【正文】 ducation, Inc. Chapter 12 22 Oligopoly ?The Cournot Model ?Oligopoly model in which firms produce a homogeneous good, each firm treats the output of its petitors as fixed, and all firms decide simultaneously how much to produce ?Firm will adjust its output based on what it thinks the other firm will produce 169。2020 Pearson Education, Inc. Chapter 12 20 Oligopoly – Equilibrium ?If one firm decides to cut their price, they must consider what the other firms in the industry will do ?Could cut price some, the same amount, or more than firm ?Could lead to price war and drastic fall in profits for all ?Actions and reactions are dynamic, evolving over time 169。2020 Pearson Education, Inc. Chapter 12 18 Oligopoly ?Examples ?Automobiles ?Steel ?Aluminum ?Petrochemicals ?Electrical equipment 169。2020 Pearson Education, Inc. Chapter 12 16 The Market for Colas and Coffee ?The demand for Royal Crown is more price inelastic than for Coke ?There is significant monopoly power in these two markets ?The greater the elasticity, the less monopoly power and vice versa 169。2020 Pearson Education, Inc. Chapter 12 14 The Market for Colas and Coffee ?Each market has much differentiation in products and tries to gain consumers through that differentiation ?Coke vs. Pepsi ?Maxwell House vs. Folgers ?How much monopoly power do each of these producers have? ?How elastic is demand for each brand? 169。2020 Pearson Education, Inc. Chapter 12 12 Monopolistic Competition and Economic Efficiency ?Firm faces downward sloping demand so zero profit point is to the left of minimum average cost ?Excess capacity is inefficient because average cost would be lower with fewer firms ?Inefficiencies would make consumers worse off 169。2020 Pearson Education, Inc. Chapter 12 9 A Monopolistically Competitive Firm in the Short and Long Run ?Long run ?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 Deadweight loss MC AC Monopolistically and Perfectly Competitive Equilibrium (LR) $/Q Quantity $/Q D = MR QC PC MC AC DLR MRLR QMC P Quantity Perfect Competition Monopolistic Competition 169。2020 Pearson Education, Inc. Chapter 12 6 Monopolistic Competition ?Two important characteristics ?Differentiated but highly substitutable products ?Free entry and exit 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 169。2020 Pearson Education, Inc. Chapter 12 5 Monopolistic Competition ?Toothpaste ? Crest and monopoly power ? Procter amp。2020 Pearson Education, Inc. Chapter 12 3 Monopolistic Competition ? Characteristics 1. Many firms 2. Free entry and exit 3. Differentiated product 169。Chapter 12 Monopolistic Competition and Oligopoly 169。2020 Pearson Education, Inc. Chapter 12 2 Topics to be Discussed ?Monopolistic Competition ?Oligopoly ?Price Competition ?Competition Versus Collusion: The Prisoners’ Dilemma ?Implications of the Prisoners’ Dilemma for Oligopolistic Pricing ?Cartels 169。2020 Pearson Education, Inc. Chapter 12 4 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 169。 Gamble is the sole producer of Crest ? Consumers can have a preference for Crest – taste, reputation, decaypreventing efficacy ? The greater the preference (differentiation) the higher the price 169。2020 Pearson Education, Inc. Chapter 12 8 A Monopolistically Competitive Firm in the Short and Long Run ?Short run ?Downward sloping demand – differentiated product ?Demand is relatively elastic – good substitutes ?MR P ?Profits are maximized when MR = MC ?This firm is making economic profits 169。2020 Pearson Education, Inc. Chapter 12 11 Monopolistic Competition and Economic Efficiency ?The monopoly power 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 – deadweight loss. ?With no economic profits in the long run, the firm is still not producing at minimum AC and excess capacity exists. 169。2020 Pearson Education, Inc. Chapter 12 13 Monopolistic Competition ? If inefficiency is bad for consumers, should monopolistic petition be regulated? ? Market power is relatively small. Usually there are enough firms to pete with enough substitutability between firms – deadweight loss small. ? Inefficiency is balanced by benefit of increased product diversity – may easily outweigh deadweight loss. 169。2020 Pearson Education, Inc. Chapter 12 15 Elasticities of Demand for Brands of Colas and Coffee 169。2020 Pearson Education, Inc. Chapter 12 17 Oligopoly – Characteristics ?Small number of firms ?Product differentiation may or may not exist ?Barriers to entry ?Scale economies ?Patents ?Technology ?Name recognition ?Strategic action 169。2020 Pearson Education, Inc. Chapter 12 19 Oligopoly ?Management Challenges ?Strategic actions to deter entry ? Threaten to decrease price against new petitors by keeping excess capacity ?Rival behavior ? Because only a few firms, each must consider how its actions will affect its rivals and in turn how their rivals will react 169。2020 Pearson Education, Inc. Chapter 12 21 Oligopoly – Equilibrium ? Defining Equilibrium ?Firms are doing the best they can and have no incentive to change their output or price ?All firms assume petitors are taking rival decisions into account ? Nash Equil