23MeierPP11_18e - Chapter 11 Chapter Monopolistic...

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Unformatted text preview: Chapter 11 Chapter Monopolistic Competition Oligopoly Four Market Models Extremes Extremes Pure Competition Pure Monopoly Market Structure Continuum Four Market Models Monopolistic Competition Monopolistic Pure Competition Pure Monopoly Market Structure Continuum Four Market Models Oligopoly Oligopoly Pure Competition Monopolistic Competition Pure Monopoly Market Structure Continuum MONOPOLISTIC COMPETITION • Many sellers Many • Differentiated product Differentiated • Some power - price maker Some • Easy entry and exit Easy • Emphasis on advertising Emphasis Pure Competition Monopolistic Competition Oligopoly Pure Monopoly Market Structure Continuum Monopolistic Competition Monopolistic • Relatively Large Numbers Relatively Small Market Share No Collusion Independent Actions Characteristics... • Product Differentiation Product Product Attributes Services Location Brand Names and Packaging Some Control Over Price Monopolistic Competition P Price Maker Role Some power D = P = AR MR 0 Q MONOPOLISTIC COMPETITION • Women’s dresses Women’s Examples • Retail bakeries Retail • Jewelry Jewelry • Curtains Curtains • Quick printing Quick • Restaurants • Hotels, motels Hotels, • Many retail stores Many Monopolistic Competition Highly elastic demand More elastic • Greater number of firms Greater • Less product differentiation Less Less elastic • Smaller number of firms Smaller • Greater product differentiation Greater Monopolistic Competition P MORE ELASTIC LESS ELASTIC 0 Q Monopolistic Competition Monopolistic Most Profitable Output Two Methods Total Revenue – Total Cost Marginal Revenue – Marginal Cost TOTAL REVENUE TOTAL TOTAL COST TR = P x Q TR TC = TFC + TVC EP = TR - TC TOTAL REVENUE TOTAL COST Produce when: Produce TR > TVC Losses < TFC TOTAL REVENUE TOTAL TOTAL COST Shut down when: Shut TR < TVC Losses > TFC MARGINAL REVENUE MARGINAL MARGINAL COST • P > AVC: produce AVC: MR = MC MR EP = (P-ATC) x Q EP • P < AVC: shut down AVC: Monopolistic Competition Quantity Price of (Average Total Marginal Marginal Output Revenue) Revenue Revenue Average Total Cost Total Cost Marginal Cost Profit + or loss - 0 1 2 3 4 5 6 7 8 9 10 $172 $172 162 162 152 152 142 132 122 112 102 92 82 72 $0 ] 162 ] 304 ] 426 ] 528 ] 610 ] 672 ] 714 ] 736 ] 738 ] 720 $162 $190.00 142 135.00 122 113.33 102 100.00 82 94.00 62 91.67 42 91.43 22 93.73 2 97.78 - 18 103.00 $100 190 270 340 400 470 550 640 750 880 1030 ] ] ] ] ] ] ] ] ] 90 80 70 60 70 80 90 110 130 150 - $100 $100 - 28 + 34 + 86 + 128 + 140 + 122 + 74 - 14 - 142 - 310 Demand, Marginal Revenue, Total Revenue Demand, Monopolistic Competition Monopolistic 200 Dollars 150 200 50 MR D = P = AR Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 750 Dollars 500 250 TR 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Q Total revenue and total costs (dollars) Total-Revenue-Total Cost Approach TC P Economic Profit TR 0 1 2 3 4 5 6 7 8 9 10 Q Total-Revenue-Total Cost Approach Total-Revenue-Total Total revenue and total costs (dollars) P TC Economic Loss 0 1 2 3 4 5 6 7 8 9 10 TR Q MR, MC: Monopolistic Competition MR, 200 175 150 125 100 75 50 25 P Profit Per Unit MC $122 $94 Profit ATC D MR = MC 0 1 2 3 4 5 6 7 8 MR 9 10 Q MR, MC: Monopolistic Competition MR, P Profit Per Unit M N MC MC Profit P T ATC D MR = MC O X MR Q Loss Minimization Under Monopoly Loss 200 175 150 125 100 75 50 25 P Loss Per Unit MC ATC Loss AVC D MR = MC 0 1 2 3 4 5 6 7 8 MR 9 10 Q Short Run Profits Short to Long Run Equilibrium Short run profits → new firms enter → profits fall until most firms earn just a normal profit just Short Run Profits Short to Long Run Equilibrium The demand for each firm falls