ECS1010.06.post - UNIT III MONOPOLY OLIGOPOLY 7/8 Monopoly...

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UNIT III: MONOPOLY & OLIGOPOLY Monopoly Oligopoly Strategic Competition 7/8
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Monopoly Market Structure Monopoly Multiplant Monopoly: 1 Firm – 2 Plants Price Discrimination: 1 Firm – 2 Markets Next Time: Review
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Market Structure So far, we have looked at how consumers and firms make optimal decisions (maximize utility and profits) under constraint. Then we looked at how those individual decisions are coordinated via the market. Under Perfect Competition, we assume an infinite number of infinitely small price-takers, and we know that the competitive market equilibrium is Pareto-efficiency. Now want to consider other market structures (e.g., monopoly; duopoly) and characterize the corresponding equilibria; what are the welfare consequences of these market structures?
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Market Structure Market structure is related to market concentration and competitiveness. Perfect Competition is a polar case (low conc; high comp), where rational decision-making at the individual level (consumer; firm) adds up to optimal outcomes at the social level – The Invisible Hand Theorem of Welfare Economics. Once we move away from the perfect case, firms can exploit market power : their behavior can influence prices (and profits). Monopoly is the case where a single firm has market power. Later we will consider what happens when several firms have power in the market (oligopoly). Here, competitive strategy comes to the fore.
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Market Structure Perfect Comp Oligopoly Monopoly No. of Firms infinite (>)2 1 Optimality MR = MC = P ??? MR = MC < P Profit No ? Yes Efficiency Yes ? ???
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Market Structure Firms are price-takers : can sell all the output they want at P*; can sell nothing at any price > P*. Homogenous product : e.g., wheat, t-shirts, long- distance phone minutes Perfect factor mobility : in the long run, factors can move costlessly to where they are most productive (highest w, r). Perfect Information : firms know everything about costs, consumer demand, other profitable opportunities, etc. Perfect Competition
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Market Structure Firms are price-setters : one firm supplies entire market, faces downward-sloping demand curve. Homogenous product : necessarily so for a single firm. Barriers to entry : no perfect factor mobility. E.g., patents; licenses; franchises. Perfect Information : firms know everything about costs, consumer demand, other profitable opportunities, etc. Monopoly
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Monopoly Barriers to Entry: The number of firms is determined by entry conditions. As we have learned, profits are the incentive for entry. The only way a firm can remain profitable (and a monopoly) is if there are very strong barriers to entry, or if the market is too small for a second firm. Some of these barriers are natural (technology) Some are created by regulators (franchise, license) Some are created by the monopolist to deter entry by potential rivals ( competitive strategy )
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Monopoly Remember that a perfectly competitive firm can sell all it wants at the market price. This means that any time it
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