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Chapter 12 Monopolistic Competition and Oligopoly.

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1 Chapter 12 Monopolistic Competition and Oligopoly

2 ©2005 Pearson Education, Inc. Chapter 122 Topics to be Discussed Monopolistic Competition Oligopoly Price Competition Competition Versus Collusion: The Prisoners’ Dilemma Implications of the Prisoners’ Dilemma for Oligopolistic Pricing Cartels

3 ©2005 Pearson Education, Inc. Chapter 123 Monopolistic Competition Characteristics 1.Many firms 2.Free entry and exit 3.Differentiated product

4 ©2005 Pearson Education, Inc. Chapter 124 Monopolistic Competition The amount of monopoly power depends on the degree of differentiation Examples of this very common market structure include:  Toothpaste  Soap  Cold remedies

5 ©2005 Pearson Education, Inc. Chapter 125 Monopolistic Competition Toothpaste  Crest and monopoly power Procter & Gamble is the sole producer of Crest Consumers can have a preference for Crest – taste, reputation, decay-preventing efficacy The greater the preference (differentiation) the higher the price

6 ©2005 Pearson Education, Inc. Chapter 126 Monopolistic Competition Two important characteristics  Differentiated but highly substitutable products  Free entry and exit

7 A Monopolistically Competitive Firm in the Short and Long Run Quantity $/Q Quantity $/Q MC AC MC AC D SR MR SR D LR MR LR Q SR P SR Q LR P LR Short RunLong Run

8 ©2005 Pearson Education, Inc. Chapter 128 A Monopolistically Competitive Firm in the Short and Long Run Short run  Downward sloping demand – differentiated product  Demand is relatively elastic – good substitutes  MR < P  Profits are maximized when MR = MC  This firm is making economic profits

9 ©2005 Pearson Education, Inc. Chapter 129 A Monopolistically Competitive Firm in the Short and Long Run Long run  Profits will attract new firms to the industry (no barriers to entry)  The old firm’s demand will decrease to DLR  Firm’s output and price will fall  Industry output will rise  No economic profit (P = AC)  P > MC  some monopoly power

10 Deadweight loss MCAC Monopolistically and Perfectly Competitive Equilibrium (LR) $/Q Quantity $/Q D = MR QCQC PCPC MCAC D LR MR LR Q MC P Quantity Perfect Competition Monopolistic Competition

11 ©2005 Pearson Education, Inc. Chapter 1211 Monopolistic Competition and Economic Efficiency The monopoly power 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 – deadweight loss. With no economic profits in the long run, the firm is still not producing at minimum AC and excess capacity exists.

12 ©2005 Pearson Education, Inc. Chapter 1212 Monopolistic Competition and Economic Efficiency Firm faces downward sloping demand so zero profit point is to the left of minimum average cost Excess capacity is inefficient because average cost would be lower with fewer firms  Inefficiencies would make consumers worse off

13 ©2005 Pearson Education, Inc. Chapter 1213 Monopolistic Competition If inefficiency is bad for consumers, should monopolistic competition be regulated?  Market power is relatively small. Usually there are enough firms to compete with enough substitutability between firms – deadweight loss small.  Inefficiency is balanced by benefit of increased product diversity – may easily outweigh deadweight loss.

14 ©2005 Pearson Education, Inc. Chapter 1214 The Market for Colas and Coffee Each market has much differentiation in products and tries to gain consumers through that differentiation  Coke vs. Pepsi  Maxwell House vs. Folgers How much monopoly power do each of these producers have?  How elastic is demand for each brand?

15 ©2005 Pearson Education, Inc. Chapter 1215 Elasticities of Demand for Brands of Colas and Coffee

16 ©2005 Pearson Education, Inc. Chapter 1216 The Market for Colas and Coffee The demand for Royal Crown is more price inelastic than for Coke There is significant monopoly power in these two markets The greater the elasticity, the less monopoly power and vice versa

17 ©2005 Pearson Education, Inc. Chapter 1217 Oligopoly – Characteristics Small number of firms Product differentiation may or may not exist Barriers to entry  Scale economies  Patents  Technology  Name recognition  Strategic action

18 ©2005 Pearson Education, Inc. Chapter 1218 Oligopoly Examples  Automobiles  Steel  Aluminum  Petrochemicals  Electrical equipment

