Post on 13-Dec-2014
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ImperfectImperfectCompetitionCompetition
Imperfect CompetitionImperfect Competition
Monopolistic CompetitionMonopolistic Competition
MONOPOLISTIC COMPETITIONMONOPOLISTIC COMPETITION
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
MR = MC
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
MR = MC
£
Q O Qs
AR D
MC
AC
MR
Short-run equilibrium of the firmunder monopolistic competitionShort-run equilibrium of the firmunder monopolistic competition
Ps
ACs
MONOPOLISTIC COMPETITIONMONOPOLISTIC COMPETITION
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
MR = MC
– long run
MR = MC; AR = AC
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
MR = MC
– long run
MR = MC; AR = AC
Long-run equilibrium of the firmunder monopolistic competitionLong-run equilibrium of the firmunder monopolistic competition
ARL DL
MRL
£
Q O QL
PL
LRAC
LRMC
MONOPOLISTIC COMPETITIONMONOPOLISTIC COMPETITION
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
MR = MC
– long run
MR = MC; AR = AC
– under-utilisation of capacity in long run
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
MR = MC
– long run
MR = MC; AR = AC
– under-utilisation of capacity in long run
Under-utilisation of capacity in the long runUnder-utilisation of capacity in the long run
£
QO
LRAC
DL under monopolistic
competition
Q1 Q2
• Limitations of the model– imperfect information
– difficulty in identifying industry demand curve
– entry may not be totally free
– indivisibilities
– importance of non-price competition
• The public interest– comparison with perfect competition
• Limitations of the model– imperfect information
– difficulty in identifying industry demand curve
– entry may not be totally free
– indivisibilities
– importance of non-price competition
• The public interest– comparison with perfect competition
MONOPOLISTIC COMPETITIONMONOPOLISTIC COMPETITION
Q2
P2 DL under perfect
competition
Long run equilibrium of the firm under perfect andmonopolistic competition
Long run equilibrium of the firm under perfect andmonopolistic competition
£
QO
P1
LRAC
DL under monopolistic
competition
Q1
• Limitations of the model– imperfect information
– difficulty in identifying industry demand curve
– entry may not be totally free
– indivisibilities
– importance of non-price competition
• The public interest– comparison with perfect competition
– comparison with monopoly
• Limitations of the model– imperfect information
– difficulty in identifying industry demand curve
– entry may not be totally free
– indivisibilities
– importance of non-price competition
• The public interest– comparison with perfect competition
– comparison with monopoly
MONOPOLISTIC COMPETITIONMONOPOLISTIC COMPETITION
Imperfect CompetitionImperfect Competition
OligopolyOligopoly
OLIGOPOLYOLIGOPOLY
• Key features of oligopoly
– barriers to entry
– interdependence of firms
– incentives to compete versus incentives to collude
• Factors favouring collusion
• Collusive oligopoly: cartels
– equilibrium of the industry
• Key features of oligopoly
– barriers to entry
– interdependence of firms
– incentives to compete versus incentives to collude
• Factors favouring collusion
• Collusive oligopoly: cartels
– equilibrium of the industry
£
Q O
Industry D AR
Profit-maximising cartelProfit-maximising cartel
Profit-maximising cartelProfit-maximising cartel£
Q O
Industry D AR
Industry MC
Industry MR
Q1
P1
OLIGOPOLYOLIGOPOLY
• Key features of oligopoly
– barriers to entry
– interdependence of firms
– incentives to compete versus incentives to collude
• Factors favouring collusion
• Collusive oligopoly: cartels
– equilibrium of the industry
– allocating and enforcing quotas
• Key features of oligopoly
– barriers to entry
– interdependence of firms
– incentives to compete versus incentives to collude
• Factors favouring collusion
• Collusive oligopoly: cartels
– equilibrium of the industry
– allocating and enforcing quotas
0
5
10
15
20
25
30
35
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00
$ per barrel
Actual price
Cease-fire inIran-Iraq war
Yom KippurWar: Arab oil
