Presentation on theme: "Why are we “Speed Reviewing”?"— Presentation transcript:
1 Why are we “Speed Reviewing”? Having you review on your own wouldn’t be effectiveLecturing about every concept would be too boring.“Speed Reviewing” will help you identify what you need to study.So you must come see me about specific things you don’t understand.
2 Unit IV: Imperfect Competition Half WayUnit IV: Imperfect Competition
3 Imperfect Competition To sell more a firm must lower its price. The cost curves are the sameThe MR= MC rule still appliesShut down rule still appliesAll have a downward sloping demand curve.To sell more a firm must lower its price.5. All are inefficient.6. MR < Demand
5 5 Characteristics of a Monopoly 1. Single SellerThe Firm IS the Industry2. Unique good with no close substitutes3. “Price Maker”The firm can change the price by changing the quantity it produces4. High Barriers to EntryNew firms CANNOT enter marketNo immediate competitors5. Some “Nonprice” Competition
20 Elastic and Inelastic Range $20015010050DollarsQ$750500250DollarsQ
21 Elastic and Inelastic Range $20015010050Total Revenue TestIf price falls and TR increases then demand is elastic.DollarsMRDQ$750500250DollarsTRQ
22 Elastic and Inelastic Range $20015010050Total Revenue TestIf price falls and TR increases then demand is elastic.DollarsMRDQTotal Revenue TestIf price falls and TR falls then demand is inelastic.$750500250DollarsWhen MR goes negative, TR will fallTRQ
35 Why Regulate? How do they regulate? Why would the government regulate an monopoly?To keep prices lowTo make monopolies efficientHow do they regulate?Price controls: Price Ceilings
36 1.Socially Optimal Price Where should the government place the price ceiling?1.Socially Optimal PriceP = MC (Allocative Efficiency)OR2. Fair-Return Price (Break–Even)P = ATC (Normal Profit)NOT THE SAME AS PRODUCTIVE EFFICIENCY
37 REGULATED NATURAL MONOPOLY Monopoly PriceMR = MCPPmPrice and CostsATCMCDMRQQm
41 PRICE DISCRIMINATION Definition: Practice of selling the same products to different buyers at different pricesRequires the following conditions:Firm must have monopoly powerFirm must be able to segregate the marketConsumers must not be able to resell product
42 A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand MCPATCPrice and CostsMR=DDQQ1Q2
43 What output do they make? Where is Consumer Surplus? MCPATCPrice and CostsMR=DDQQ2
44 Where is the Profit? Profit with price discrimination MC P ATC Price and CostsMR=DDQQ2
50 FOUR MARKET MODELS Monopolistic Competition: Relatively Large Number of SellersDifferentiated ProductsSome control over priceEasy Entry and ExitNon-price competition (Advertising)Market Structure ContinuumPureCompetitionMonopolyMonopolisticOligopoly
51 Differentiated Products Goods are NOT identical.Firms seek to capture a piece of the market by making unique goods.Since these products have substitutes, firms use NON-PRICE CompetitionExamples:Fast Food RestaurantsFurniture companiesJewelry storesHair SalonsClothing Manufacturers
52 “Monopolistic” +”Competition” Monopolistic QualitiesControl over price of own good due to differentiated product.D > MRPlenty of non-price competitionNot efficientPerfect Competition QualitiesLarge number of smaller firmsRelatively easy entry and exitZero Economic Profit in Long-Run since firms can enter.
60 MONOPOLISTIC COMPETITION AND EFFICIENCYNot Productively Efficient Minimum ATCNot Allocatively EfficientPrice MCFirm has Excess CapacityGraphically…
61 MONOPOLISTIC COMPETITION AND EFFICIENCYExcess CapacityThe gap between the minimum ATC output and the profit maximizing outputGiven current resources, the firm can produce at minimum ATC, but they decide not to.
62 MONOPOLISTIC COMPETITION AND EFFICIENCYMCLong-Run EquilibriumATCP3= A3Excess CapacityPrice and CostsDMRQ3Quantity
64 FOUR MARKET MODELS Oligopoly: A Few Large Producers Identical or Differentiated ProductsMutual InterdependenceFirms use Strategic PricingHigh Entry BarriersExamples: Cereal Companies, Car ProducersMarket Structure ContinuumPureCompetitionMonopolyMonopolisticOligopoly
65 HOW DO OLIGOPOLIES OCCUR? Oligopolies occur when only a few large firms start to control an industry.High barriers to entry keep others from entering.Types of Barriers to EntryEconomies of ScaleHigh Start-up CostsOwnership of Raw Materials
67 The study of how people behave in strategic situations What is game theory?The study of how people behave in strategic situationsA thorough understanding of game theory helps firms in an oligopoly maximize profit.
