【正文】 Lecture 12 Monopolistic Competition and Oligopoly 1 Chapter 1 Topics to be Discussed ? Monopolistic Competition ? Oligopoly ? Price Competition ? Competition Versus Collusion: The Prisoners’ Dilemma 2 Chapter 1 Topics to be Discussed ? Implications of the Prisoners’ Dilemma for Oligopolistic Pricing ? Cartels 3 Chapter 1 Monopolistic Competition ? Characteristics 1) Many firms 2) Free entry and exit 3) Differentiated product 4 Chapter 1 Monopolistic Competition ? The amount of monopoly power depends on the degree of differentiation. ? Examples of this very mon market structure include: ? Toothpaste ? Soap ? Cold remedies 5 Chapter 1 Monopolistic Competition ? Toothpaste ? Crest and monopoly power ?Procter Gamble is the sole producer of Crest ?Consumers can have a preference for Cresttaste, reputation, decay preventing efficacy ?The greater the preference (differentiation) the higher the price. 6 Chapter 1 Monopolistic Competition ? Question ? Does Procter Gamble have much monopoly power in the market for Crest? 7 Chapter 1 Monopolistic Competition ? The Makings of Monopolistic Competition ? Two important characteristics ?Differentiated but highly substitutable products ?Free entry and exit 8 Chapter 1 A Monopolistically Competitive Firm in the Short and Long Run Quantity $/Q Quantity $/Q MC AC MC AC DSR MRSR DLR MRLR QSR PSR QLR PLR Short Run Long Run 9 Chapter 1 ? Observations (shortrun) ? Downward sloping demanddifferentiated product ? Demand is relatively elasticgood substitutes ? MR P ? Profits are maximized when MR = MC ? This firm is making economic profits A Monopolistically Competitive Firm in the Short and Long Run 10 Chapter 1 ? Observations (longrun) ? Profits will attract new firms to the industry (no barriers to entry) ?The old firm’s demand will decrease to DLR ?Firm’s output and price will fall ? Industry output will rise ? No economic profit (P = AC) ? P MC some monopoly power A Monopolistically Competitive Firm in the Short and Long Run 11 Chapter 1 Deadweight loss MC AC Comparison of Monopolistically Competitive Equilibrium and Perfectly Competitive Equilibrium $/Q Quantity $/Q D = MR QC PC MC AC DLR MRLR QMC P Quantity Perfect Competition Monopolistic Competition 12 Chapter 1 Monopolistic Competition ? Monopolistic Competition and Economic Efficiency ? The monopoly power (differentiation) yields a higher price than perfect petition. If price was lowered to the point where MC = D, consumer surplus would increase by the yellow triangle. 13 Chapter 1 Monopolistic Competition ? Monopolistic Competition and Economic Efficiency ? With no economic profits in the long run, the firm is still not producing at minimum AC and excess capacity exists. 14 Chapter 1 Monopolistic Competition ? Questions 1) If the market became petitive, what would happen to output and price? 2) Should monopolistic petition be regulated? 15 Chapter 1 Monopolistic Competition ? Questions 3) What is the degree of monopoly power? 4) What is the benefit of product diversity? 16 Chapter 1 Monopolistic Competition in the Market for Colas and Coffee ? The markets for soft drinks and coffee illustrate the characteristics of monopolistic petition. 17 Chapter 1 Elasticities of Demand for Brands of Colas and Coffee Colas: Royal Crown Coke to Ground Coffee: Hills Brothers Maxwell House Chase and Sanborn Brand Elasticity of Demand 18 Chapter 1 ? Questions 1) Why is the demand for Royal Crown more price inelastic than for Coke? 2) Is there much monopoly power in these two markets? 3) Define the relationship between elasticity and monopoly power. Elasticities of Demand for Brands of Colas and Coffee 19 Chapter 1 Example ? At its current output level of 10, a monopolistically petitive firm has MR=4, MC=4, ATC=6, and P=8. Is this market in longrun equilibrium? If not, describe the adjustment process necessary to achieve longrun equilibrium? 20 Chapter 1 Oligopoly ? Characteristics ? Small number of firms ? Product differentiation may or may not exist ? Barriers to entry 21 Chapter 1 Oligopoly ? Examples ? Automobiles ? Steel ? Aluminum ? Petrochemicals ? Electrical equipment ? Computers 22 Chapter 1 Oligopoly ? The barriers to entry are: ? Natural ?Scale economies ?Patents ?Technology ?Name recognition 23 Chapter 1 Oligopoly ? The barriers to entry are: ? Strategic action ?Flooding the market ?Controlling an essential input 24 Chapter 1 Oligopoly ? Management Challenges ? Strategic actions ? Rival behavior ? Question ? What are the possible rival responses to a 10% price cut by Ford? 25 Chapter 1 Oligopoly ? Equilibrium in an Oligopolistic Market ? In perfect petition, monopoly, and monopolistic petition the producers