05. imperfect competion

ImperfectImperfectCompetitionCompetition

Imperfect CompetitionImperfect Competition

Monopolistic CompetitionMonopolistic Competition

MONOPOLISTIC COMPETITIONMONOPOLISTIC COMPETITION

• Assumptions of monopolistic competition

• Equilibrium of the firm

– short run

MR = MC



– 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




– short run

MR = MC

– long run

MR = MC; AR = AC



– 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




– short run

MR = MC

– long run

MR = MC; AR = AC

– under-utilisation of capacity in long run



– 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








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







– comparison with monopoly







– comparison with monopoly



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








£

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








– allocating and enforcing quotas








– 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


• 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


• dominant firm

• barometric

• Tacit collusion


• dominant firm

• barometric

OLIGOPOLYOLIGOPOLY

• Tacit collusion


• dominant firm

• barometric

– rules of thumb

• Tacit collusion


• dominant firm

• barometric

– rules of thumb

OLIGOPOLYOLIGOPOLY

• Tacit collusion


• dominant firm

• barometric

– rules of thumb

• Collusion and the law

• Tacit collusion


• dominant firm

• barometric

– rules of thumb


OLIGOPOLYOLIGOPOLY

• Tacit collusion


• dominant firm

• barometric

– rules of thumb


• The breakdown of collusion

• Tacit collusion


• dominant firm

• barometric

– rules of thumb


• 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


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



0

• Non-collusive oligopoly: game theory– alternative strategies: maximax and

maximin


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


maximin

– simple dominant strategy games


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


maximin

– simple dominant strategy games• the prisoners’ dilemma


maximin


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


maximin


– more complex non-dominant strategy games


maximin



OLIGOPOLYOLIGOPOLY

Profit possibilities for firm XProfit possibilities for firm X


maximin



– Importance of threats and promises


maximin




OLIGOPOLYOLIGOPOLY


maximin




– Importance of timing


maximin




– Importance of timing

OLIGOPOLYOLIGOPOLY


maximin




– Importance of timing• decision trees


maximin




– 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




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


£

QO

P1

Q1

MR

a

bD AR





– stable prices




– 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




– stable prices

– limitations of the model




– 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


Price DiscriminationPrice Discrimination

PRICE DISCRIMINATIONPRICE DISCRIMINATION

• Meaning of price discrimination

• Types of price discrimination

– first degree



– 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




– first degree

– second degree



– first degree

– second degree




– first degree

– second degree

– third degree



– 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




– first degree

– second degree

– third degree

• Conditions necessary for price discrimination to operate



– first degree

– second degree

– third degree

• Conditions necessary for price discrimination to operate

• Profit-maximising prices and output under price discrimination

– first degree


– first degree


D = MR

MC£

Q O Q1

Profit maximising under first-degree price discriminationProfit maximising under first-degree price discrimination


– first degree

– third degree


– first degree

– third degree


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



O O OMRX

MRY MRT

(a) Market X (b) Market Y (c) Total

(markets X + Y)

DX



DY



O O OMRX

MRY MRT

MC


(markets X + Y)

DX

DY

O O OMRX

MRY MRT

MC


(markets X + Y)

DX

3000



DY

O O O

DX

MRX

MRY MRT

MC

5


(markets X + Y)

3000



DY

O O OMRX

MRY MRT

MC

5

1000


(markets X + Y)

DX

3000



DY

O O OMRX

MRY MRT

MC

5

1000 2000


(markets X + Y)

DX

3000



DY

O O OMRX

MRY MRT

MC

5

9

1000 2000


(markets X + Y)

DX

3000



DY

O O OMRX

MRY MRT

MC

DY

5

7

1000 2000 3000


(markets X + Y)

9

DX




– first degree

– third degree

• Advantages to the firm


– first degree

– third degree




– first degree

– third degree


• Price discrimination and the public interest

– advantages


– first degree

– third degree



– advantages



– first degree

– third degree



– advantages

– disadvantages


– first degree

– third degree



– advantages

– disadvantages


05. imperfect competion

Education

Transcript of 05. imperfect competion