lec09 - 20 Oligopoly 1 Few firms 2 Homogeneous or...

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1 2 Monopolistic Competition 1. Many firms. 2. Heterogeneous product. 3. Free entry and exit. 4. Equal access to technology and inputs. 3 Stage One: Number of firms is fixed. 4 $ Q D p 1 Q 1 Each firm faces a downward-sloping demand curve. 5 $ Q D p 1 Q 1 MR curve is below demand curve. MR 7 Firm chooses output where MR = MC. $ Q D = MWTP P * Q* MR MC Result: P > MC 8 What are profits of the firm? $ Q D P* Q* MR MC AC
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2 9 Stage Two: Firms enter or leave 10 Initial situation: firm makes profit. $ Q D 1 AC p 1 Q 1 13 Effect of new firm on demand of old firm: $ Q D 1 D 2 D 3 D 4 AC p 4 Q 4 14 Equilibrium for each firm: $ Q D P* Q* MR MC AC 18 Outcome with Monopolistic Competition: P > MC Profits = 0 P = AC P > min AC
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Unformatted text preview: 20 Oligopoly 1. Few firms. 2. Homogeneous or heterogeneous product. 3. Barriers to entry. 4. Not necessarily equal access to inputs and technology. 3 23 Possible Pricing Behavior: Collusion Competition until P = MC Other possibilities 24 Prisoners’ Dilemma Confess Don’t Confess 1 15 Don’t Confess Confess 10 10 5 5 15 1 25 Oligopolists’ Dilemma Lower price Keep price high 8 million 2 million Keep price high Lower price 4 million 4 million 6 million 6 million 2 million 8 million Saudi Arabia Iraq...
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