Monopolistic Competition and Oligopoly - PowerPoint PPT Presentation

Loading...

PPT – Monopolistic Competition and Oligopoly PowerPoint presentation | free to download - id: 3d0369-NGU3Y



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

Monopolistic Competition and Oligopoly

Description:

If Adidas, Fila, and Reebok stopped making tennis shoes, some of their former customers would switch to like, and the demand for Nike shoes would increase. – PowerPoint PPT presentation

Number of Views:87
Avg rating:3.0/5.0
Slides: 54
Provided by: belkcolleg
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: Monopolistic Competition and Oligopoly


1
13
Monopolistic Competition and Oligopoly
CHAPTER
Profits, like sausages, are esteemed most by
those that know least about what goes into
them. Alvin Toffler Futurist, Author (1928 -
)
2
C H A P T E R C H E C K L I S T
  • When you have completed your study of this
    chapter, you will be able to
  • 1 Explain how price and quantity are determined
    in monopolistic competition.
  • 2 Explain why selling costs are high in
    monopolistic competition.
  • 3 Explain the dilemma faced by firms in
    oligopoly.
  • 4 Use game theory to explain how price and
    quantity are determined in oligopoly.

3
MARKET CHARACTERISTICS
4
13.1 MONOPOLISTIC COMPETITION
  • Relatively Large Number of Firms
  • Fewer than perfect competition.
  • Three implications are
  • Small market share
  • No market dominance
  • Collusion impossible

5
13.1 MONOPOLISTIC COMPETITION
  • Product Differentation
  • Product differentiation - making a product that
    is slightly different from the products of
    competing firms.
  • A differentiated product has close substitutes,
    but not perfect substitutes.
  • When the price of one firms product rises, the
    quantity demanded of that firms product
    decreases.

6
13.1 MONOPOLISTIC COMPETITION
  • Competition on Quality, Price, and Marketing
  • Quality
  • Design, reliability, after-sales service, and
    buyers ease of access to the product.
  • Price
  • Because of product differentiation, the demand
    curve for the firms product is downward sloping.
  • Marketing
  • Advertising and packaging.

7
13.1 MONOPOLISTIC COMPETITION
  • Entry and Exit
  • Low to no barriers to entry, so the firm is
    unlikely to make economic profit in the long run.
  • Examples
  • Restaurants
  • Gas stations
  • Hair salons
  • Dry Cleaners

These firms are monopolistic in that each one has
a monopoly on their brand, image, service,
ambience, menu, etc. They are competitive in the
sense that there are many, many of them, and
consumers can easily sub one for another.
8
Industry Concentration
  • Concentration ratio percentage of sales
    accounted for by specified number of top firms in
    a market.
  • Usually reported as 4-firm, 8-firm, or 20-firm.
  • The higher the concentration ratio, the greater
    the degree of market dominance by small number of
    firms.
  • The range of concentration ratio is from almost
    zero for perfect competition to 100 percent for
    monopoly.
  • Can distinguish between market structures by
    concentration ratio

9
Industry Concentration
of GDP
10
Industry Concentration
  • Herfindahl-Hirschman Index (HHI) sum of the
    squared market shares of all firms.
  • HHI s12 s22 . . . .sn2
  • Ranges from 10,000 for pure monopolist to zero
    for infinite number of small firms.
  • The more unequal the market share, the higher the
    HHI value. The greater the number of firms, the
    lower the HHI.

11
Industry Concentration
  • Increases in concentration typically yield
    increased prices and profits, ceteris paribus.
  • Squaring gives greater weight to larger shares.
  • Example If there are five firms in a market with
    market shares of 40, 30, 16, 10 and 4
  • HHI 402 302 162 102 42 2,872

12
Industry Concentration
13
13.1 MONOPOLISTIC COMPETITION
  • The Firms Profit-Maximizing Decision
  • The firm in monopolistic competition makes its
    output and price decision just like a monopoly
    firm does (MCMR).