embargo
First oil fromNorth Sea
Revolutionin Iran
Iraq invadesIran
OPEC’s firstquotas
Iraq invadesKuwait
New OPECquotas
World-widerecovery
Recessionin Far East
World-wideslowdown
Oil PricesOil Prices
0
5
10
15
20
25
30
35
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00
$ per barrelActual price
Cost in 1973 prices
Yom KippurWar: Arab oil
embargo
First oil fromNorth Sea
Revolutionin Iran
Iraq invadesIran
OPEC’s firstquotas
Cease-fire inIran-Iraq war Recession
in Far East
Iraq invadesKuwait
New OPECquotas
World-widerecovery
World-wideslowdown
Oil PricesOil Prices
• Tacit collusion
– price leadership
• dominant firm
• Tacit collusion
– price leadership
• dominant firm
OLIGOPOLYOLIGOPOLY
Dmarket
£
QO
Sall other firms
P1
P2
a
b
Division of the market between leader and followersDivision of the market between leader and followers
Dleader
Dominant firm price leadershipDominant firm price leadership
£
QO
Sall other firms
Dmarket
Dleader
PL
MRleader
MCleader
QL QFQT
f t
Determination of price and outputDetermination of price and output
l
Dominant firm price leadershipDominant firm price leadership
£
Q O
MR leader
AR D leader
AR D market
Price leader aiming to maximise profits for a given market sharePrice leader aiming to maximise profits for a given market share
Assume constantmarket share
for leader
£
Q O
AR D market
MC
MR leader
PL
QT
AR D leader
QL
l t
Price leader aiming to maximise profits for a given market sharePrice leader aiming to maximise profits for a given market share
• Tacit collusion
– price leadership
• dominant firm
• barometric
• Tacit collusion
– price leadership
• dominant firm
• barometric
OLIGOPOLYOLIGOPOLY
• Tacit collusion
– price leadership
• dominant firm
• barometric
– rules of thumb
• Tacit collusion
– price leadership
• dominant firm
• barometric
– rules of thumb
OLIGOPOLYOLIGOPOLY
• Tacit collusion
– price leadership
• dominant firm
• barometric
– rules of thumb
• Collusion and the law
• Tacit collusion
– price leadership
• dominant firm
• barometric
– rules of thumb
• Collusion and the law
OLIGOPOLYOLIGOPOLY
• Tacit collusion
– price leadership
• dominant firm
• barometric
– rules of thumb
• Collusion and the law
• The breakdown of collusion
• Tacit collusion
– price leadership
• dominant firm
• barometric
– rules of thumb
• Collusion and the law
• The breakdown of collusion
OLIGOPOLYOLIGOPOLY
2
4
6
10
12
1000
MC
AR
MR
£
Q
The IndustryThe Industry
2000 3000
£10 is the cartel’sprofit-maximising price
8
The incentive for a firm to produce more than its quota, or undercut the cartel’s price
The incentive for a firm to produce more than its quota, or undercut the cartel’s price
0
2
4
6
8
10
12
200 400 600
MC
AR
MR
£
Q
Firm AFirm A
800
Cartel PriceCartel Price(= (= MRMR if price remains fixed) if price remains fixed)
Firm is temptedto increase
output to 600
The incentive for a firm to produce more than its quota, or undercut the cartel’s price
The incentive for a firm to produce more than its quota, or undercut the cartel’s price
0
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
OLIGOPOLYOLIGOPOLY
Profits for firms A and B at different pricesProfits for firms A and B at different prices
£2.00 £1.80
£2.00
£1.80
X’s price
Y’s price
A B
C D
£10m each
£8m each£12m for Y£5m for X
£5m for Y£12m for X
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games
OLIGOPOLYOLIGOPOLY
Profits for firms A and B at different pricesProfits for firms A and B at different prices
£2.00 £1.80
£2.00
£1.80
X’s price
Y’s price
A B
C D
£10m each
£8m each£12m for Y£5m for X
£5m for Y£12m for X
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games• the prisoners’ dilemma
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games• the prisoners’ dilemma
OLIGOPOLYOLIGOPOLY
The prisoners' dilemmaThe prisoners' dilemma
Not confess Confess
Notconfess
Confess
Amanda's alternatives
Nigel'salternatives
A B
C D
Each gets1 year
Each gets3 years
Nigel gets3 months
Amanda gets10 years
Nigel gets10 years
Amanda gets3 months
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games• the prisoners’ dilemma
– more complex non-dominant strategy games