19 ©2005 Pearson Education, Inc. Chapter 1219 Oligopoly Management Challenges  Strategic actions to deter entry Threaten to decrease price against new competitors by keeping excess capacity  Rival behavior Because only a few firms, each must consider how its actions will affect its rivals and in turn how their rivals will react

20 ©2005 Pearson Education, Inc. Chapter 1220 Oligopoly – Equilibrium If one firm decides to cut their price, they must consider what the other firms in the industry will do  Could cut price some, the same amount, or more than firm  Could lead to price war and drastic fall in profits for all Actions and reactions are dynamic, evolving over time

21 ©2005 Pearson Education, Inc. Chapter 1221 Oligopoly – Equilibrium Defining Equilibrium  Firms are doing the best they can and have no incentive to change their output or price  All firms assume competitors are taking rival decisions into account Nash Equilibrium  Each firm is doing the best it can given what its competitors are doing We will focus on duopoly  Markets in which two firms compete

22 ©2005 Pearson Education, Inc. Chapter 1222 Oligopoly The Cournot Model  Oligopoly model in which firms produce a homogeneous good, each firm treats the output of its competitors as fixed, and all firms decide simultaneously how much to produce  Firm will adjust its output based on what it thinks the other firm will produce

23 ©2005 Pearson Education, Inc. Chapter 1223 MC 1 50 MR 1 (75) D 1 (75) 12.5 If Firm 1 thinks Firm 2 will produce 75 units, its demand curve is shifted to the left by this amount. Firm 1’s Output Decision Q1Q1 P1P1 D 1 (0) MR 1 (0) Firm 1 and market demand curve, D 1 (0), if Firm 2 produces nothing. D 1 (50)MR 1 (50) 25 If Firm 1 thinks Firm 2 will produce 50 units, its demand curve is shifted to the left by this amount.

24 ©2005 Pearson Education, Inc. Chapter 1224 Oligopoly The Reaction Curve  The relationship between a firm’s profit- maximizing output and the amount it thinks its competitor will produce  A firm’s profit-maximizing output is a decreasing schedule of the expected output of Firm 2

25 ©2005 Pearson Education, Inc. Chapter 1225 Firm 2’s Reaction Curve Q* 2 (Q 1 ) Firm 2’s reaction curve shows how much it will produce as a function of how much it thinks Firm 1 will produce. Reaction Curves and Cournot Equilibrium Q2Q2 Q1Q1 255075100 25 50 75 100 Firm 1’s Reaction Curve Q* 1 (Q 2 ) x x x x Firm 1’s reaction curve shows how much it will produce as a function of how much it thinks Firm 2 will produce. The x’s correspond to the previous model.

26 ©2005 Pearson Education, Inc. Chapter 1226 Firm 2’s Reaction Curve Q* 2 (Q 1 ) Reaction Curves and Cournot Equilibrium Q2Q2 Q1Q1 255075100 25 50 75 100 Firm 1’s Reaction Curve Q* 1 (Q 2 ) x x x x In Cournot equilibrium, each firm correctly assumes how much its competitors will produce and thereby maximizes its own profits. Cournot Equilibrium

27 ©2005 Pearson Education, Inc. Chapter 1227 Cournot Equilibrium Each firm’s reaction curve tells it how much to produce given the output of its competitor Equilibrium in the Cournot model, in which each firm correctly assumes how much its competitor will produce and sets its own production level accordingly

28 ©2005 Pearson Education, Inc. Chapter 1228 Oligopoly Cournot equilibrium is an example of a Nash equilibrium (Cournot-Nash Equilibrium) The Cournot equilibrium says nothing about the dynamics of the adjustment process  Since both firms adjust their output, neither output would be fixed

29 ©2005 Pearson Education, Inc. Chapter 1229 The Linear Demand Curve An Example of the Cournot Equilibrium  Two firms face linear market demand curve  We can compare competitive equilibrium and the equilibrium resulting from collusion  Market demand is P = 30 - Q  Q is total production of both firms: Q = Q 1 + Q 2  Both firms have MC 1 = MC 2 = 0

30 ©2005 Pearson Education, Inc. Chapter 1230 Oligopoly Example Firm 1’s Reaction Curve  MR = MC

31 ©2005 Pearson Education, Inc. Chapter 1231 Oligopoly Example An Example of the Cournot Equilibrium

32 ©2005 Pearson Education, Inc. Chapter 1232 Oligopoly Example An Example of the Cournot Equilibrium

33 ©2005 Pearson Education, Inc. Chapter 1233 Duopoly Example Q1Q1 Q2Q2 Firm 2’s Reaction Curve 30 15 Firm 1’s Reaction Curve 15 30 10 Cournot Equilibrium The demand curve is P = 30 - Q and both firms have 0 marginal cost.

