5 pricing and output decisions: imperfectly competitive markets 5 pricing and output decisions:...
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5Pricing and Output
Decisions: Imperfectly Competitive Markets
5Pricing and Output
Decisions: Imperfectly Competitive Markets
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Alternative Market StructuresAlternative Market Structures
• Classifying markets (by degree of competition)
– number of firms
– freedom of entry to industry
• free, restricted or blocked?
– nature of product
• homogeneous or differentiated?
– nature of demand curve
• degree of control the firm has over price
• Classifying markets (by degree of competition)
– number of firms
– freedom of entry to industry
• free, restricted or blocked?
– nature of product
• homogeneous or differentiated?
– nature of demand curve
• degree of control the firm has over price
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Alternative Market StructuresAlternative Market Structures
• The four market structures
– perfect competition
– monopoly
– monopolistic competition
– oligopoly
• The four market structures
– perfect competition
– monopoly
– monopolistic competition
– oligopoly
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Features of the four market structuresFeatures of the four market structures
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Features of the four market structuresFeatures of the four market structures
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Features of the four market structuresFeatures of the four market structures
![Page 7: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/7.jpg)
Features of the four market structuresFeatures of the four market structures
![Page 8: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/8.jpg)
Features of the four market structuresFeatures of the four market structures
![Page 9: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/9.jpg)
Features of the four market structuresFeatures of the four market structures
![Page 10: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/10.jpg)
Alternative Market StructuresAlternative Market Structures
• The four market structures
– perfect competition
– monopoly
– monopolistic competition
– oligopoly
• Structure conduct performance
• The four market structures
– perfect competition
– monopoly
– monopolistic competition
– oligopoly
• Structure conduct performance
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MonopolyMonopoly
• Defining monopoly– importance of market power
• Barriers to entry– economies of scale
– economies of scope
– product differentiation and brand loyalty
– lower costs for an established firm
– ownership/control of key factors or outlets
– legal protection
– mergers and takeovers
• Defining monopoly– importance of market power
• Barriers to entry– economies of scale
– economies of scope
– product differentiation and brand loyalty
– lower costs for an established firm
– ownership/control of key factors or outlets
– legal protection
– mergers and takeovers
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MonopolyMonopoly
• The monopolist's demand curve– downward sloping
• the greater the market power, the less elastic the demand curve
– MR below AR
• The monopolist's demand curve– downward sloping
• the greater the market power, the less elastic the demand curve
– MR below AR
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-4
-2
0
2
4
6
8
1 2 3 4 5 6 7
AR and MR curves for a monopolyAR and MR curves for a monopolyQ
(units)
1234567
P =AR(£)8765432
ARAR
, MR
(£
)
Quantity
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-4
-2
0
2
4
6
8
1 2 3 4 5 6 7
Q(units)
1234567
P =AR(£)8765432
TR(£)
8141820201814
MR(£)
6420
-2-4
MR
AR
, MR
(£
)
Quantity
AR
AR and MR curves for a monopolyAR and MR curves for a monopoly
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MonopolyMonopoly
• The monopolist's demand curve– downward sloping
• the greater the market power, the less elastic the demand curve
– MR below AR
• Equilibrium price and output– Equilibrium output, where MC = MR
• The monopolist's demand curve– downward sloping
• the greater the market power, the less elastic the demand curve
– MR below AR
• Equilibrium price and output– Equilibrium output, where MC = MR
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Profit maximising under monopolyProfit maximising under monopoly
MR
£
Q O
MC
Qm
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MonopolyMonopoly
• The monopolist's demand curve– downward sloping
• the greater the market power, the less elastic the demand curve
– MR below AR
• Equilibrium price and output– Equilibrium output, where MC = MR
– Equilibrium price, found from D curve
• The monopolist's demand curve– downward sloping
• the greater the market power, the less elastic the demand curve
– MR below AR
• Equilibrium price and output– Equilibrium output, where MC = MR
– Equilibrium price, found from D curve
![Page 18: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/18.jpg)
Profit maximising under monopolyProfit maximising under monopoly
MR
£
Q O
MC
Qm
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£
Q O
MC
AC
Qm
MR
AR
AC
AR
Profit maximising under monopolyProfit maximising under monopoly
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MonopolyMonopoly
• The monopolist's demand curve– downward sloping
