Presentation on theme: "9 9 Between Competition and Monopoly. ●Monopolistic Competition ●Oligopoly ●Monopolistic Competition, Oligopoly, and Public Welfare ●A Glance Backward:"— Presentation transcript:
9 9 Between Competition and Monopoly
●Monopolistic Competition ●Oligopoly ●Monopolistic Competition, Oligopoly, and Public Welfare ●A Glance Backward: Comparing the Four Market Forms ●Monopolistic Competition ●Oligopoly ●Monopolistic Competition, Oligopoly, and Public Welfare ●A Glance Backward: Comparing the Four Market Forms Outline
FIGURE 1. Short-Run Equilibrium Under Monopolistic Competition D AC P 3.40 Price per Gallon Gallons of Gasoline per Week 12,000 $3.50 MR MC E C $3.80 $3.00 Π -max Q =12,000 and P = $3.50 Per unit Π = $0.10 → total Π = $1,200.
FIGURE 2. Long-Run Equilibrium Under Monopolistic Competition 15,000 $3.35 Price per Gallon Gallons of Gasoline per Week 10,000 $3.45 MR MC AC D E P M SR profits in Fig. 1 → new firms enter which shifts each firm’s D curve down until P = AC. Compared with SR profits in Fig. 1: a. P is lower in LR b. more firms in industry; each produces a smaller Q with higher AC.
FIGURE 3. Sales-Max Equilibrium 3.75 3.69 3.75 3.80 2.5 $4.00 MR B D E AC Price per Box Millions of Boxes per Year F MC A Π -max Q = 2.5m where MR = MC. P = $4.00 and total Π = $0.20 x 2.5 m = $500,000. Sales-max Q = 3.75m where MR = 0. P = $3.75 and total Π = $0.06 x 3.75 m = $225,000. Total Π (TR) is lower (higher) at point F than point E.
FIGURE 4. The Kinked Demand Curve 0 7 Quantity per Year Price $8 D (Competitors’ prices are fixed) D 1,4001,1001,000 (Competitors respond to price changes) d d A Typical oligopoly fears the worst. If firm cuts P then rivals will match P cut → relevant demand curve is dd. But if firm raises P then rival will not match the P increase → relevant demand curve is DD. Thus, the firm’s true demand curve is the red line “DAd.”
TABLE 1. Payoff Matrix with Dominant Strategies A gets $10m B gets $10m A gets -$2m B gets $12m A gets $12m B gets -$2m A gets $3m B gets $3m Firm B Strategy High PriceLow Price Firm A Strategy High Price Low Price
FIGURE 6. Entry and Entry-Blocking Strategy 60 22 40 –2 Profits (millions $) Old FirmNew Firm Possible Reactions of New Firm Possible Choices of Old Firm Enter Don’t Enter Enter Small Factory Big Factory