68 A B C D A Game-Theory Overview OLIGOPOLY BEHAVIOR $12 $15 $6 $8 RareAir’s Price StrategyHighLowBADC$12$15$6$8HighLowUptown’s Price Strategy
69 Greatest Combined Profit if both Sell High OLIGOPOLY BEHAVIORGreatest Combined Profit if both Sell HighRareAir’s Price StrategyHighLowBADC$12$15$6$8HighLowUptown’s Price Strategy
70 Each firm recognizes that more profit is made if they lower price OLIGOPOLY BEHAVIOREach firm recognizes that more profit is made if they lower priceRareAir’s Price StrategyHighLowBADC$12$15$6$8HighLowUptown’s Price Strategy
71 BUT if both lower price they end up in the Worst Case OLIGOPOLY BEHAVIORBUT if both lower price they end up in the Worst CaseRareAir’s Price StrategyHighLowBADC$12$15$6$8HighLowUptown’s Price Strategy
72 To make more profit, firms may try to cooperate (collude) OLIGOPOLY BEHAVIORTo make more profit, firms may try to cooperate (collude)RareAir’s Price StrategyHighLowBADC$12$15$6$8HighLowUptown’s Price Strategy
73 To make more profit, firms may try to cooperate (collude) OLIGOPOLY BEHAVIORTo make more profit, firms may try to cooperate (collude)RareAir’s Price StrategyHighLowBADC$12$15$6$8HighLowUptown’s Price Strategy
74 But now each firm has the incentive to cheat. OLIGOPOLY BEHAVIORBut now each firm has the incentive to cheat.RareAir’s Price StrategyHighLowBADC$12$15$6$8HighLowUptown’s Price Strategy
75 What did we learn? Oligopoly pricing must be strategic Oligopolies have a tendency to collude to gain profit.(Collusion is the act of cooperating with rivals in order to “rig” a situation.)Collusion results in the incentive to cheat.
79 Cartel = Colluding Oligopoly CARTELS AND COLLUSIONCartel = Colluding OligopolyA cartel is a group of producers that create a formal agreement to fix prices high.Cartels set price and output at an agreed upon priceFirms require identical or highly similar demand and costsCartel must have a way to punish cheatersTogether they act as a monopoly
80 Colluding Oligopolists Will Split the Monopoly Profits. CARTELS AND OTHER COLLUSIONColluding Oligopolists WillSplit the Monopoly Profits.DMCATCMREconomicProfitMR = MCPrice and costsQ0P0A0
82 Kinked Demand Curve Model Noncollusive firms are likely to react to competitor’s pricing in two ways:1. Match price-If one firm cuts it’s prices, then the other firms follow suit causing inelastic demand2. Ignore change-If one firm raises prices, others maintain same price causing elastic demand
83 KINKED DEMAND THEORY:The demand and MR curves if other firms match lower pricingIf this firm lowers its price and others follow, Qd will increase mildlyPriceD1QuantityMR1
84 KINKED DEMAND THEORY:The demand and MR curves if other firms ignore higher pricingIf this firm increases its price and others ignore it, Qd for this firm will decrease significantlyPriceD2MR2Quantity
85 Two sets of curves based on the pricing decisions of other firms The firm’s demand andmarginal revenue curvesPriceD2MR2D1QuantityMR1
86 Two sets of curves based on the pricing decisions of other firms Rivals tend tofollow a price cutPriceD2MR2D1QuantityMR1
87 Two sets of curves based on the pricing decisions of other firms Rivals tend tofollow a price cutor ignore aprice increasePriceD2MR2D1QuantityMR1
88 Two sets of curves based on the pricing decisions of other firms Effectively creatinga kinked demand curvePriceD2MR2D1QuantityMR1
89 Two sets of curves based on the pricing decisions of other firms Effectively creatinga kinked demand curvePriceDQuantity
90 Two sets of curves based on the pricing decisions of other firms What about MR?PriceD2MR2D1QuantityMR1
91 Two sets of curves based on the pricing decisions of other firms Since we use sections of both MR curves, the MR has a vertical gap.MR2PriceDQuantityMR1
92 NONCOLLUSIVE OLIGOPOLY KINKED DEMAND THEORY:NONCOLLUSIVE OLIGOPOLYProfit maximizationMR = MC occursat the kink.MR2PriceDQuantityMR1
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