction Curve for Q2:First Mover Advantage-The Stackelbe

26、rg Model44Chapter 1ConclusionFirm 1s output is twice as large as firm 2sFirm 1s profit is twice as large as firm 2sQuestionsWhy is it more profitable to be the first mover?Which model (Cournot or Shackelberg) is more appropriate?First Mover Advantage-The Stackelberg Model45Chapter 1Price Competition

27、Competition in an oligopolistic industry may occur with price instead of output.The Bertrand Model is used to illustrate price competition in an oligopolistic industry with homogenous goods.46Chapter 1Price CompetitionAssumptionsHomogenous goodMarket demand is P = 30 - Q where Q = Q1 + Q2MC = $3 for

28、 both firms and MC1 = MC2 = $3Bertrand Model47Chapter 1Price CompetitionAssumptionsThe Cournot equilibrium: Assume the firms compete with price, not quantity.Bertrand Model48Chapter 1Price CompetitionHow will consumers respond to a price differential? (Hint: Consider homogeneity)The Nash equilibrium

29、:P = MC; P1 = P2 = $3Q = 27; Q1 & Q2 = 13.5 Bertrand Model49Chapter 1Price CompetitionWhy not charge a higher price to raise profits? How does the Bertrand outcome compare to the Cournot outcome?The Bertrand model demonstrates the importance of the strategic variable (price versus output).Bertrand M

30、odel50Chapter 1Price CompetitionCriticismsWhen firms produce a homogenous good, it is more natural to compete by setting quantities rather than prices.Even if the firms do set prices and choose the same price, what share of total sales will go to each one?It may not be equally divided.Bertrand Model

31、51Chapter 1Price CompetitionPrice Competition with Differentiated ProductsMarket shares are now determined not just by prices, but by differences in the design, performance, and durability of each firms product.52Chapter 1Price CompetitionAssumptionsDuopolyFC = $20VC = 0Differentiated Products53Chap

32、ter 1Price CompetitionAssumptionsFirm 1s demand is Q1 = 12 - 2P1 + P2Firm 2s demand is Q2 = 12 - 2P1 + P1P1 and P2 are prices firms 1 and 2 charge respectivelyQ1 and Q2 are the resulting quantities they sell Differentiated Products54Chapter 1Price CompetitionDetermining Prices and OutputSet prices a

33、t the same timeDifferentiated Products55Chapter 1Price CompetitionDetermining Prices and OutputFirm 1: If P2 is fixed:Differentiated Products56Chapter 1Firm 1s Reaction CurveNash Equilibrium in PricesP1P2Firm 2s Reaction Curve$4$4Nash Equilibrium$6$6Collusive Equilibrium57Chapter 1Nash Equilibrium i

34、n PricesDoes the Stackelberg model prediction for first mover hold when price is the variable instead of quantity?Hint: Would you want to set price first?58Chapter 1A Pricing Problem for Procter & GambleScenario1)Procter & Gamble, Kao Soap, Ltd., and Unilever, Ltd were entering the market for Gypsy

35、Moth Tape.2)All three would be choosing their prices at the same time.Differentiated Products59Chapter 1Scenario3)Procter & Gamble had to consider competitors prices when setting their price.4)FC = $480,000/month and VC = $1/unit for all firmsDifferentiated ProductsA Pricing Problem for Procter & Ga

36、mble60Chapter 1Scenario5)P&Gs demand curve was:Q = 3,375P-3.5(PU).25(PK).25Where P, PU , PK are P&Gs, Unilevers, and Kaos prices respectivelyDifferentiated ProductsA Pricing Problem for Procter & Gamble61Chapter 1ProblemWhat price should P&G choose and what is the expected profit?Differentiated Prod

37、uctsA Pricing Problem for Procter & Gamble62Chapter 1P&Gs Profit (in thousands of $ per month)1.10-226-215-204-194-183-174-165-1551.20-106-89-73-58-43-28-15-21.30-56-37-192153147621.40-44-25-612294662781.50-52-32-153203652681.60-70-51-34-18-11430441.70-93-76-59-44-28-131151.80-118-102-87-72-57-44-30

38、-17Competitors (Equal) Prices ($) P&GsPrice ($)01.401.501.601.701.8063Chapter 1What Do You Think?1)Why would each firm choose a price of $1.40? Hint: Think Nash Equilibrium 2) What is the profit maximizing price with collusion?A Pricing Problem for Procter & Gamble64Chapter 1Competition V

39、ersus Collusion:The Prisoners DilemmaWhy wouldnt each firm set the collusion price independently and earn the higher profits that occur with explicit collusion?65Chapter 1Assume:Competition Versus Collusion:The Prisoners Dilemma66Chapter 1Possible Pricing Outcomes:Competition Versus Collusion:The Pr

40、isoners Dilemma67Chapter 1Payoff Matrix for Pricing GameFirm 2Firm 1Charge $4Charge $6Charge $4Charge $6$12, $12$20, $4$16, $16$4, $2068Chapter 1These two firms are playing a noncooperative game.Each firm independently does the best it can taking its competitor into account.QuestionWhy will both fir

