1. CHARACTERISTIC MONO- OLIGO- MONO- COM- POLY POLY POLIS- PETI- TIC C. TION STRUCTURE # firms? differentiated? entry is: market power? CONDUCT: interdependece? Marginal Cost Pricing? PERFORMANCE: High prices? Economic Profits? Efficient capacity util? Efficient investment? Allocatively Efficient? One Few Many Many Unique ? Yes No Blocked Impeded Easy Easy YES YES YES NO NO YES NO NO NO NO NO YES Yes Yes Yes No Yes Yes No No No No Under Yes No No No Yes

2. Profit Maximization 0 123456789 1 2 3 4 5 6 7 8 9 10 11 12 13 $14 D d Demand Marginal revenue PRICE OR COST (per basket) QUANTITY (baskets per hour) Marginal cost Average total cost

3. Copiers per month (000’s) Price ($/copier) 4 COPIER PRODUCING PLANTS LRAC (envelope) #4 #3 #2 #1 Most Efficient Investment (lowest point)

4. Copiers per month Price ($/copier) 4 COPIER PRODUCING PLANTS LRAC LRMC

5. 1000s Copiers per month Price ($/copier) LRAC LRMC DEMAND MR MR=MC PROFIT MAXIMIZATION

6. Copiers per month Price ($/copier) LRAC LRMC DEMAND MR MR=MC PROFIT MAXIMIZATION TC TOTAL COST

7. Copiers per month Price ($/copier) LRAC LRMC DEMAND MR MR=MC PROFIT MAXIMIZATION TR

8. Copiers per month Price ($/copier) LRAC LRMC DEMAND MR MR=MC PROFIT MAXIMIZATION TC TOTAL COST PRO- FIT

9. Copiers per month Price ($/copier) DEMAND MR MR=MC OTHER EFFICIENCIES? MIN SRAC MIN LRAC P=LRMC

10. Copiers per month Price ($/copier) DEMAND MR MR=MC OTHER EFFICIENCIES? MIN SRAC MIN LRAC P=LRMC NOT EFFICIENT INVESTING INEFFICIENT CAPACITY UTILIZATION (ALLOCATIVELY INEFFICIENT) NONE!!

11. MONOPOLY HIGH PRICES (P>SRAC) HIGH LONG RUN PROFITS (P>LRAC) INEFFICIENT CAPACITY (SRAC NOT THROUGH MIN OF LRAC) INEFFICIENT CAPACITY UTILIZATION (NOT AT MIN SRAC) INEFFICIENT ALLOCATION OF RESOURCES (P>MC)

12. The Kinked Demand Curve Confronting an Oligopolist Demand curve facing oligopolist if rivals match price changes Demand curve facing oligopolist if rivals don't match price changes Demand curve facing oligopolist if rivals match price cuts but not price hikes M A C D B $1100 1000 900 PRICE (per computer) QUANTITY DEMANDED (computers per month) 08000

13. 1000s Copiers per month Price ($/copier) OLIGOPOLY MODELS 4X 3X { { { { { { { { { 1X Average Explicit Cost Long Run Average Cost Demand american choice european choice japanese choice

14. NUMBER OF FIRMS 0 1 2 3 4 5 10 20 N PRICE MONOPOLY PRICE COMPETITIVE PRICE COURNOT CHAMBERLAIN BERTRAND

15. OLIGOPOLY HIGH PRICES (P>SRAC) HIGH LONG RUN PROFITS (P>LRAC) INEFFICIENT CAPACITY (SRAC NOT THROUGH MIN OF LRAC) INEFFICIENT CAPACITY UTILIZATION (NOT AT MIN SRAC) INEFFICIENT ALLOCATION OF RESOURCES (P>MC)

16. Equilibrium in Monopolistic Competition QUANTITY(units per period) Later MRqgqg pgpg 0 G ATC MC PRICE OR COST (dollars per unit) Later demand Initial deman d The long run PRICE OR COST (dollars per unit) MR qaqa 0 papa F MC ATC QUANTITY (units per period) Demand K The short run

