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Imperfect Competition and Strategic Behavior

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Chapter 11. Imperfect Competition and Strategic Behavior. Industrial Concentration. The concentration ratio measures economic power in an industry and shows the ... – PowerPoint PPT presentation

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Title: Imperfect Competition and Strategic Behavior


1
Chapter 11
  • Imperfect Competition and Strategic Behavior

2
Industrial Concentration
  • The concentration ratio measures economic power
    in an industry and shows the market shares of a
    specific number of the industrys largest firms.

3
Imperfect Competition
  • Industries with a large number of small firms
    the theory of monopolistic competition.
  • Industries with a small number of large firms
    the theory of oligopoly (which involves game
    theory).

4
Monopolistic Competition
  • 1. Each firm produces one variety of the
    differentiated product. Thus, it faces a
    negatively sloped and highly elastic demand
    curve.
  • 2. The industry contains so many firms that each
    one ignores competitors when making price and
    output decisions.
  • 3. Firms are free to enter and exit the industry.

5
Profit Maximization for a Firm in Monopolistic
Competition
6
Monopolistic Competition vs. Perfect Competition
  • In contrast to perfect competition, the LR
    equilibrium in monopolistic competition does not
    minimize ATC there is excess capacity.
  • This excess capacity may not mean waste if
    consumers value product variety.
  • Society faces a tradeoff between product variety
    and lower cost per unit.

7
Oligopoly and Game Theory
  • Oligopoly an industry containing two or more
    firms, at least one of which produces a
    significant portion of the industrys total
    output.
  • An oligopolistic firm faces only a few
    competitors.
  • Strategic behavior is central to their actions.

8
Game Theory
  • The players are firms, their strategies are the
    price or output decisions, and their payoffs are
    profits.
  • Consider a simplified duopoly in which two firms
    choose to cooperate or compete
  • Cooperate produce 1/2 of the monopoly output
  • yields low output and high price
  • Compete produce 2/3 of the monopoly output
  • yields high output and low price

9
The Oligopolists Dilemma To Cooperate or to
Compete?
10
Nash Equilibrium
  • A Nash equilibrium is an outcome in which each
    firm is doing the best it can given what the
    other firm is doing.
  • Note that for each firm, the best action is to
    compete, no matter what the other firm is
    doing.
  • So in this game, the Nash equilibrium has both
    firms competing and producing the higher level
    of output.

11
Prisoners Dilemma
As output
One-half monopoly output
Two-thirds monopoly output
Cooperative Outcome
One-half monopoly output
20
20
15
22
Bs output
Nash equilibrium
Two-thirds monopoly output
22
15
17
17
But notice that this outcome does not maximize
joint profits this is the classic example of
the prisoners dilemma!
12
Entry Barriers
  • Brand Proliferation
  • Advertising
  • Predatory Pricing
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