14
13.1 MONOPOLISTIC COMPETITION
1. Profit is maximized when MR MC.
2. The profit-maximizing output is 125 pairs of
Tommy jeans per day.
3. The profit-maximizing price is 75 per pair.
ATC is 25 per pair, so
4. The firm makes an economic profit of 6,250 a
day.
15
(No Transcript)
16
13.1 MONOPOLISTIC COMPETITION
  • Long Run Zero Economic Profit
  • Economic profit induces entry and economic loss
    induces exit, as in perfect competition.
  • Entry decreases the demand for the product of
    each firm. (demand curve shifts left)
  • Exit increases the demand for the product of each
    firm. (demand curve shifts right)
  • In the long run, economic profit is competed away
    and firms earn normal profit.

17
13.1 MONOPOLISTIC COMPETITION
1. In LR, the output that maximizes profit is 75
pairs of Tommy jeans a day.
2. The price is 50 per pair. Average total cost
is also 50 per pair.
3. Economic profit is zero.
18
(No Transcript)
19
Equilibrium in Monopolistic Competition
20
13.1 MONOPOLISTIC COMPETITION
  • Monopolistic Competition and Efficiency
  • Efficiency requires that the MB of the consumer
    equal the MC of the producer.
  • Price measures marginal benefit, so efficiency
    requires PMC.
  • In monopolistic competition, P gt MR and MRMC, so
    P gt MC a sign of inefficiency.
  • Demand curve cant lie tangent to minimum ATC, so
    tangency is at higher ATC inefficient.

21
13.1 MONOPOLISTIC COMPETITION
  • But this inefficiency arises from product
    differentiationvarietythat consumers value and
    for which they are willing to pay.
  • So the loss that arises because MB gt MC must be
    weighed against the gain that arises from greater
    product variety.
  • In a broader view of efficiency, monopolistic
    competition brings gains for consumers.
  • But firms in monopolistic competition always have
    excess capacity in long-run equilibrium.

22
13.1 MONOPOLISTIC COMPETITION
  • Excess Capacity
  • Excess capacity - quantity produced is less than
    the quantity at minimum ATC.
  • Efficient scale quantity at minimum ATC.
  • Figure 13.3 on the next slide illustrates excess
    capacity.

23
13.1 MONOPOLISTIC COMPETITION
1. The efficient scale is 100 pairs of Tommy
jeans a day. (min ATC)
2. The firm produces less than the efficient
scale and has excess capacity.
3. Price exceeds 4. marginal cost.
5. Deadweight loss arise.
24
(No Transcript)
25
MARKET CHARACTERISTICS
26
13.3 OLIGOPOLY
  • Tight oligopoly concentration ratio gt 60
  • Duopoly - market in which there are only two
    producers.
  • Loose oligopoly concentration ratio between 40
    and 60.

Firms in an oligopoly are closely interdependent.
Price and output changes will impact rivals, and
likely draw some reaction from the rival firms.
Examples airlines, aircraft, soft drinks,
cellular service, computer chips, athletic shoes,
cigarettes.
27
The Battle for Market Shares
OLIGOPOLY
  • Increased sales on the part of one firm will be
    noticed immediately by the other firms.
  • Increases in the market share of one oligopolist
    will reduce the shares of the remaining
    oligopolists.
  • There isnt any way that a firm can do so without
    causing alarms to go off in the industry.
  • An attempt by one oligopolist to increase its
    market share by cutting prices will lead to a
    general reduction in the market price, eventually
    harming everyone.
  • This is why oligopolists avoid price competition
    and instead pursue non-price competition.

28
OLIGOPOLY
  • NON-PRICE COMPETITION
  • Product differentiation Features that make one
    product appear different from competing products
    in the same market.
  • Advertising - strengthens brand loyalty, and
    makes it expensive for new producers to enter the
    market
  • Training - Customers of training-intensive
    products (computer hardware, software) become
    familiar with a particular system. Creates
    barriers to later competition.
  • Network Economies - The widespread use of a
    particular product may heighten its value to
    consumers, thereby making potential substitutes
    less viable.

29
The Kinked Demand Curve
OLIGOPOLY
  • Close interdependence between firms
  • The degree to which sales increase when the price
    is reduced depends on the response of rival
    oligopolists.
  • We expect oligopolists to match any price cuts by
    rival oligopolists.
  • Rival oligopolists may not match price increases
    in order to gain market share.

