Micro.Week10.2007 - 10/1 so summarize Arguments for and...

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10/1 so summarize Arguments for and against monopoly Against : 0 reduce Q, raise P, reduce CS 0 hard to regulate For : 0 natural monopoly 0 even if not natural monopoly, dynamic argument Joseph Schumpeter lure of monopoly profits lead to innovation eg. Microsoft ?? Policy issue: break up? regulate? leave alone?
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10/2 1. Break up: issue of proof 0 anti-trust law in Canada used to be criminal problem of proof, so now civil assumes no economies of scale (microsoft?) restores advantages of market (airlines) loses reward for innovation 2. Regulate: losses of efficiency? how to retain incentives cost of regulation issue of “capture” how to deal with new technologies and entry 3. Leave alone: static losses in efficiency higher prices gains of potential competition in long run
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10/3 Now, let’s move from the two extremes: perfect competition – many small firms, each firm can do nothing to influence the price monopoly – only a single firm, total control of price many markets have a small number of firms: OLIGOPOLY Each firm can influence the price, but your result depends not only on what you do, but what other firms do. eg. Suppose we have two firms competing in a given market, producing identical output (homogeneous output, just like perfect competition). The decision each firm has to make is: “How much output should I try to sell?” (again, just like we have modeled competition and monopoly) Firm #1 decides on q 1 Firm #2 decides on q 2 Each firm has MC = AC = $2, no matter how much they produce (that is, TC 1 = 2q 1 and TC 2 = 2q 2 ) Finally, assume that demand is P = 14 - Q T Notice that Q T = q 1 + q 2 The key to this problem is that the individual firm influences the price, but price depends on BOTH firms’ decisions
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10/4 So: TC 1 = 2q 1 and TC 2 = 2q 2 P = 14 - Q T Q T = q 1 + q 2 For example, if firm #1 chooses q 1 = 2 then if q 2 = 2, P = 10 if q 2 = 3, P = 9 if q 2 = 4, P = 8 On the other hand, if firm #1 chooses q 1 = 3 then if q 2 = 2, P = 9 if q 2 = 3, P = 8 if q 2 = 4, P = 7 So, to repeat, the outcome (your profits, if you are one of the firms) depends not only on your decision but also on the other firm’s decision
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Micro.Week10.2007 - 10/1 so summarize Arguments for and...

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