Tsinghua_2005MBA_Lecture_12(Monopolistic_competition_and_Oligopoly)

Tsinghua_2005MBA_Lecture_12(Monopolistic_competition_and_Oligopoly)

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Lecture 12 Monopolistic Competition and Oligopoly
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Lecture 12 Slide 2 Topics to be Discussed Monopolistic Competition Oligopoly Price Competition Competition Versus Collusion: The Prisoners’ Dilemma
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Lecture 12 Slide 3 Topics to be Discussed Implications of the Prisoners’ Dilemma for Oligopolistic Pricing Cartels
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Lecture 12 Slide 4 Monopolistic Competition Characteristics 1) Many firms 2) Free entry and exit 3) Differentiated product
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Lecture 12 Slide 5 Monopolistic Competition The amount of monopoly power depends on the degree of differentiation. Examples of this very common market structure include: Toothpaste Soap Cold remedies
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Lecture 12 Slide 6 Monopolistic Competition Toothpaste Crest and monopoly power Procter & Gamble is the sole producer of Crest Consumers can have a preference for Crest---taste, reputation, decay preventing efficacy The greater the preference (differentiation) the higher the price.
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Lecture 12 Slide 7 Monopolistic Competition Question Does Procter & Gamble have much monopoly power in the market for Crest?
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Lecture 12 Slide 8 Monopolistic Competition The Makings of Monopolistic Competition Two important characteristics Differentiated but highly substitutable products Free entry and exit
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A Monopolistically Competitive Firm in the Short and Long Run Quantity $/Q Quantity $/Q MC AC MC AC D SR MR SR D LR MR LR Q SR P SR Q LR P LR Short Run Long Run
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Lecture 12 Slide 10 Observations (short-run) Downward sloping demand--differentiated product Demand is relatively elastic--good substitutes MR < P Profits are maximized when MR = MC This firm is making economic profits A Monopolistically Competitive Firm in the Short and Long Run
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Lecture 12 Slide 11 Observations (long-run) Profits will attract new firms to the industry (no barriers to entry) The old firm’s demand will decrease to D LR Firm’s output and price will fall Industry output will rise No economic profit ( P = AC ) P > MC -- some monopoly power A Monopolistically Competitive Firm in the Short and Long Run
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Deadweight loss MC AC Comparison of Monopolistically Competitive Equilibrium and Perfectly Competitive Equilibrium $/Q Quantity $/Q D = MR Q C P C MC AC D LR MR LR Q MC P Quantity Perfect Competition Monopolistic Competition
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Lecture 12 Slide 13 Monopolistic Competition Monopolistic Competition and Economic Efficiency The monopoly power (differentiation) yields a higher price than perfect competition. If price was lowered to the point where MC = D , consumer surplus would increase by the yellow triangle.
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Lecture 12 Slide 14 Monopolistic Competition Monopolistic Competition and Economic Efficiency With no economic profits in the long run, the firm is still not producing at minimum AC and excess capacity exists.
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Slide 15 Monopolistic Competition Questions 1) If the market became competitive, what would happen to output and price? 2) Should monopolistic competition be
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This note was uploaded on 01/03/2011 for the course COMM 290 taught by Professor Brian during the Winter '09 term at The University of British Columbia.

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Tsinghua_2005MBA_Lecture_12(Monopolistic_competition_and_Oligopoly)

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