• the greater the market power, the less elastic the demand curve
– MR below AR
• Equilibrium price and output– Equilibrium output, where MC = MR
– Equilibrium price, found from D curve
• Profit– Measuring profit
• The monopolist's demand curve– downward sloping
• the greater the market power, the less elastic the demand curve
– MR below AR
• Equilibrium price and output– Equilibrium output, where MC = MR
– Equilibrium price, found from D curve
• Profit– Measuring profit
![Page 21: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/21.jpg)
£
Q O
MC
AC
Qm
MR
AR
AC
AR
Total profit
Profit maximising under monopolyProfit maximising under monopoly
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MonopolyMonopoly
• The monopolist's demand curve– downward sloping
• the greater the market power, the less elastic the demand curve
– MR below AR
• Equilibrium price and output– Equilibrium output, where MC = MR
– Equilibrium price, found from D curve
• Profit– Measuring profit
– Supernormal profit can persist in long run
• The monopolist's demand curve– downward sloping
• the greater the market power, the less elastic the demand curve
– MR below AR
• Equilibrium price and output– Equilibrium output, where MC = MR
– Equilibrium price, found from D curve
• Profit– Measuring profit
– Supernormal profit can persist in long run
![Page 23: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/23.jpg)
MonopolyMonopoly
• Monopoly versus perfect competition– lower short-run output at a higher price
– supernormal profit not competed away
– costs under monopoly• lack of competition to drive down costs
• BUT possibility of substantial economies of scale
– innovation and new products• less incentive to innovate
• BUT greater possibility of innovation through investing ploughed-back profit
– competition for corporate control
• Monopoly versus perfect competition– lower short-run output at a higher price
– supernormal profit not competed away
– costs under monopoly• lack of competition to drive down costs
• BUT possibility of substantial economies of scale
– innovation and new products• less incentive to innovate
• BUT greater possibility of innovation through investing ploughed-back profit
– competition for corporate control
![Page 24: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/24.jpg)
AR = D
MC
MR
£
Q O Q1
P1
Monopoly
Equilibrium of industry under perfect competition and monopoly: with the same MC curve
Equilibrium of industry under perfect competition and monopoly: with the same MC curve
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£
Q O
MC ( = supply under perfect competition)
Q1
MR
P1
P2
Q2
AR = D
Comparison withPerfect competition
Equilibrium of industry under perfect competition and monopoly: with the same MC curve
Equilibrium of industry under perfect competition and monopoly: with the same MC curve
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MonopolyMonopoly
• Monopoly versus perfect competition– lower short-run output at a higher price
– supernormal profit not competed away
• Monopoly versus perfect competition– lower short-run output at a higher price
– supernormal profit not competed away
![Page 27: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/27.jpg)
MonopolyMonopoly
• Monopoly versus perfect competition– lower short-run output at a higher price
– supernormal profit not competed away
– costs under monopoly• lack of competition to drive down costs
• BUT possibility of substantial economies of scale
• Monopoly versus perfect competition– lower short-run output at a higher price
– supernormal profit not competed away
– costs under monopoly• lack of competition to drive down costs
• BUT possibility of substantial economies of scale
![Page 28: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/28.jpg)
MonopolyMonopoly
• Monopoly versus perfect competition– lower short-run output at a higher price
– supernormal profit not competed away
– costs under monopoly• lack of competition to drive down costs
• BUT possibility of substantial economies of scale
– innovation and new products• less incentive to innovate
• BUT greater possibility of innovation through investing ploughed-back profit
• Monopoly versus perfect competition– lower short-run output at a higher price
– supernormal profit not competed away
– costs under monopoly• lack of competition to drive down costs
• BUT possibility of substantial economies of scale
– innovation and new products• less incentive to innovate
• BUT greater possibility of innovation through investing ploughed-back profit
![Page 29: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/29.jpg)
MonopolyMonopoly
• Monopoly versus perfect competition– lower short-run output at a higher price
– supernormal profit not competed away
– costs under monopoly• lack of competition to drive down costs
• BUT possibility of substantial economies of scale
– innovation and new products• less incentive to innovate
• BUT greater possibility of innovation through investing ploughed-back profit
– competition for corporate control
• Monopoly versus perfect competition– lower short-run output at a higher price
– supernormal profit not competed away
– costs under monopoly• lack of competition to drive down costs
• BUT possibility of substantial economies of scale
– innovation and new products• less incentive to innovate