34 ©2005 Pearson Education, Inc. Chapter 1234 Oligopoly Example Profit Maximization with Collusion

35 ©2005 Pearson Education, Inc. Chapter 1235 Profit Maximization w/ Collusion Contract Curve  Q 1 + Q 2 = 15 Shows all pairs of output Q 1 and Q 2 that maximize total profits  Q 1 = Q 2 = 7.5 Less output and higher profits than the Cournot equilibrium

36 ©2005 Pearson Education, Inc. Chapter 1236 Firm 1’s Reaction Curve Firm 2’s Reaction Curve Duopoly Example Q1Q1 Q2Q2 30 10 Cournot Equilibrium Collusion Curve 7.5 Collusive Equilibrium For the firm, collusion is the best outcome followed by the Cournot Equilibrium and then the competitive equilibrium 15 Competitive Equilibrium (P = MC; Profit = 0)

37 ©2005 Pearson Education, Inc. Chapter 1237 First Mover Advantage – The Stackelberg Model Oligopoly model in which one firm sets its output before other firms do Assumptions  One firm can set output first  MC = 0  Market demand is P = 30 - Q where Q is total output  Firm 1 sets output first and Firm 2 then makes an output decision seeing Firm 1’s output

38 ©2005 Pearson Education, Inc. Chapter 1238 First Mover Advantage – The Stackelberg Model Firm 1  Must consider the reaction of Firm 2 Firm 2  Takes Firm 1’s output as fixed and therefore determines output with the Cournot reaction curve: Q 2 = 15 - ½(Q 1 )

39 ©2005 Pearson Education, Inc. Chapter 1239 First Mover Advantage – The Stackelberg Model Firm 1  Choose Q 1 so that:  Firm 1 knows Firm 2 will choose output based on its reaction curve. We can use Firm 2’s reaction curve as Q 2.

40 ©2005 Pearson Education, Inc. Chapter 1240 First Mover Advantage – The Stackelberg Model Using Firm 2’s Reaction Curve for Q 2 :

41 ©2005 Pearson Education, Inc. Chapter 1241 First Mover Advantage – The Stackelberg Model Conclusion  Going first gives Firm 1 the advantage  Firm 1’s output is twice as large as Firm 2’s  Firm 1’s profit is twice as large as Firm 2’s Going first allows Firm 1 to produce a large quantity. Firm 2 must take that into account and produce less unless it wants to reduce profits for everyone.

42 ©2005 Pearson Education, Inc. Chapter 1242 Price Competition Competition in an oligopolistic industry may occur with price instead of output The Bertrand Model is used  Oligopoly model in which firms produce a homogeneous good, each firm treats the price of its competitors as fixed, and all firms decide simultaneously what price to charge

43 ©2005 Pearson Education, Inc. Chapter 1243 Price Competition – Bertrand Model Assumptions  Homogenous good  Market demand is P = 30 - Q where Q = Q 1 + Q 2  MC 1 = MC 2 = $3 Can show the Cournot equilibrium if Q 1 = Q 2 = 9 and market price is $12, giving each firm a profit of $81.

44 ©2005 Pearson Education, Inc. Chapter 1244 Price Competition – Bertrand Model Assume here that the firms compete with price, not quantity Since good is homogeneous, consumers will buy from lowest price seller  If firms charge different prices, consumers buy from lowest priced firm only  If firms charge same price, consumers are indifferent who they buy from

45 ©2005 Pearson Education, Inc. Chapter 1245 Price Competition – Bertrand Model Nash equilibrium is competitive output since have incentive to cut prices Both firms set price equal to MC  P = MC; P 1 = P 2 = $3  Q = 27; Q 1 & Q 2 = 13.5 Both firms earn zero profit

46 ©2005 Pearson Education, Inc. Chapter 1246 Price Competition – Bertrand Model Why not charge a different price?  If charge more, sell nothing  If charge less, lose money on each unit sold The Bertrand model demonstrates the importance of the strategic variable  Price versus output