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games• the prisoners’ dilemma
– more complex non-dominant strategy games
OLIGOPOLYOLIGOPOLY
Profit possibilities for firm XProfit possibilities for firm X
Profit possibilities for firm XProfit possibilities for firm X
Profit possibilities for firm XProfit possibilities for firm X
Profit possibilities for firm XProfit possibilities for firm X
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games• the prisoners’ dilemma
– more complex non-dominant strategy games
– Importance of threats and promises
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games• the prisoners’ dilemma
– more complex non-dominant strategy games
– Importance of threats and promises
OLIGOPOLYOLIGOPOLY
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games• the prisoners’ dilemma
– more complex non-dominant strategy games
– Importance of threats and promises
– Importance of timing
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games• the prisoners’ dilemma
– more complex non-dominant strategy games
– Importance of threats and promises
– Importance of timing
OLIGOPOLYOLIGOPOLY
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games• the prisoners’ dilemma
– more complex non-dominant strategy games
– Importance of threats and promises
– Importance of timing• decision trees
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games• the prisoners’ dilemma
– more complex non-dominant strategy games
– Importance of threats and promises
– Importance of timing• decision trees
OLIGOPOLYOLIGOPOLY
Boeingdecides
500
seat
er
500 seater
500 seater
400 seater
400 seater
400 seater
A decision treeA decision tree
Boeing –£10mAirbus –£10m
(1)
Boeing +£30mAirbus +£50m
(2)
Boeing +£50mAirbus +£30m
(3)
Boeing –£10mAirbus –£10m (4)
Airbusdecides
B2
Airbusdecides
B1
A
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– the shape of the demand and MR curves
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– the shape of the demand and MR curves
OLIGOPOLYOLIGOPOLY
Kinked demand for a firm under oligopolyKinked demand for a firm under oligopoly
£
QO
P1
Q1
Current priceand quantity
give one pointon demand curve
£
QO
P1
Q1
D
D
Kinked demand for a firm under oligopolyKinked demand for a firm under oligopoly
£
QO
P1
Q1
MR
a
bD AR
Kinked demand for a firm under oligopolyKinked demand for a firm under oligopoly
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– the shape of the demand and MR curves
– stable prices
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– the shape of the demand and MR curves
– stable prices
OLIGOPOLYOLIGOPOLY
£
QO
P1
Q1
MC2
MC1
MR
a
bD AR
Stable price under conditions of a kinked demand curveStable price under conditions of a kinked demand curve
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– the shape of the demand and MR curves
– stable prices
– limitations of the model
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– the shape of the demand and MR curves
– stable prices
– limitations of the model
OLIGOPOLYOLIGOPOLY
• Oligopoly and the public interest
– advantages
– disadvantages
– difficulties in drawing general conclusions
• Advertising and the public interest
• Oligopoly and contestable markets
• Oligopoly and the public interest
– advantages
– disadvantages
– difficulties in drawing general conclusions
• Advertising and the public interest
• Oligopoly and contestable markets
OLIGOPOLYOLIGOPOLY
Imperfect CompetitionImperfect Competition
Price DiscriminationPrice Discrimination
PRICE DISCRIMINATIONPRICE DISCRIMINATION
• Meaning of price discrimination
• Types of price discrimination
– first degree
• Meaning of price discrimination
• Types of price discrimination
– first degree
First-degree price discriminationFirst-degree price discrimination
O
P1
D
200
P
Q
O
P1
D
200
P
Q
First-degree price discriminationFirst-degree price discrimination
PRICE DISCRIMINATIONPRICE DISCRIMINATION
• Meaning of price discrimination
• Types of price discrimination
– first degree
– second degree
• Meaning of price discrimination
• Types of price discrimination
– first degree
– second degree
PRICE DISCRIMINATIONPRICE DISCRIMINATION
