Ch 16 outline - Chapter 16 outline I Between Monopoly and...

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Chapter 16 outline: I. Between Monopoly and Perfect Competition A. The typical firm has some market power, but its market power is not as great as  that described by monopoly. B. Firms in imperfect competition lie somewhere between the competitive model  and the monopoly model. C. Definition of  oligopoly : a market structure in which only a few sellers offer  similar or identical products. D. Definition of  monopolistic competition : a market structure in which many  firms sell products that are similar but not identical. E. Figure 1 summarizes the four types of market structure.  Note that it is the  number of firms and the type of product sold that distinguishes one market  structure from another. II. Markets with Only a Few Sellers A. A key feature of oligopoly is the tension between cooperation and self-interest. 1. The group of oligopolists is better off cooperating and acting like a  monopoly, producing a small quantity of output and charging a price  above marginal cost. 2. Yet, because the oligopolist cares about his own profit, there is an  incentive to act on his own.  This will limit the ability of the group to act as  a monopoly. B. A Duopoly Example 1. A duopoly is an oligopoly with only two members. 2. Example: Jack and Jill own the only water wells in town.  They have to  decide how much water to bring to town to sell.  (Assume that the  marginal cost of each gallon of water is zero.)
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3. The demand for the water is as follows: Quantity Price Total Revenue (and Total Profit) 0    $120                          $  0 10 110 1,100 20 100 2,000 30 90 2,700 40 80 3,200 50 70 3,500 60 60 3,600 70 50 3,500 80 40 3,200 90 30 2,700 100 20 2,000 110 10 1,100 120 0                              0 C. Competition, Monopolies, and Cartels 1. If the market for water were perfectly competitive, price would equal  marginal cost ($0).  This means that 120 gallons of water would be sold. 2. If a monopoly controlled the supply of water, profit would be maximized  at a price of $60 and an output of 60 gallons. a. Note that in this case, price ($60) exceeds marginal cost ($0). b. This level of output is lower than the socially efficient level of  output (120 gallons).
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3. The duopolists may agree to act together to set the price and quantity of  water. a. Definition of  collusion : an agreement among firms in a  market about quantities to produce or prices to charge. b. Definition of  cartel : a group of firms acting in unison.
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