• BUT greater possibility of innovation through investing ploughed-back profit
– competition for corporate control
![Page 30: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/30.jpg)
OligopolyOligopoly
• Key features of oligopoly
– barriers to entry
– interdependence of firms
• Competition versus collusion
• Collusive oligopoly
– cartels
• equilibrium of the industry
• Key features of oligopoly
– barriers to entry
– interdependence of firms
• Competition versus collusion
• Collusive oligopoly
– cartels
• equilibrium of the industry
![Page 31: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/31.jpg)
£
Q O
Industry D AR
Profit-maximising cartelProfit-maximising cartel
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£
Q O
Industry D AR
Industry MC
Industry MR
Q1
P1
Profit-maximising cartelProfit-maximising cartel
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OligopolyOligopoly
• Key features of oligopoly
– barriers to entry
– interdependence of firms
• Competition versus collusion
• Collusive oligopoly
– cartels
• equilibrium of the industry
• allocating and enforcing quotas
• Key features of oligopoly
– barriers to entry
– interdependence of firms
• Competition versus collusion
• Collusive oligopoly
– cartels
• equilibrium of the industry
• allocating and enforcing quotas
![Page 34: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/34.jpg)
OligopolyOligopoly
• Collusive oligopoly (cont.)– tacit collusion
• price leadership
• rules of thumb
– factors favouring collusion• few firms which are open with each other
• similar cost structures
• similar products
• there is a dominant firm
• significant barriers to entry
• stable market conditions
• no government measures to curb collusion
• Collusive oligopoly (cont.)– tacit collusion
• price leadership
• rules of thumb
– factors favouring collusion• few firms which are open with each other
• similar cost structures
• similar products
• there is a dominant firm
• significant barriers to entry
• stable market conditions
• no government measures to curb collusion
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OligopolyOligopoly
• The breakdown of collusion
• Non-collusive oligopoly: game theory– alternative strategies
• optimistic or cautious approach?
– simple dominant strategy games
• The breakdown of collusion
• Non-collusive oligopoly: game theory– alternative strategies
• optimistic or cautious approach?
– simple dominant strategy games
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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
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OligopolyOligopoly
• The breakdown of collusion
• Non-collusive oligopoly: game theory– alternative strategies
• optimistic or cautious approach?
– simple dominant strategy games• Nash equilibrium
• The breakdown of collusion
• Non-collusive oligopoly: game theory– alternative strategies
• optimistic or cautious approach?
– simple dominant strategy games• Nash equilibrium
![Page 38: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/38.jpg)
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
![Page 39: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/39.jpg)
OligopolyOligopoly
• Non-collusive oligopoly: game theory– alternative strategies
• optimistic or cautious approach?
– simple dominant strategy games• Nash equilibrium
• the prisoners’ dilemma
• Non-collusive oligopoly: game theory– alternative strategies
• optimistic or cautious approach?
– simple dominant strategy games• Nash equilibrium
• the prisoners’ dilemma
![Page 40: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/40.jpg)
OligopolyOligopoly
• Non-collusive oligopoly: game theory– alternative strategies
• optimistic or cautious approach?
– simple dominant strategy games• Nash equilibrium
• the prisoners’ dilemma
– more complex non-dominant strategy games
• Non-collusive oligopoly: game theory– alternative strategies
• optimistic or cautious approach?
– simple dominant strategy games• Nash equilibrium
• the prisoners’ dilemma
– more complex non-dominant strategy games
![Page 41: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/41.jpg)
OligopolyOligopoly
• Non-collusive oligopoly: game theory– alternative strategies
• optimistic or cautious approach?
– simple dominant strategy games• Nash equilibrium
• the prisoners’ dilemma
– more complex non-dominant strategy games
– the importance of threats and promises
• Non-collusive oligopoly: game theory– alternative strategies
• optimistic or cautious approach?
– simple dominant strategy games• Nash equilibrium
• the prisoners’ dilemma
– more complex non-dominant strategy games
– the importance of threats and promises
![Page 42: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/42.jpg)
OligopolyOligopoly
• Non-collusive oligopoly: game theory– alternative strategies
• optimistic or cautious approach?
– simple dominant strategy games• Nash equilibrium
• the prisoners’ dilemma
– more complex non-dominant strategy games
– the importance of threats and promises• are threats seen by rivals as credible?
• Non-collusive oligopoly: game theory– alternative strategies
• optimistic or cautious approach?
– simple dominant strategy games• Nash equilibrium
• the prisoners’ dilemma
– more complex non-dominant strategy games
– the importance of threats and promises• are threats seen by rivals as credible?