47 ©2005 Pearson Education, Inc. Chapter 1247 Bertrand Model – Criticisms When 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

48 ©2005 Pearson Education, Inc. Chapter 1248 Price Competition – Differentiated Products Market shares are now determined not just by prices, but by differences in the design, performance, and durability of each firm’s product In these markets, more likely to compete using price instead of quantity

49 ©2005 Pearson Education, Inc. Chapter 1249 Price Competition – Differentiated Products Example  Duopoly with fixed costs of $20 but zero variable costs  Firms face the same demand curves Firm 1’s demand: Q 1 = 12 - 2P 1 + P 2 Firm 2’s demand: Q 2 = 12 - 2P 1 + P 2  Quantity that each firm can sell decreases when it raises its own price but increases when its competitor charges a higher price

50 ©2005 Pearson Education, Inc. Chapter 1250 Price Competition – Differentiated Products Firms set prices at the same time

51 ©2005 Pearson Education, Inc. Chapter 1251 Price Competition – Differentiated Products If P 2 is fixed:

52 ©2005 Pearson Education, Inc. Chapter 1252 Nash Equilibrium in Prices What if both firms collude?  They both decide to charge the same price that maximizes both of their profits  Firms will charge $6 and will be better off colluding since they will earn a profit of $16

53 ©2005 Pearson Education, Inc. Chapter 1253 Firm 1’s Reaction Curve Nash Equilibrium in Prices P1P1 P2P2 Firm 2’s Reaction Curve $4 Nash Equilibrium $6 Collusive Equilibrium Equilibrium at price of $4 and profits of $12

54 ©2005 Pearson Education, Inc. Chapter 1254 Nash Equilibrium in Prices If Firm 1 sets price first and then Firm 2 makes pricing decision:  Firm 1 would be at a distinct disadvantage by moving first  The firm that moves second has an opportunity to undercut slightly and capture a larger market share

55 ©2005 Pearson Education, Inc. Chapter 1255 A Pricing Problem: Procter & Gamble Procter & Gamble, Kao Soap, Ltd., and Unilever, Ltd. were entering the market for Gypsy Moth Tape All three would be choosing their prices at the same time Each firm was using same technology so had same production costs  FC = $480,000/month & VC = $1/unit

56 ©2005 Pearson Education, Inc. Chapter 1256 A Pricing Problem: Procter & Gamble Procter & Gamble had to consider competitors’ prices when setting their price P&G’s demand curve was: Q = 3,375P -3.5 (P U ) 0.25 (P K ) 0.25 Where P, P U, P K are P&G’s, Unilever’s, and Kao’s prices respectively

57 ©2005 Pearson Education, Inc. Chapter 1257 A Pricing Problem: Procter & Gamble What price should P&G choose and what is the expected profit? Can calculate profits by taking different possibilities of prices you and the other companies could charge Nash equilibrium is at $1.40 – the point where competitors are doing the best they can as well

58 ©2005 Pearson Education, Inc. Chapter 1258 P&G’s Profit (in thousands of $ per month)

59 ©2005 Pearson Education, Inc. Chapter 1259 A Pricing Problem for Procter & Gamble Collusion with competitors will give larger profits  If all agree to charge $1.50, each earn profit of $20,000  Collusion agreements are hard to enforce

60 ©2005 Pearson Education, Inc. Chapter 1260 Competition Versus Collusion: The Prisoners’ Dilemma Nash equilibrium is a noncooperative equilibrium: each firm makes decision that gives greatest profit, given actions of competitors Although collusion is illegal, why don’t firms cooperate without explicitly colluding?  Why not set profit maximizing collusion price and hope others follow?

61 ©2005 Pearson Education, Inc. Chapter 1261 Competition Versus Collusion: The Prisoners’ Dilemma Competitor is not likely to follow Competitor can do better by choosing a lower price, even if they know you will set the collusive level price We can use example from before to better understand the firms’ choices

62 ©2005 Pearson Education, Inc. Chapter 1262 Competition Versus Collusion: The Prisoners’ Dilemma Assume:

63 ©2005 Pearson Education, Inc. Chapter 1263 Competition Versus Collusion: The Prisoners’ Dilemma Possible Pricing Outcomes:

64 ©2005 Pearson Education, Inc. Chapter 1264 Payoff Matrix for Pricing Game Firm 2 Firm 1 Charge $4Charge $6 Charge $4 Charge $6 $12, $12$20, $4 $16, $16$4, $20

65 ©2005 Pearson Education, Inc. Chapter 1265 Competition Versus Collusion: The Prisoners’ Dilemma We can now answer the question of why firm does not choose cooperative price Cooperating means both firms charging $6 instead of $4 and earning $16 instead of $12 Each firm always makes more money by charging $4, no matter what its competitor does Unless enforceable agreement to charge $6, will be better off charging $4

66 ©2005 Pearson Education, Inc. Chapter 1266 Competition Versus Collusion: The Prisoners’ Dilemma An example in game theory, called the Prisoners’ Dilemma, illustrates the problem oligopolistic firms face  Two prisoners 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

67 ©2005 Pearson Education, Inc. Chapter 1267 -5, -5-1, -10 -2, -2-10, -1 Payoff Matrix for Prisoners’ Dilemma Prisoner A ConfessDon’t confess Confess Don’t confess Prisoner B Would you choose to confess?

68 ©2005 Pearson Education, Inc. Chapter 1268 Oligopolistic Markets Conclusions 1.Collusion will lead to greater profits 2.Explicit and implicit collusion is possible 3.Once collusion exists, the profit motive to break and lower price is significant

69 ©2005 Pearson Education, Inc. Chapter 1269 Charge $1.40Charge $1.50 Charge $1.40 Unilever and Kao Charge $1.50 P&G $12, $12$29, $11 $3, $21$20, $20 Payoff Matrix for the P&G Pricing Problem What price should P & G choose?

70 ©2005 Pearson Education, Inc. Chapter 1270 Observations of Oligopoly Behavior 1.In some oligopoly markets, pricing behavior in time can create a predictable pricing environment and implied collusion may occur 2.In other oligopoly markets, the firms are very aggressive and collusion is not possible

71 ©2005 Pearson Education, Inc. Chapter 1271 Observations of Oligopoly Behavior 2.In other oligopoly markets, the firms are very aggressive and collusion is not possible a.Firms are reluctant to change price because of the likely response of their competitors b.In this case, prices tend to be relatively rigid

72 ©2005 Pearson Education, Inc. Chapter 1272 Price Rigidity Firms have strong desire for stability Price rigidity – characteristic of oligopolistic markets by which firms are reluctant to change prices even if costs or demands change  Fear lower prices will send wrong message to competitors, leading to price war  Higher prices may cause competitors to raise theirs

73 ©2005 Pearson Education, Inc. Chapter 1273 Price Rigidity Basis of kinked demand curve model of oligopoly  Each firm faces a demand curve kinked at the current prevailing price, P*  Above P*, demand is very elastic If P > P*, other firms will not follow  Below P*, demand is very inelastic If P < P*, other firms will follow suit

74 ©2005 Pearson Education, Inc. Chapter 1274 Price Rigidity With a kinked demand curve, marginal revenue curve is discontinuous Firm’s costs can change without resulting in a change in price Kinked demand curve does not really explain oligopolistic pricing  Description of price rigidity rather than an explanation of it

75 ©2005 Pearson Education, Inc. Chapter 1275 The Kinked Demand Curve $/Q Quantity MR D If the producer lowers price, the competitors will follow and the demand will be inelastic. If the producer raises price, the competitors will not and the demand will be elastic.

76 ©2005 Pearson Education, Inc. Chapter 1276 The Kinked Demand Curve $/Q D P* Q* MC MC’ So long as marginal cost is in the vertical region of the marginal revenue curve, price and output will remain constant. MR Quantity

77 ©2005 Pearson Education, Inc. Chapter 1277 Price Signaling and Price Leadership Price Signaling  Implicit collusion in which a firm announces a price increase in the hope that other firms will follow suit Price Leadership  Pattern of pricing in which one firm regularly announces price changes that other firms then match

78 ©2005 Pearson Education, Inc. Chapter 1278 Price Signaling and Price Leadership The Dominant Firm Model  In some oligopolistic markets, one large firm has a major share of total sales, and a group of smaller firms supplies the remainder of the market  The large firm might then act as the dominant firm, setting a price that maximizes its own profits

79 ©2005 Pearson Education, Inc. Chapter 1279 The Dominant Firm Model Dominant firm must determine its demand curve, D D  Difference between market demand and supply of fringe firms To maximize profits, dominant firm produces Q D where MR D and MC D cross At P*, fringe firms sell Q F and total quantity sold is Q T = Q D + Q F

80 ©2005 Pearson Education, Inc. Chapter 1280 Price Setting by a Dominant Firm Price Quantity DD QDQD P* At this price, fringe firms sell Q F, so that total sales are Q T. P1P1 QFQF QTQT P2P2 MC D MR D SFSF The dominant firm’s demand curve is the difference between market demand (D) and the supply of the fringe firms (S F ).