17. Copiers per month (000s) Price ($/copier) LRMC MONOPOLISTIC COMPETITION MR Demand LRAC Long Run Profit Maximizing Output

18. MONOPOLISTIC COMPETITION HIGH PRICES (P>SRAC) NO LONG RUN PROFITS (P=LRAC) INEFFICIENT CAPACITY (SRAC NOT THROUGH MIN OF LRAC) UNDERUTILIZED CAPACITY (AT LOWER OUTPUT THAN MIN SRAC) INEFFICIENT ALLOCATION OF RESOURCES (P>MC)

19. Market Entry Market deman d S2S2 S1S1 E1E1 E2E2 p1p1 p2p2 Market entry pushes price down and... New firms enter PRICE QUANTITY ATC MC f1f1 f1f1 p1p1 p2p2 q1q1 q2q2 Reduces profits of competitive firm QUANTITY

20. Copiers per month Price ($/copier) Copiers per month 0 1 BILL 2 BILL 3BILL Price ($/copier) COMPETITION DEMAND LRAC LRMC SUPPLY MARKET FIRM POINT OF VIEW

21. 1000s Copiers per month Price ($/copier) Copiers per month 0 1 BILL 2 BILL 3BILL Price ($/copier) COMPETITION DEMAND SRAVC SUPPLY MARKET FIRM POINT OF VIEW SRMC SRAC A B SHUT DOWN PRICE

22. Copiers per month Price ($/copier) Copiers per month 0 1 BILL 2 BILL 3BILL Price ($/copier) COMPETITION DEMAND LRAC LRMC SUPPLY MARKET FIRM POINT OF VIEW PROFIT

23. Copiers per month Price ($/copier) Copiers per month 0 1 BILL 2 BILL 3BILL Price ($/copier) ENTRY DUE TO PROFIT DEMAND LRAC LRMC SUPPLY MARKET FIRM POINT OF VIEW SHIFT LOSS

24. 1000s Copiers per month Price ($/copier) Copiers per month 0 1 BILL 2 BILL 3BILL Price ($/copier) COMPETITIVE EQUILIBRIUM: THROUGH NATURAL MARKET FORCES DEMAND LRAC LRMC SUP PLY MARKET FIRM POINT OF VIEW

25. PERFECT COMPETITION LOWEST PRICES (P= MIN SRAC) NO LONG RUN PROFITS (P=LRAC) EFFICIENT CAPACITY (SRAC THROUGH MIN OF LRAC) FULLY UTILIZED CAPACITY (AT SAME OUTPUT AS MIN SRAC) EFFICIENT ALLOCATION OF RESOURCES (P=MC)

26. PORTER’S INDUSTRY STUDY STRUCTURAL ANALYSIS (# of firms, product differentiation, barriers to entry, government involvement, cost conditions, supply and demand conditions, global,etc CONDUCT: Analysis of competitive behavior, interdependence, industry strategies, PERFORMANCE: Price, Profitability, Efficiency, Quality, etc.

27. PAYOFF MATRIX FOR THE PRISONER’S DILEMMA DON’T TELL TELL DON’T TELL BOTH Hunt-jail FREE Liddy-free & write bk Liddy-jail BOTH IN Hunt-free JAIL & writes bk HUNTHUNT LIDDY

28. SOLUTION TO PRISONER’S DILEMMA EXCHANGE INFORMATION ENFORCEMENT (ALTER PAYOFF MATRIX) REPETITION

29. PAYOFF MATRIX FOR THE PRISONER’S DILEMMA: LOWERING PRICES FIRM I F I R M II DON’T LOWER CHANGE PRICE DON’T CHANGE LOWER PRICE Both gain II broke profits I gains monopoly I broke II gains No Profit monopoly

30. PAYOFF MATRIX FOR THE PRISONER’S DILEMMA: RAISING PRICES FIRM I F I R M II RAISE DON’T PRICE CHANGE RAISE PRICE DON’T CHANGE Both gain II broke profits I gains monopoly I broke II gains No Profit monopoly