lecture 20 - Economics 100A Lecture #20: Thursday, April 8...

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Economics 100A Lecture #20: Thursday, April 8 1) Concentrated industries 2) The oligopoly problem 3) Cournot’s oligopoly model 4) Stackelberg leader-follower model
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(1) Dimensions of competition Pure Monopoly Monopolistic competition Oligopoly Dominant firm Cartel Perfect Competition
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Concentrated industries in U.S. history U.S. Steel’s dominance in the 1910s and 1920s “Big three” auto makers in the 1950s and 1960s IBM’s dominance of mainframe computers in the 1960s and 1970s Microsoft’s and Intel’s dominance of PC software and microprocessors in 1990s “Seven sisters” of the oil industry in 1950s and 1960s Big eight cereal makers through most of 1900s Anheuser-Busch and SAB/Miller in beer today
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Causes for concentration Cost conditions Scale and scope economies Absolute cost advantages (e.g., scarce inputs) Barriers to entry Gov’t regulation (e.g., patents) Product differentiation Collusive and exclusionary behavior
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Consequences of Concentration Concentration + profits in U.S. manufacturing 6.9% < 70% Source : Joe S. Bain, "Relation of Profit Rate to Industry Concentration: American Manufacturing, 1936-1940," Quarterly Journal of Economics, August 1951. 12.1% > 70% Average industry profit rate Market share of largest 8 firms
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Mexico attacks oligopoly "The lack of strong competition in domestic markets has deteriorated the efficiency and competitiveness of our economy. The presence of monopolistic or oligopolistic practices hamper the achievement levels of growth required to create more jobs and increase the welfare and quality of life for Mexican families.” The typical Mexican household would spend 30 per cent of its annual income in a highly concentrated markets , and in those markets consumers would spend 40 per cent more than they would if the markets were more competitive … causing a disproportionate impact on the poor in Mexico as they often spend even more of their annual income on products where the major producers enjoy monopoly or oligopoly power. - Mexican President Felipe Calderón, April 6, 2010
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(2) The oligopoly problem Characteristics of Oligopoly a “few” sellers (named by Sir Thomas More in Utopia ) restricted entry (artificial or natural barriers) interdependent profits (usually through demand) Each firm faces downward-sloping demand
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Oligopoly (cont’d) How do firms make their decisions? What are the equilibrium price, quantity, profits? How well does oligopoly perform relative to social optimum? How does oligopoly compare against other industry structures, e.g.,, monopoly and perfect competition?
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Cournot’s solution Cournot’s 1838 Model Each firm chooses its quantity of a homogeneous good Price is adjusted to equate demand to oligopoly supply (think: Walrasian auctioneer) Strategic interaction Firms act non-cooperatively, choosing their quantity to
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This note was uploaded on 04/21/2010 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at University of California, Berkeley.

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lecture 20 - Economics 100A Lecture #20: Thursday, April 8...

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