41、ms both choose $4 when $6 will yield higher profits?Competition Versus Collusion:The Prisoners Dilemma69Chapter 1An example in game theory, called the Prisoners Dilemma, illustrates the problem oligopolistic firms face.Competition Versus Collusion:The Prisoners Dilemma70Chapter 1ScenarioTwo prisoner

42、s have been accused of collaborating in a crime.They are in separate jail cells and cannot communicate.Each has been asked to confess to the crime.Competition Versus Collusion:The Prisoners Dilemma71Chapter 1-5, -5-1, -10-2, -2-10, -1Payoff Matrix for Prisoners DilemmaPrisoner AConfessDont confessCo

43、nfessDontconfessPrisoner BWould you choose to confess?72Chapter 1Payoff Matrix forthe P & G Prisoners DilemmaConclusions: Oligipolistic Markets1)Collusion will lead to greater profits2)Explicit and implicit collusion is possible3)Once collusion exists, the profit motive to break and lower price is s

44、ignificant73Chapter 1Charge $1.40Charge $1.50Charge$1.40Unilever and KaoCharge$1.50P&G$12, $12$29, $11$3, $21$20, $20Payoff Matrix for the P&G Pricing ProblemWhat price should P & G choose?74Chapter 1Implications of the PrisonersDilemma for Oligipolistic PricingObservations of Oligopoly Behavior1)In

45、 some oligopoly markets, pricing behavior in time can create a predictable pricing environment and implied collusion may occur.75Chapter 1Observations of Oligopoly Behavior2)In other oligopoly markets, the firms are very aggressive and collusion is not possible. Firms are reluctant to change price b

46、ecause of the likely response of their competitors.In this case prices tend to be relatively rigid.Implications of the PrisonersDilemma for Oligipolistic Pricing76Chapter 1The Kinked Demand Curve$/QQuantityMRDIf the producer lowers price thecompetitors will follow and the demand will be inelastic.If

47、 the producer raises price thecompetitors will not and the demand will be elastic.77Chapter 1The Kinked Demand Curve$/QDP*Q*MCMCSo long as marginal cost is in the vertical region of the marginal revenue curve, price and output will remain constant. MRQuantity78Chapter 1Implications of the PrisonersD

48、ilemma for Oligopolistic PricingPrice SignalingImplicit collusion in which a firm announces a price increase in the hope that other firms will follow suitPrice Signaling & Price Leadership79Chapter 1Implications of the PrisonersDilemma for Oligopolistic PricingPrice LeadershipPattern of pricing in w

49、hich one firm regularly announces price changes that other firms then matchPrice Signaling & Price Leadership80Chapter 1Implications of the PrisonersDilemma for Oligopolistic PricingThe Dominant Firm ModelIn some oligopolistic markets, one large firm has a major share of total sales, and a group of

50、smaller firms supplies the remainder of the market.The large firm might then act as the dominant firm, setting a price that maximized its own profits.81Chapter 1Price Setting by a Dominant FirmPriceQuantityDDDQDP*At this price, fringe firmssell QF, so that totalsales are QT.P1QFQTP2MCDMRDSFThe domin

51、ant firms demandcurve is the difference betweenmarket demand (D) and the supplyof the fringe firms (SF).82Chapter 1CartelsCharacteristics1) Explicit agreements to set output and price2)May not include all firms83Chapter 1CartelsExamples of successful cartelsOPECInternational Bauxite AssociationMercu

52、rio EuropeoExamples of unsuccessful cartelsCopperTinCoffeeTeaCocoaCharacteristics3) Most often international84Chapter 1CartelsCharacteristics4) Conditions for successCompetitive alternative sufficiently deters cheatingPotential of monopoly power-inelastic demand85Chapter 1CartelsComparing OPEC to CI

53、PECMost cartels involve a portion of the market which then behaves as the dominant firm86Chapter 1The OPEC Oil CartelPriceQuantityMROPECDOPECTDSCMCOPECTD is the total world demandcurve for oil, and SC is the competitive supply. OPECs demand is the differencebetween the two.QOPECP*OPECs profits maxim

54、izingquantity is found at the intersection of its MR andMC curves. At this quantityOPEC charges price P*.87Chapter 1CartelsAbout OPECVery low MCTD is inelasticNon-OPEC supply is inelasticDOPEC is relatively inelastic88Chapter 1The OPEC Oil CartelPriceQuantityMROPECDOPECTDSCMCOPECQOPECP*The price wit

55、hout the cartel:Competitive price (PC) where DOPEC = MCOPECQCQTPc89Chapter 1The CIPEC Copper CartelPriceQuantityMRCIPECTDDCIPECSCMCCIPECQCIPECP*PCQCQTTD and SC are relatively elasticDCIPEC is elasticCIPEC has little monopoly powerP* is closer to PC90Chapter 1CartelsObservationsTo be successful:Total demand must not be very price elasticEither the cartel must control nearly all of the worlds su