• Meaning of price discrimination
• Types of price discrimination
– first degree
– second degree
– third degree
• Meaning of price discrimination
• Types of price discrimination
– first degree
– second degree
– third degree
Third-degree price discriminationThird-degree price discrimination
P
QO
P1
D
200
O
P1
D
P2
150 200
P
Q
Third-degree price discriminationThird-degree price discrimination
PRICE DISCRIMINATIONPRICE DISCRIMINATION
• Meaning of price discrimination
• Types of price discrimination
– first degree
– second degree
– third degree
• Conditions necessary for price discrimination to operate
• Meaning of price discrimination
• Types of price discrimination
– first degree
– second degree
– third degree
• Conditions necessary for price discrimination to operate
• Profit-maximising prices and output under price discrimination
– first degree
• Profit-maximising prices and output under price discrimination
– first degree
PRICE DISCRIMINATIONPRICE DISCRIMINATION
D = MR
MC£
Q O Q1
Profit maximising under first-degree price discriminationProfit maximising under first-degree price discrimination
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
PRICE DISCRIMINATIONPRICE DISCRIMINATION
O O OMRX
(a) Market X
DX
Profit-maximising output underthird degree price discriminationProfit-maximising output under
third degree price discrimination
O O O
DY
MRX
MRY
(a) Market X (b) Market Y
DX
Profit-maximising output underthird degree price discriminationProfit-maximising output under
third degree price discrimination
O O OMRX
MRY MRT
(a) Market X (b) Market Y (c) Total
(markets X + Y)
DX
Profit-maximising output underthird degree price discriminationProfit-maximising output under
third degree price discrimination
DY
Profit-maximising output underthird degree price discriminationProfit-maximising output under
third degree price discrimination
O O OMRX
MRY MRT
MC
(a) Market X (b) Market Y (c) Total
(markets X + Y)
DX
DY
O O OMRX
MRY MRT
MC
(a) Market X (b) Market Y (c) Total
(markets X + Y)
DX
3000
Profit-maximising output underthird degree price discriminationProfit-maximising output under
third degree price discrimination
DY
O O O
DX
MRX
MRY MRT
MC
5
(a) Market X (b) Market Y (c) Total
(markets X + Y)
3000
Profit-maximising output underthird degree price discriminationProfit-maximising output under
third degree price discrimination
DY
O O OMRX
MRY MRT
MC
5
1000
(a) Market X (b) Market Y (c) Total
(markets X + Y)
DX
3000
Profit-maximising output underthird degree price discriminationProfit-maximising output under
third degree price discrimination
DY
O O OMRX
MRY MRT
MC
5
1000 2000
(a) Market X (b) Market Y (c) Total
(markets X + Y)
DX
3000
Profit-maximising output underthird degree price discriminationProfit-maximising output under
third degree price discrimination
DY
O O OMRX
MRY MRT
MC
5
9
1000 2000
(a) Market X (b) Market Y (c) Total
(markets X + Y)
DX
3000
Profit-maximising output underthird degree price discriminationProfit-maximising output under
third degree price discrimination
DY
O O OMRX
MRY MRT
MC
DY
5
7
1000 2000 3000
(a) Market X (b) Market Y (c) Total
(markets X + Y)
9
DX
Profit-maximising output underthird degree price discriminationProfit-maximising output under
third degree price discrimination
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Advantages to the firm
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Advantages to the firm
PRICE DISCRIMINATIONPRICE DISCRIMINATION
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Advantages to the firm
• Price discrimination and the public interest
– advantages
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Advantages to the firm
• Price discrimination and the public interest
– advantages
PRICE DISCRIMINATIONPRICE DISCRIMINATION
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Advantages to the firm
• Price discrimination and the public interest
– advantages
– disadvantages
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Advantages to the firm
• Price discrimination and the public interest
– advantages
– disadvantages
PRICE DISCRIMINATIONPRICE DISCRIMINATION