30
The Kinked Demand Curve
OLIGOPOLY
  • The shape of the demand curve facing an
    oligopolist depends on how its rivals respond to
    a change in the price of its own output.
  • The demand curve will be kinked if rival
    oligopolists match price cuts, but not price
    increases.

31
Price Rigidity (Kinked Demand)
  • Oligopolistic firms are interdependent when one
    firm changes, others will have to consider
    whether action is required on their part.
  • Firms tend to match price cuts and NOT match
    price increases.
  • When firm cuts price, Q will increase if other
    firms also cut price, increase in Q will be
    minimal (inelastic)
  • When firm raises price, Q will decrease. If
    other firms do not raise their price, increase in
    Q will be more substantial (elastic).
  • Difference in relative elasticity will cause kink
    in demand curve at current price.

32
P1

Dno match
MRno match
MRmatch
Dmatch
Q1
33
P1

Dno match
MRno match
MRmatch
Dmatch
Q1
34
Profit max output is where the MR curve is
discontinuous (where MC runs thru discontinuity).
Marginal costs can increase or decrease without
changing profit max output as long as MC stays in
gap.
MC3
MC2
P1

MC1
MR
D
Q1
35
Response by other firms tends to discourage this
firm from changing price, keeping prices stable
(price rigidity).
MC3
MC2
P1

MC1
MR
D
Q1
36
Oligopoly vs. Competition
OLIGOPOLY
  • Oligopolists may try to coordinate their behavior
    in a way that maximizes industry profits.
  • An oligopoly will want to behave like a monopoly,
    choosing a rate of industry output that maximizes
    total industry profit.
  • To maximize industry profit, the firms in an
    oligopoly must agree on a monopoly price and
    agree to maintain it by limiting production and
    allocating market shares.

37
13.3 OLIGOPOLY
  • Collusion
  • When a small number of firms share a market, they
    can increase their profit by forming a cartel and
    acting like a monopoly.
  • Cartel - group of firms acting together to limit
    output, raise price, and increase economic
    profit.
  • Firms would behave collectively like a multi-firm
    profit-maximizing monopolist
  • Cartels are illegal in U.S., but they can operate
    covertly in some markets.

38
OLIGOPOLY
Price Fixing
  • Explicit agreement among producers about price at
    which goods will be sold.
  • The most explicit form of coordination among
    oligopolists.
  • NOT LEGAL.

39
Examples of Price Fixing
Examples of Price Fixing
  • Coca Cola The Coca-Cola Bottling Co. of North
    Carolina agreed to pay a fine and give consumers
    discount coupons to settle charges of conspiring
    to fix soft-drink prices from 1982 to 1985.

School Milk Between 1988 and 1991, the U.S.
Justice Department filed charges against 50
companies for fixing the price of milk sold to
public schools in 16 states.
Beer In 2007, the European Commission fined
Heineken and three other beer producers 273.7
(about 380 million) for operating a price fixing
cartel in Holland. The beer cartel operated
between 1996 and 1999 in the EU market.
Cases currently pending in court Chocolate
Hersheys, Mars, Nestle and Cadbury (control 75
of chocolate candy industry) accused of
conspiring to fix prices since 2002. Accused
of price fixing and squeezing out internet
competition by colluding with manufacturers on
prices.
40
OLIGOPOLY
Price Leadership (Dominant Firm Strategy)
  • Often one firm in oligopolistic market owns
    dominant market share.
  • Dominant firm can establish profit max price
    based on their cost structure, then smaller, or
    less aggressive, firms behave as price takers.
  • Example Airlines

41
13.4 GAME THEORY
  • Game theory is the tool used to analyze strategic
    behaviorbehavior that recognizes mutual
    interdependence and takes account of the expected
    behavior of others.

42
13.4 GAME THEORY
  • What Is a Game?
  • All games involve three features
  • Rules
  • Strategies
  • Payoffs
  • Prisoners dilemma is a game between two
    prisoners that shows why it is hard to cooperate,
    even when it would be beneficial to both players
    to do so.

