mbf ge econ ppt ch14
Post on 19-Dec-2015
236 Views
Preview:
DESCRIPTION
TRANSCRIPT
-
Monopolistic Competition and Oligopoly14McGraw-Hill/IrwinCopyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
-
Four Market ModelsLO1
Characteristics of the Four Basic Market ModelsCharacteristicPure CompetitionMonopolistic CompetitionOligopolyMonopolyNumber of firmsA very large numberManyFewOneType of productStandardizedDifferentiatedStandardized or differentiatedUnique; no close subs.Control over priceNoneSome, but within rather narrow limitsLimited by mutual inter-dependence; considerable with collusionConsiderableConditions of entryVery easy, no obstaclesRelatively easySignificant obstaclesBlockedNonprice competitionNoneConsiderable emphasis on advertising, brand names, trademarksTypically a great deal, particularly with product differentiationMostly public relation advertisingExamplesAgricultureRetail trade, dresses, shoesSteel, auto, farm implementsLocal utilities
-
Monopolistic CompetitionRelatively large number of sellersDifferentiated productsEasy entry and exitAdvertisingLO1
-
Monopolistically Competitive Industry concentrationMeasured by:Four-firm concentration ratiosPercentage of 4 largest firms
Herfindahl index Sum of squared market shares
LO14-Firm CR =Output of four largest firmsTotal output in the industryHI = (%S1)2 + (%S2)2 + (%S3)2 + . + (%Sn)2
-
Price and Output in Monopolistic Comp
Demand is highly elasticShort run profit or lossProduce where MR=MCLong run normal profitEntry and exitInefficientProduct varietyLO2
-
The Short Run: Profit or LossLO2QuantityPrice and CostsMR = MCMCMRD1ATCEconomicProfitQ1A1P10
-
The Short Run: Profit or LossLO2QuantityPrice and CostsMCMRD2ATCLossQ2A2P20MR = MC
-
The Long Run: Only a Normal ProfitLO2QuantityPrice and CostsMCMRD3ATCQ3P3= A30MR = MC
-
Monopolistic Competition: EfficiencyInefficientProductive inefficiencyP > ATCAllocative inefficiencyP > MCLO2
-
Monopolistic Competition: EfficiencyLO2P=MC=Min ATC for pure competition (recall)P4Q4Price is LowerExcess Capacity atMinimum ATCMonopolistic competition is not efficient
-
Product VarietyThe firm constantly manages price, product, and advertisingBetter product differentiationBetter advertisingThe consumer benefits by greater array of choices and better productsTypes and stylesBrands and qualityLO2
-
OligopolyA few large producersHomogeneous or differentiated productsLimited control over priceMutual interdependenceStrategic behaviorEntry barriersMergersLO3
-
Oligopolistic IndustriesFour-firm concentration ratio40% or more to be oligopolyShortcomingsLocalized marketsInter-industry competitionWorld priceDominant firms
LO3
-
Game Theory OverviewOligopolies display strategic pricing behaviorMutual interdependenceCollusionIncentive to cheatPrisoners dilemmaLO4
-
Game Theory OverviewLO4RareAirs Price StrategyUptowns Price StrategyABCD$12$12$15$6$8$8$6$15HighHighLowLow2 competitors2 price strategiesEach strategy has a payoff matrixGreatest combinedprofitIndependent actionsstimulate a response
-
Game Theory OverviewLO4RareAirs Price StrategyUptowns Price StrategyABCD$12$12$15$6$8$8$6$15HighHighLowLowIndependently lowered prices in expectation of greater profit leads to worst combined outcomeEventually low outcomes make firms return to higher prices.
-
Three Oligopoly ModelsKinked-demand curveCollusive pricingPrice leadershipReasons for 3 modelsDiversity of oligopoliesComplications of interdependenceLO5
-
Kinked-Demand CurveLO5P0MR2D2D1MR1efgRivals IgnorePrice IncreaseRivals MatchPrice DecreaseQ0MR2D2D1MR1Q0MC1MC2P0efgPricePriceQuantityQuantity00
-
Kinked-Demand CurveCriticismsExplains inflexibility, not pricePrices are not that rigidPrice wars
LO6
-
Cartels and Other CollusionLO6DMR=MCATCMCMRP0A0Q0EconomicProfit
-
Overt CollusionCartels - a group of firms or nations that colludeFormally agreeing to the price Sets output levels for membersCollusion is illegal in the United StatesOPECLO6
-
Obstacles to CollusionDemand and cost differencesNumber of firms CheatingRecessionNew entrantsLegal obstaclesLO6
-
Price Leadership ModelPrice LeadershipDominant firm initiates price changesOther firms follow the leaderUse limit pricing to block entry of new firmsPossible price war
LO6
-
Oligopoly and AdvertisingPrevalent to compete with product development and advertisingLess easily duplicated than a price changeFinancially able to advertise LO7
-
AdvertisingLO7
Positive Effects Negative Effects Low-cost way of providing information to consumersCan be manipulative
Enhances competitionContains misleading claims that confuse consumers
Speeds up technological progressConsumers pay high prices for a good while forgoing a better, lower priced, unadvertised version of the productCan help firms obtain economies of scale
-
Oligopoly and EfficiencyOligopolies are inefficientProductively inefficient P > minATCAllocatively inefficient P > MCQualificationsIncreased foreign competitionLimit pricingTechnological advanceLO7
**************************
top related