81 ©2005 Pearson Education, Inc. Chapter 1281 Cartels Producers in a cartel explicitly agree to cooperate in setting prices and output Typically only a subset of producers are part of the cartel and others benefit from the choices of the cartel If demand is sufficiently inelastic and cartel is enforceable, prices may be well above competitive levels

82 ©2005 Pearson Education, Inc. Chapter 1282 Cartels Examples of successful cartels  OPEC  International Bauxite Association  Mercurio Europeo Examples of unsuccessful cartels  Copper  Tin  Coffee  Tea  Cocoa

83 ©2005 Pearson Education, Inc. Chapter 1283 Cartels – Conditions for Success 1.Stable cartel organization must be formed – price and quantity settled on and adhered to  Members have different costs, assessments of demand and objectives  Tempting to cheat by lowering price to capture larger market share

84 ©2005 Pearson Education, Inc. Chapter 1284 Cartels – Conditions for Success 2.Potential for monopoly power  Even if cartel can succeed, there might be little room to raise prices if it faces highly elastic demand  If potential gains from cooperation are large, cartel members will have more incentive to make the cartel work

85 ©2005 Pearson Education, Inc. Chapter 1285 Analysis of Cartel Pricing Members of cartel must take into account the actions of non-members when making pricing decisions Cartel pricing can be analyzed using the dominant firm model  OPEC oil cartel – successful  CIPEC copper cartel – unsuccessful

86 ©2005 Pearson Education, Inc. Chapter 1286 The OPEC Oil Cartel Price Quantity MR OPEC D OPEC TDSCSC MC OPEC TD is the total world demand curve for oil, and S C is the competitive supply. OPEC’s demand is the difference between the two. Q OPEC P* OPEC’s profit maximizing quantity is found at the intersection of its MR and MC curves. At this quantity OPEC charges price P*.

87 ©2005 Pearson Education, Inc. Chapter 1287 Cartels About OPEC  Very low MC  TD is inelastic  Non-OPEC supply is inelastic  D OPEC is relatively inelastic

88 ©2005 Pearson Education, Inc. Chapter 1288 The OPEC Oil Cartel Price Quantity MR OPEC D OPEC TDSCSC MC OPEC Q OPEC P* The price without the cartel: Competitive price (P C ) where D OPEC = MC OPEC QCQC QTQT PcPc

89 ©2005 Pearson Education, Inc. Chapter 1289 The CIPEC Copper Cartel Price Quantity MR CIPEC TD D CIPEC SCSC MC CIPEC Q CIPEC P* PCPC QCQC QTQT TD and S C are relatively elastic D CIPEC is elastic CIPEC has little monopoly power P* is closer to P C

90 ©2005 Pearson Education, Inc. Chapter 1290 Cartels To be successful:  Total demand must not be very price elastic  Either the cartel must control nearly all of the world’s supply or the supply of noncartel producers must not be price elastic

91 ©2005 Pearson Education, Inc. Chapter 1291 The Cartelization of Intercollegiate Athletics 1.Large number of firms (colleges) 2.Large number of consumers (fans) 3.Very high profits

92 ©2005 Pearson Education, Inc. Chapter 1292 The Cartelization of Intercollegiate Athletics NCAA is the cartel  Restricts competition  Reduces bargaining power by athletes – enforces rules regarding eligibility and terms of compensation  Reduces competition by universities – limits number of games played each season, number of teams per division, etc.  Limits price competition – sole negotiator for all football television contracts

93 ©2005 Pearson Education, Inc. Chapter 1293 The Cartelization of Intercollegiate Athletics Although members have occasionally broken rules and regulations, has been a successful cartel In 1984, Supreme Court ruled that the NCAA’s monopolization of football TV contracts was illegal  Competition led to drop in contract fees  More college football on TV, but lower revenues to schools

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