and becomes more elastic more Long-run equilibrium $ Price and Costs MC ATC D2 MR Q Q D1 Short Run Losses Short to Long Run Equilibrium Short run losses → firms leave → losses fall until most firms (of those remaining) earn just a normal profit normal Short Run Losses Short to Long Run Equilibrium The demand for each firm rises (of those remaining) and becomes less elastic less Long-run equilibrium $ Price and Costs MC ATC D2 MR Q D1 Q Long Run Long Most firms tend to break-even and earn just a normal profit normal Long-run equilibrium $ Price and Costs MC ATC D MR Q Q Monopolistic Competition Monopolistic $ P>MC underallocation MC Pmc Pc Sells less units at a higher price than under perfect competition D MR Qmc Qc Q OLIGOPOLY • Few sellers Few • Standard/differentiated products Standard/differentiated • Considerable power - price maker Considerable • Difficult entry Difficult • Some/considerable advertising Some/considerable Pure Competition Monopolistic Competition Oligopoly Pure Monopoly Market Structure Continuum Market Economies of Scale Average Average Total Cost $20 15 10 ATC 0 50 100 200 Quantity Oligopoly: Characteristics Oligopoly: Mutual Interdependence: Large firms must be concerned about the actions of rival firms • Steel Steel • Oil Oil • Primary copper Primary • Automobiles Automobiles • Breakfast cereals Breakfast • Beer Beer • Electric light bulbs Electric Oligopoly Examples Herfindahl Index Herfindahl The Herfindahl index is used to measure the degree to which firms control markets. This concentration index is calculated by adding the squared market shares of each of the firms in an industry. Herfindahl Index Herfindahl With S standing for % share, the formula would be: (S1)² + (S2)² + (S3)² + …… (Sn)² Concentration Concentration Substituting the % share for each firm: < 1,000 is highly competitive 1,000 - 1,800 is moderately competitive > 1,800 is highly concentrated. Oligopoly Oligopoly Most Profitable Output Two Methods Total Revenue – Total Cost Marginal Revenue – Marginal Cost TOTAL REVENUE TOTAL TOTAL COST TR = P x Q TR TC = TFC + TVC EP = TR - TC TOTAL REVENUE TOTAL COST Produce when: Produce TR > TVC Losses < TFC TOTAL REVENUE TOTAL TOTAL COST Shut down when: Shut TR < TVC Losses > TFC MARGINAL REVENUE MARGINAL MARGINAL COST • P > AVC: produce AVC: MR = MC MR EP = (P-ATC) x Q EP • P < AVC: shut down AVC: Three Oligopoly Models 1 - Non-collusive oligopoly Non-collusive (kinked demand curve) 2 - Collusive oligopoly 3 - Price leadership Kinked Demand: Noncollusive Oligopoly Kinked P Rivals tend to ignore a price increase Going price D2 D1 0 Q Kinked Demand: Noncollusive Oligopoly Kinked P Rivals tend to follow a price cut Going price D2 D1 0 Q Kinked Demand: Noncollusive Oligopoly Kinked P Effectively creating a kinked demand curve D2 D1 0 Q Kinked Demand: Noncollusive Oligopoly Kinked P Kinked Demand Curve D1 0 Q Kinked Demand: Noncollusive Oligopoly Kinked P Kinked Demand Curve MC 1 MC 2 D1 0 Q $ Most Profitable Output Most MC MC P T M N ATC Economic Profit 0 D MR Q Collusion Oligopoly is conducive to collusion If a few firms face identical or If highly similar demand and costs... They will seek joint profit maximization... Cartels and Collusion Cartels Cartel: a group of producers group that collectively decides on how much to produce and what price to charge. OPEC is an example. is (Organization of Petroleum Exporting Countries) OPEC Cartel OPEC 13 nations: Saudi Arabia, Iran, 13 Kuwait, Venezuela, Iraq, Nigeria, UAE, Angola, Libya, Algeria, Qatar, Indonesia, Ecuador Ecuador 40% of oil production and 40% 60% of oil sold in world markets 60% Price Leadership Price • Not outright collusion Not • Formal agreements not involved involved • One firm takes the lead and others follow suit others Obstacles