43
13.4 GAME THEORY
  • The Prisoners Dilemma
  • Art and Bob are caught stealing a car sentence
    is 2 years in jail.
  • DA wants to convict them of a big bank robbery
    sentence is 10 years in jail.
  • DA has no evidence and to get the conviction, he
    makes the prisoners play a game.

44
13.4 GAME THEORY
  • Rules
  • Players cannot communicate with one another.
  • If both confess to the larger crime, each will
    receive a sentence of 3 years for both crimes.
  • If one confesses and the accomplice does not, the
    one who confesses will receive a 1-year sentence,
    while the accomplice receives a 10-year sentence.
  • If neither confesses, both receive a 2-year
    sentence.

45
13.4 GAME THEORY
  • Strategies
  • The strategies of a game are all the possible
    outcomes of each player.
  • The strategies in the prisoners dilemma are
  • Confess to the bank robbery.
  • Deny the bank robbery.

46
13.4 GAME THEORY
  • Payoffs
  • Four outcomes
  • Both confess.
  • Both deny.
  • Art confesses and Bob denies.
  • Bob confesses and Art denies.
  • A payoff matrix is a table that shows the payoffs
    for every possible action by each player given
    every possible action by the other player.

47
13.4 GAME THEORY
  • Table 13.5 shows the prisoners dilemma payoff
    matrix for Art and Bob.

48
(No Transcript)
49
13.4 GAME THEORY
  • Equilibrium
  • Occurs when each player takes the best possible
    action given the action of the other player.
  • Nash equilibrium is an equilibrium in which each
    player takes the best possible action given the
    action of the other player.
  • The Nash equilibrium for Art and Bob is to
    confess.
  • The equilibrium of the prisoners dilemma is not
    the best outcome possible for the players, but is
    the best option if players dont know what the
    other is doing.

50
13.4 GAME THEORY
  • The Duopolists Dilemma as a Game
  • The dilemma of Boeing and Airbus is similar to
    that of Art and Bob.
  • Each firm has two strategies. It can produce
    airplanes at the rate of
  • 3 a week
  • 4 a week

51
13.4 GAME THEORY
  • Because each firm has two strategies, there are
    four possible combinations of actions
  • Both firms produce 3 a week (monopoly outcome).
  • Both firms produce 4 a week.
  • Airbus produces 3 a week and Boeing produces 4 a
    week.
  • Boeing produces 3 a week and Airbus produces 4 a
    week.

52
13.4 GAME THEORY
  • The Payoff Matrix
  • Table 13.6 shows the payoff matrix as the
    economic profits for each firm in each possible
    outcome.

53
(No Transcript)
54
13.4 GAME THEORY
  • Equilibrium of the Duopolists Dilemma
  • Both firms produce 4 a week.

Like the prisoners, the duopolists fail to
cooperate and get a worse outcome than the one
that cooperation would deliver.
55
(No Transcript)
56
13.4 GAME THEORY
  • Collusion Is Profitable but Difficult to Achieve
  • The duopolists dilemma explains why it is
    difficult for firms to collude and achieve the
    maximum monopoly profit.
  • Even if collusion were legal, it would be
    individually rational for each firm to cheat on a
    collusive agreement and increase output.
  • In OPEC, member countries frequently break the
    cartel agreement and overproduce (more players
    more difficult to prevent cheating).

57
13.4 GAME THEORY
Advertising Game
  • Coke and Pepsi have two strategies advertise or
    not advertise.

Table 13.8 shows the payoff matrix as the
economic profits for each firm in each possible
outcome.
58
(No Transcript)
59
13.4 GAME THEORY
  • The Nash equilibrium for this game is for both
    firms advertise.
  • But they could earn a larger joint profit if they
    could collude and not advertise.

60
(No Transcript)
61
13.4 GAME THEORY
  • Is Oligopoly Efficient?
  • In oligopoly, price usually exceeds marginal
    cost.
  • So the quantity produced is less than the
    efficient quantity.
  • Oligopoly suffers from the same source and type
    of inefficiency as monopoly.
About PowerShow.com