chap14a - 1 1 Chapter 14: Imperfect Competition Chapter 14:...

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Unformatted text preview: 1 1 Chapter 14: Imperfect Competition Chapter 14: Imperfect Competition Initial focus on pricing under homogeneous oligopoly industry consists of a few firms firms produce an identical product, e.g., bottled water, milk, or gasoline market equilibrium may occur at various points along the demand curve, depending on firm behaviors Later examination of product differentiation Firms in industry produce similar products Variation in quality and variety of features 2 Competing Views of How Markets Work Competing Views of How Markets Work Free-market view- Market forces inherently drive production and consumption choices to efficient solution- Government role should be passive, I.e., intervention will disrupt markets and make society worse off- Even if markets dont work perfectly, market advocates are skeptical that government will do better Interventionist view- Monopolies and market inefficiencies mean that market solutions have persistent inefficiencies- Further concerns about income inequality that gives persistent disadvantage to some- Government should fine-tune markets and redistribute income to improve social welfare 2 3 Oligopoly Decisionmaking Oligopoly Decisionmaking Two key questions How do firms decide their appropriate level of output? What assumptions do they make about the effect of their behavior on the price and output level of other firms? Four types of models quasi-competitive model cartel model Cournot model conjectural variations models 4 Quasi Quasi-Competitive Model Competitive Model Each firm is a price-taker and assumes that its behavior will not affect price i = Pq i- TC i (q i ) where P has no subscript, because the firm assumes that it cannot affect price i / q i = P - TC i (q i )/ q i = 0 P = MC i (q i ) Even with a few firms, the assumption that P is exogenous leads to the competitive solution 3 5 Cartel Model Cartel Model Firms recognize that their collective behaviors affect price they collude with one another to restrict output from Q c to Q m they achieve monopoly rents and charge monopoly price P m D P Q AC=MC Q c MR P c P m Q m 6 Problems for Cartels Problems for Cartels They are illegal restraints of trade, so government may restrict or punish collusion Inherent incentive to chisel because P>MC i- each firm has an incentive to expand output- cartel must police chiseling or monopoly solution will breakdown D P Q AC=MC Q c MR P c P m Q m 4 7 Cournot Model Cournot Model Limited foresight The firm recognizes that its own output decisions affect price ( P/ q i 0) The firm considers other firms output decisions as fixed ( q j / q i = 0) This is small first step away from competitive model 8 Implications of Cournot Assumption Implications of Cournot Assumption i = Pq i- TC i (q i ) Effects of change in output on firm revenue can be decomposed into two parts...
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chap14a - 1 1 Chapter 14: Imperfect Competition Chapter 14:...

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