to Collusion Obstacles Cost Differences Market Shares Product Differentiation Number of Firms Economy, Recessions Legal Obstacles: Antitrust Economic Effects of Oligopoly Economic Under Perfect Competition Under P = MC P = Minimum ATC Under Oligopoly Neither is true in under oligopoly oligopoly Most Profitable Output Most MC MC Price P ATC Economic Profit 0 D MR Q $ Colluding Oligopolists Will Split the Monopoly Profits Split MC MC ATC D Economic Profit MR = MC MR Q Economic Effects of Oligopoly Economic P>MC underallocation MC $ $ Pm Pc Oligopolists will sell less units at a higher price than in competition D MR Qm Qc Q Monopolistic Competition Monopolistic & Oligopoly Common to both: • Non-price competition (advertising) (advertising) • R & D more so (than the other two models) two Successful advertising leads to: Successful • Increased demand Increased • Demand becomes more inelastic inelastic • Economies of scale Economies $ Price and Costs Advertising Effects on Demand D2 D1 Q Advertising Effects on Output & Average Costs Advertising Costs Unit Costs • • • • • ATC2 ATC1 W X Y Z Q Technological Advancement Technological Why would the development Why of technology apply more so to the monopolistic competition and oligopoly models? and Role of Market Structure Role Investment in technology by... Perfect competition Perfect Monopoly Monopoly Oligopoly Oligopoly Monopolistic competition Monopolistic R&D Expenditure Percent of Sales Inverted-U Theory E COMPETITION LESS COMPE 0 25 50 75 Concentration Ratio (Percent) 100 Evidence Evidence Supports the theory... The largest amount of The technological advancement occurs technological in industries where there is a concentration ratio of between 40 and 60% TECHNOLOGICAL ADVANCE Research & Development: Invention Invention Innovation Innovation Diffusion Diffusion INVENTION Initial discovery of Initial product or process product Protected by patents ... Protected 20 years worldwide 20 duration duration INNOVATION INNOVATION Successful commercial Successful introduction of a product, first use of a new method, and creation of a new form of business enterprise of DIFFUSION DIFFUSION Imitation of product Imitation or service or UNITED STATES R&D Research (invention) - 26% Research Development (innovation and diffusion) – 74% diffusion) Optimal Amount of R & D Compare: s s Expected Rate of Return Interest-Rate Cost of Funds MR = MC Expected return > interest rate: increase investment s Expected return < interest rate: decrease investment s Expected return = interest rate: optimal level s Interest Rate Percent - i 20 Expected Rate vs. Cost of Funds R&D Exp. Ret. % 16 $10 18 8% 8% 20 16 12 30 14 40 12 8 50 10 4 60 8 70 6 0 20 40 60 80 100 80 4 R&D Expenditures (millions of dollars) Expected Return Schedule INNOVATION Two types … Product innovation Process innovation Process PRODUCT INNOVATION PRODUCT New and improved New products or services products Thus, technology (with product innovation) leads to: product Allocative efficiency More preferred product mix More Better products Better Higher overall utility Higher PROCESS INNOVATION PROCESS New and/or improved New production and distribution methods methods Reduced Cost Reduced with Process Innovation Leads to a decrease in ATC Short-run average costs (dollars) ATC1 ATC2 Economies of scale Quantity Thus, technology (with Thus, product innovation) leads to: product Productive efficiency Productive More output, lower cost/unit More Higher business profits Higher Lower consumer prices Lower ...
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This note was uploaded on 02/22/2011 for the course ECON 2023 taught by Professor Meier during the Spring '11 term at St. Petersburg College.

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