1. Chapter 10 Monopolistic Competition and Oligopoly

2. Key Concepts  monopolistic competition  oligopoly  high-price/low-output equilibrium  cartel  collusion  Cournot model 古诺模型  output-reaction curve  Stackelberg model 斯泰克伯格模型  first-mover advantage 先行者利益 优先模型  price signaling  price leadership

3.  barometric price leadership  Bertrand model 伯川德模型  price-reaction curve  contestable markets theory  Sweezy model 斯威齐模型  kinked demand curve  oligopoly theory  economic census  North American Industry Classification System (NAICS)  concentration ratios  Herfindahl-Hirschmann Index (HHI) 赫芬德尔指数

4. 一、 Monopolistic Competition versus Oligopoly  Monopolistic Competition Large number of sellers that offer differentiated products. Normal profit opportunity in long-run equilibrium.  Oligopoly Few sellers. Economic profits are possible in long-run equilibrium.

5.  ***Dynamic Nature of Competition Timely market structure information is required for managerial investment decisions

6. 二、 Monopolistic Competition 1.Features of monopolistic Competition  Many buyers and sellers.  Product heterogeneity.  Free entry and exit.  Perfect information.  Opportunity for normal profits in long-run equilibrium.

7. Figure 10.1

8. 2.Price/Output Decisions  Set M π = MR - MC = 0 to Max profits  MR=MC at optimal output.  No durable economic profits because P=AR=AC.

9. Figure 10.2

10. Monopolistic Competition Process  Short-run Monopoly Equilibrium To take full advantage of S.R monopoly. P > MR = MC.  Long-run: Normal profit P=AC at a point above minimum LRAC.

11. Illustration of Monopolistic Competition P271 TR= 20,000Q-15.6 TC=400,000+4640Q P=? MR=? MC=?

12.  Profit maximization in the short run: Patent  Profit maximization in the long run:  P.C Long run: P=MR=MC=AC

13. 二、 Oligopoly 1.Characteristics Few sellers. Homogenous or unique products. Blockaded entry and exit. Imperfect dissemination of information. Opportunity for above-normal (economic) profits in long-run equilibrium.

14. 2.Cartels and Collusion  Overt and Covert Agreements Cartels operate under formal agreements.  Powerful cartels function as a monopoly. Collusion exists when firms reach secret, covert agreements.  Enforcement Problem Cartels are typically rather short-lived because coordination problems often lead to cheating. Cartel subversion can be extremely profitable. Detecting the source of secret price concessions can be extremely difficult.

15. Fig 10.4

16. Oligopoly Output-Setting Models  Cournot Oligopoly  Cournot equilibrium output is found by simultaneously solving output- reaction curves for both competitors.  Cournot equilibrium output exceeds monopoly output but is less than competitive output.

18. Stackelberg Oligopoly Stackelberg model posits a first- mover advantage. Price wars severely undermine profitability for both leading and following firms. Price signaling can reduce uncertainty in oligopoly markets. Price leadership occurs when firms follow the industry leader ’ s pricing policy.

20. Oligopoly Price-Setting Models  Bertrand Oligopoly: Identical Products The Bertrand model focuses upon the price reactions. The Bertrand model predicts a competitive market price/output solution in oligopoly markets with identical products.  Bertrand Oligopoly: Differentiated Products The Bertrand model demonstrates how price- setting oligopolists profit with differentiated products.

22. Sweezy Oligopoly  Sweezy model predicts “ sticky ” prices.  Sweezy model explains why prices in oligopoly markets sometimes fail to respond to marginal cost change.

24. Oligopoly Model Comparison  Cournot model does not incorporate output reactions.  Bertrand model does not incorporate price reactions.  Stackelberg model explains first-mover advantages, but does not explain countermoves.  Sweezy model is incomplete.  Modeling behavior in oligopoly markets is difficult.

25. Market Structure Measurement  Economic Markets An economic market consists of all individuals and firms willing and able to buy or sell. When cross-price elasticities are large and positive, goods are competing products.  Economic Census The economic census provides a comprehensive statistical profile of the economy. Industry statistics are classified using the North American Industry Classification System (NAICS).

26. Measures of Market Concentration  Concentration Ratios Group market share data are called concentration ratios. CR i = ∑ X i, where X i is market share of the ith leading firm.  CR i = 100 for monopoly.  CR i ≈ 0 for a perfectly competitive industry.

27.  Herfindahl-Hirschmann Index Calculated in percentage terms, the HHI is the sum of squared market shares for all competitors. HHI = ∑ X i 2, where X i 2 =squared market share of the ith firm.  HHI = 10,000 for monopoly.  HHI ≈ 0 for a perfectly competitive industry.

28. Be good, OK....

29. After a week …  Please, put more effort in your work......

30. After a month ….  I SAID “ MORE EFFORT ” !!!!

31. After a quarterly report …  Did you hear me? More effort!!!