![Page 43: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/43.jpg)
OligopolyOligopoly
• Non-collusive oligopoly: game theory– alternative strategies
• optimistic or cautious approach?
– simple dominant strategy games• Nash equilibrium
• the prisoners’ dilemma
– more complex non-dominant strategy games
– the importance of threats and promises• are threats seen by rivals as credible?
– the importance of timing
• Non-collusive oligopoly: game theory– alternative strategies
• optimistic or cautious approach?
– simple dominant strategy games• Nash equilibrium
• the prisoners’ dilemma
– more complex non-dominant strategy games
– the importance of threats and promises• are threats seen by rivals as credible?
– the importance of timing
![Page 44: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/44.jpg)
OligopolyOligopoly
• Non-collusive oligopoly: game theory– alternative strategies
• optimistic or cautious approach?
– simple dominant strategy games• Nash equilibrium
• the prisoners’ dilemma
– more complex non-dominant strategy games
– the importance of threats and promises• are threats seen by rivals as credible?
– the importance of timing• decision trees
• Non-collusive oligopoly: game theory– alternative strategies
• optimistic or cautious approach?
– simple dominant strategy games• Nash equilibrium
• the prisoners’ dilemma
– more complex non-dominant strategy games
– the importance of threats and promises• are threats seen by rivals as credible?
– the importance of timing• decision trees
![Page 45: 5 Pricing and Output Decisions: Imperfectly Competitive Markets 5 Pricing and Output Decisions: Imperfectly Competitive Markets](https://reader033.vdocuments.site/reader033/viewer/2022061306/55146c18550346b0158b4dec/html5/thumbnails/45.jpg)
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
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OligopolyOligopoly
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
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£
QO
P1
Q1
Current priceand quantity
give one pointon demand curve
Kinked demand for a firm under oligopolyKinked demand for a firm under oligopoly
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£
QO
P1
Q1
D
D
Kinked demand for a firm under oligopolyKinked demand for a firm under oligopoly
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OligopolyOligopoly
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– stable prices
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– stable prices
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£
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
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OligopolyOligopoly
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– stable prices
– limitations of the model
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– stable prices
– limitations of the model
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OligopolyOligopoly
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– stable prices
– limitations of the model
• Oligopoly and the consumer
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– stable prices
– limitations of the model
• Oligopoly and the consumer
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OligopolyOligopoly
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– stable prices
– limitations of the model
• Oligopoly and the consumer
– advantages
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– stable prices
– limitations of the model
• Oligopoly and the consumer
– advantages
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OligopolyOligopoly
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– stable prices
– limitations of the model
• Oligopoly and the consumer
– advantages
– disadvantages
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– stable prices
– limitations of the model
• Oligopoly and the consumer
– advantages
– disadvantages
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OligopolyOligopoly
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– stable prices
– limitations of the model
• Oligopoly and the consumer
– advantages
– disadvantages
– difficulties in drawing general conclusions
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– stable prices
– limitations of the model
• Oligopoly and the consumer
– advantages
– disadvantages
– difficulties in drawing general conclusions
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Alternative Aims to Profit MaximisationAlternative Aims to Profit Maximisation
• Alternative aims– separation of ownership and control
– the principal–agent problem
– managerial utility maximisation
– profit satisficing
• Sales revenue maximisation (short run)– equilibrium output and price
• comparisons with short-run profit maximising
• implications for advertising
• Alternative aims– separation of ownership and control
– the principal–agent problem
– managerial utility maximisation
– profit satisficing
• Sales revenue maximisation (short run)– equilibrium output and price
• comparisons with short-run profit maximising
• implications for advertising
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£
Q O
AR
MC
MRQ1
P1
Sales revenue maximising price and outputSales revenue maximising price and output
Profit-maximisingprice and output
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£
O
AR
P1
MC
Q1
MRQ2
P2
Sales revenuemaximising
price and output
Q
Sales revenue maximising price and outputSales revenue maximising price and output
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Alternative Aims to Profit MaximisationAlternative Aims to Profit Maximisation
• Alternative aims– separation of ownership and control
– the principal–agent problem
– managerial utility maximisation
– profit satisficing
• Sales revenue maximisation (short run)– equilibrium output and price
• comparisons with short-run profit maximising
• implications for advertising
– implications for the consumer
• Alternative aims– separation of ownership and control
– the principal–agent problem
– managerial utility maximisation
– profit satisficing
• Sales revenue maximisation (short run)– equilibrium output and price
• comparisons with short-run profit maximising
• implications for advertising
– implications for the consumer
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Alternative Aims to Profit MaximisationAlternative Aims to Profit Maximisation
• Growth maximisation– measuring ‘growth’
– equilibrium for growth maximising firm?
