Week10.Oligopoly.2010

Week10.Oligopoly.2010 - ECMA04 - Week 10 Finish up material...

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ECMA04 - Week 10 Finish up material on natural monopoly (and efficiency) 2 choices for regulating monopolist:  (a) Regulate monopolist to charge P = MC (b) Regulate monopolist to charge P = AC (c) Or, do nothing
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Diagramatically, what are these alternatives?  First,  what does natural monopoly industry/firm look like?
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What are the effects of P = MC?
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What are the effects of P = AC?
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What will happen if the government does nothing?
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What are the strengths and weaknesses of these  different solutions?
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An algebraic example: Highway 407. Privately owned and operated highway. Demand: P = 300 - .5Q, where Q is measured in trips  per day FC = $1,950 per day VC = $100 per trip TC = $1,950 + 100Q
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What will unregulated monopolist do and what is  the GTS?  
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What if government regulates the  monopolist to  charge P = MC?  What happens and what is the  GTS?
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What if government regulates the monopolist to  charge P = AC?  What happens and what is the  GTS?
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Conclusions?
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OLIGOPOLY Oligopoly is a market in which there are only a few  sellers. How many?  So few that they feel the effects of each other’s  decisions.  (cigarette companies, the banks, oil producers, steel  producers, car companies, insurance companies, cereal  producers, electronics, etc)
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When top four firms control large % of sales Four-firm concentration ratio = share of sales in  hands of top four firms in industry. In Canada: Four firm concentration ratio is over 50% for  Tobacco products Petroleum and coal products Transportation equipment Primary metals Beverages Metal mining - broadly defined industries
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  e.g., Suppose we have two firms competing in a given  market, producing identical output  (homogeneous,  standardized product).  The decision each firm has to  make is: “How much output should I try to sell, given what  I think the other producer might try to sell?” 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  andTC 2  = 2q 2 )
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The key to this problem is that each firm chooses its own output, but price depends on BOTH firms’ decisions TC 1  = 2q 1 and TC 2  = 2q 2 P = 14 - Q T   (Industry Demand Curve) Q T  = q 1  + q 2 For example, if firm #1 chooses q 1  = 2 then if q 2  = 2, so Q = 4 and  P = 10  or if q 2  = 3, then Q = 5 and P = 9   or if q 2  = 4,  then Q = 6 and P = 8
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Week10.Oligopoly.2010 - ECMA04 - Week 10 Finish up material...

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