Undifferentiated product Q Set production quota for each cartel members Game

Undifferentiated product q set production quota for

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Undifferentiated product (Q) Set production quota for each cartel members Game Theory - models of strategic interaction If a player has a dominant strategy that is the best move regardless of what the opponent does Firm A has dominant strategy: Cheat Firm B has a dominant strategy: Cheat Prisoner's dilemma Cartels are best for commodities with limited geographic options for entry Manufacturing cartels break down in the long run because firms can enter Antitrust laws limit cartels and illegalize them. Sherman act of 1890 Clayton anti-trust act 1914 - Monitored by FTC and Department of Justice Oligopoly involves small number of firms, high barriers of entry - It does not make cartels but prices are above MC Monopolistic Competition - But even in markets with lots of firms assumptions of perfect competition may not apply - In markets for consumer goods, opposed to commodities, there is product differentiation o In the mind of the consumers, the products are good, but not perfect, substitute What produces differentiation? - Advertising - to increase demand and reduce price elasticity - Advertising is a feature of Monopolistically competitive and oligopolistic markets o Farmer Jones had no need to advertise in a perfectly competitive market
Lots of firms but with differentiated products - Good (but not perfect) substitutes - Each firm faces a downward sloping demand curve Market for Pizza - Lots of firms - Low barriers to entry - But o Each firm does not face a perfectly elastic demand curve o Downward sloping demand curve o One type of pizza is good but not perfect substitute for another * Profit is the (Demand Curve - Average Cost) x Q where Quantity MR = MC In the long run, demand curve will become adjacent to the average cost curve Like competition model - Lots of other firms and potential entrants - So many that individual firm just looks at own demand curve (like monopoly) - Hence: monopoly + competition = monopolistic competition
Chapter 16 - Network Goods Network good - A good whose value to one customer increases the more than others use the good o Telephones o Facebook o Word Given the network externality, (big is better), network goods are usually supplied by monopolies or oligopolies - Software: windows, word, excel, adobe - Social media (facebook, match.com) - Hardware: DVD, railroad gauge, construction - Keyboard: QWERTY Consequences

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