1. Slide 1Copyright © 2004 McGraw-Hill Ryerson Limited Appendix 13 Additional Models of Oligopoly and Monopolistic Competition

2. Slide 2Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE A.13-1 Sharing a Market with Increasing Returns With two firms in the market, costs are higher than with one. Yet there may be no tendency for one firm to drive the other out of business.

3. Slide 3Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE A.13-2 The Monopolistic Competitor’s Two Demand Curves The demand facing any one firm will be more elastic if others hold prices constant (dd) than if all firms vary prices in unison (DD).

4. Slide 4Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE A.13-3 Short-Run Equilibrium for the Chamberlinian Firm The Chamberlinian monopolistically competitive firm maximizes economic profit in the short run by equating marginal revenue and short-run marginal cost. Economic profit is P, the area of the shaded rectangle.

5. Slide 5Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE A.13-4 Long-Run Equilibrium in the Chamberlin Model Entry occurs, shifting dd leftward until it becomes tangent to the LAC curve. The firm produces Q*, sells for P*, and earns zero economic profit.

6. Slide 6Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE A.13-5 Total Cost as a Function of Both Price and Distance The total cost of a meal is the price charged by the restaurant plus the transportation cost incurred in getting there.

7. Slide 7Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE A.13-6 The Breakeven Point of a Low- Priced Restaurant The restaurant at 0 is charging a price (P  ) lower than the price charged by its competitor at 1/N. The total cost of a meal at the two restaurants will therefore be the same at X , which lies to the right of the halfway point.

8. Slide 8Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE A.13-7 The Profit-Maximizing Restaurant The more the restaurants on either side charge, the higher the profit- maximizing price will be. The profit-maximizing price also rises with transportation cost, t, and with the marginal cost of producing meals, M.

9. Slide 9Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE A.13-8 Distributing the Cost of Variety The buyers who care most about variety will generally choose the model with premium features. By pricing its models differently, the seller recovers most of the extra costs of variety from the buyers who are most responsible for their incurrence.

10. Slide 10Copyright © 2004 McGraw-Hill Ryerson Limited ANSWER A.13-1