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Monopolistic Competition:
Price and Output
The firm faces highly elastic demand.
many rivals producing close
substitutes
product differentiation means
demand is not perfectly elastic
Shortrun:
MR = MC maximizes profits (or
Longrun:
minimizes losses)
the firm will tend to earn a normal profit only,
but no economic profits
Easy entry/exit
Complicating factors (theory v. practice):
Product differentiation can be strong (branding, location, etc.);
some firms are able to sustain long run profits
Always some restriction to entry (e.g. start-up costs); economic
profits may linger into the long run
#1. Explain how the entry of firms into its industry affects the demand
curve facing a monopolistic competitor and how that, in turn, affects its
economic profit.
http://
www.youtube.com/watch?v=6c0VtOdibcI&feature=relmfu
Spurlock on branding/advertising
Oligopoly
Key characteristics:
a few large producers
differentiated or homogeneous product
some monopoly power over price, but
limited by mutual interdependence
strong barriers to entry
Economies of scale, initial costs of capital,
control/ownership of resources
Mergers may lead to and are prevalent in oligoply.
increase monopoly power
23%
15%
10%
8%
6%
4% 2% 1% 1%
11%
10%
10%
10%
10%
10%
10%
9% 8%
23%
15%
10%
8%
6%
4% 2% 1% 1%
11%
10%
10%
10%
10%
10%
10%
9% 8%
Dominant Strategy:
No matter what the opponent
does, a strategy that earns a
player a payoff better than any
other strategy.
Does not mean player gets the
best possible payoff.
Nash Equilibrium:
- set of strategies, one for each player, such that
no player has incentive to unilaterally
change his strategy
- does not mean either player gets the best possible payoff
- one example of equilibrium is if both players have a dominant
strategy
- players are in Nash equilibrium if each one is making the best decisio
that he can, taking into account the potential decisions of the other
Prisoners Dilemma:
- situation in which both players could improve the Equilibrium
outcome by collusion
McDs & BK
No
No
No
No
Perhaps
economies of scale
Coca-Cola,
Sanford.
Chrysler,
General Electric,
Whirlpool,
#7b. Suppose that the five firms in industry A have annual sales of 30, 30,
20, 10, and 10 percent of total industry sales. For the five firms in industry B
the figures are 60, 25, 5, 5, and 5 percent. Calculate the Herfindahl index
for each industry
8. Explain the general meaning of the following profit payoff matrix for oligopolists
C and D. All profit figures are in thousands. Use the payoff matrix to explain the
mutual interdependence that characterizes oligopolistic industries.
FTC:
http://www.youtube.com/watch?v=NssfPApe5iQ
Bagels price fixing:
http://www.youtube.com/watch?v=u6VHDJ4x0sI
Qantas price fixing:
http://www.youtube.com/watch?v=o_gnvHKoOX4
Prisoners dilemma:
http://www.youtube.com/watch?v=ED9gaAb2BEw
Dark Knight:
http://www.youtube.com/watch?v=TmUWRJInwhk&feature=related
Split/Steal:
http://www.youtube.com/watch?v=InDgRkn04xg