• Multiple aims– satisficing and the setting of targets
• different stakeholders with different aims
• various possible targets
• potential conflicts between targets
– organisational slack• a way of reconciling conflicting aims?
• cutting slack with 'just-in-time' methods
• Growth maximisation– measuring ‘growth’
– equilibrium for growth maximising firm?
• Multiple aims– satisficing and the setting of targets
• different stakeholders with different aims
• various possible targets
• potential conflicts between targets
– organisational slack• a way of reconciling conflicting aims?
• cutting slack with 'just-in-time' methods
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Pricing in PracticePricing in Practice
• Do firms know their costs and revenues?
– difficulties in identifying the profit-maximising price and output
– difficulties in predicting rivals’ behaviour
• Cost-based pricing
– the use of a profit mark-up on AC
• choosing the level of output
• choosing the mark-up
• Do firms know their costs and revenues?
– difficulties in identifying the profit-maximising price and output
– difficulties in predicting rivals’ behaviour
• Cost-based pricing
– the use of a profit mark-up on AC
• choosing the level of output
• choosing the mark-up
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Choosing the output and profit mark-upChoosing the output and profit mark-up
O
AC
£
Q
D
P1
Q1
f
gP2
Q2
j
h
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Pricing in PracticePricing in Practice
• Do firms know their costs and revenues?
– difficulties in identifying the profit-maximising price and output
– difficulties in predicting rivals’ behaviour
• Cost-based pricing
– the use of a profit mark-up on AC
• choosing the level of output
• choosing the mark-up
• equilibrium price and output?
• Do firms know their costs and revenues?
– difficulties in identifying the profit-maximising price and output
– difficulties in predicting rivals’ behaviour
• Cost-based pricing
– the use of a profit mark-up on AC
• choosing the level of output
• choosing the mark-up
• equilibrium price and output?
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Pricing in PracticePricing in Practice
• Do firms know their costs and revenues?
– difficulties in identifying the profit-maximising price and output
– difficulties in predicting rivals’ behaviour
• Cost-based pricing
– the use of a profit mark-up on AC
• choosing the level of output
• choosing the mark-up
• equilibrium price and output?
– variations in the mark-up
• Do firms know their costs and revenues?
– difficulties in identifying the profit-maximising price and output
– difficulties in predicting rivals’ behaviour
• Cost-based pricing
– the use of a profit mark-up on AC
• choosing the level of output
• choosing the mark-up
• equilibrium price and output?
– variations in the mark-up
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Pricing in PracticePricing in Practice
• Price discrimination
– meaning of price discrimination
• charging different prices to different consumers for reasons unrelated to costs
• the prices depend on price elasticity of demand
• Price discrimination
– meaning of price discrimination
• charging different prices to different consumers for reasons unrelated to costs
• the prices depend on price elasticity of demand
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Price discriminationPrice discrimination
P
QO
P1
D
200
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O
P1
D
P2
150 200
P
Q
Price discriminationPrice discrimination
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Pricing in PracticePricing in Practice
• Price discrimination (cont.)
– conditions for price discrimination
• firm must be able to set its price
• markets must be separate
• demand elasticity must differ between markets
– advantages to the firm
• higher profits
• possibility of cross-subsidisation
• Price discrimination (cont.)
– conditions for price discrimination
• firm must be able to set its price
• markets must be separate
• demand elasticity must differ between markets
– advantages to the firm
• higher profits
• possibility of cross-subsidisation
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• Pricing and the product life cycle
– the four stages
• launch
• growth
• maturity
• decline
– competition and pricing in each stage
• Pricing and the product life cycle
– the four stages
• launch
• growth
• maturity
• decline
– competition and pricing in each stage
Pricing in PracticePricing in Practice
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O
Sal
es p
er p
erio
d
Time
The stages in a product’s life cycleThe stages in a product’s life cycle
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The stages in a product’s life cycleThe stages in a product’s life cycle
O (1)Launch
(2)Growth
(3)Maturity
(4)Decline
Sal
es p
er p
erio
d
Time
Product notbecomingobsolete
Productbecomingobsolete