Transcript Chapter 12
Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency 12 C HAPTE R Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Monopolistic Competition and Oligopoly Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 1 Next Slide Copyright McGraw-Hill/Irwin, 2005 FOUR MARKET MODELS Monopolistic Competition: Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 2 Next Slide •Relatively Large Number of Sellers •Differentiated Products •Easy Entry and Exit Pure Competition Monopolistic Competition Oligopoly Pure Monopoly Market Structure Continuum Copyright McGraw-Hill/Irwin, 2005 CHARACTERISTICS Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 3 Next Slide Relatively Large Number of Sellers •Small Market Shares •No Collusion •Independent Action Copyright McGraw-Hill/Irwin, 2005 CHARACTERISTICS Differentiated Products Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 4 Next Slide • Product Attributes • Service • Location • Brand Names and Packaging • Some Control Over Price • Easy Entry and Exit • Advertising Copyright McGraw-Hill/Irwin, 2005 PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Expect New Competitors MC Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 5 Price and Costs Monopolistic Competition and Efficiency ATC P1 A1 Short-Run Economic Profits D MR Next Slide Q1 Quantity Copyright McGraw-Hill/Irwin, 2005 PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Expect New Competitors MC Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 6 Price and Costs Monopolistic Competition and Efficiency ATC New competition drives down the P price level – leading to economic A losses in the short run. 1 1 Short-Run Economic Profits D MR Next Slide Q1 Quantity Copyright McGraw-Hill/Irwin, 2005 PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Monopolistic Competition MC Characteristics Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 7 Price and Costs Monopolistic Competition and Efficiency ATC A2 P2 Short-Run Economic Losses D MR Next Slide Q2 Quantity Copyright McGraw-Hill/Irwin, 2005 PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Monopolistic Competition MC Characteristics Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 8 A2 P2 With economic losses, firms will exit the market – stability occurs Short-Run when economic profits are zero. Price and Costs Monopolistic Competition and Efficiency ATC Economic Losses D MR Next Slide Q2 Quantity Copyright McGraw-Hill/Irwin, 2005 PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Long-Run Equilibrium MC Monopolistic Competition Characteristics Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 9 Price and Costs Price and Output in Monopolistic Competition Normal Profit Only ATC P3 = A3 D MR Next Slide Q3 Quantity Copyright McGraw-Hill/Irwin, 2005 MONOPOLISTIC COMPETITION AND EFFICIENCY Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency • Not Productively Efficient Minimum ATC Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency • Not Allocatively Efficient Price MC Key Terms Previous Slide End Show 12 - 10 Next Slide • Excess Capacity Graphically… Copyright McGraw-Hill/Irwin, 2005 MONOPOLISTIC COMPETITION AND EFFICIENCY Monopolistic Competition Long-Run Equilibrium MC Characteristics Price is Not = Minimum ATC Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 11 Price and Costs Price and Output in Monopolistic Competition ATC P3 = A3 Price MC D MR Next Slide Q3 Quantity Copyright McGraw-Hill/Irwin, 2005 MONOPOLISTIC COMPETITION AND EFFICIENCY Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 12 Next Slide Product Variety • Benefits of Product Variety • Nonprice Competition • Advertising Role • Trial & Error Search for Maximum Profits Copyright McGraw-Hill/Irwin, 2005 FOUR MARKET MODELS Oligopoly: Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 13 Next Slide • A Few Large Producers • Homogeneous or Differentiated Products • Control Over Price, But Mutual Interdependence •Strategic Behavior • Entry Barriers Pure Competition Monopolistic Competition Oligopoly Pure Monopoly Market Structure Continuum Copyright McGraw-Hill/Irwin, 2005 OLIGOPOLIES AND MERGERS Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 14 Next Slide Mergers Measures of Industry Concentration •Concentration Ratio •Localized Markets •Interindustry Competition •World Trade •Import Competition Copyright McGraw-Hill/Irwin, 2005 OLIGOPOLIES AND MERGERS Monopolistic Competition Herfindahl Index Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Sum of the squared percentage market shares for all firms in the industry – Places greater weight upon the larger firms (%S1)2 + (%S2)2 + (%S3)2 + … + (%Sn)2 Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 15 Next Slide A greater Herfindahl Index indicates a greater concentration of market power in the industry. (Pure competition is near zero.) Copyright McGraw-Hill/Irwin, 2005 OLIGOPOLIES AND MERGERS Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 16 Next Slide Mutual Interdependence Game-Theory Model Collusive Tendencies •Collusion Incentive to Cheat Introduction to Game Theory… Copyright McGraw-Hill/Irwin, 2005 OLIGOPOLY BEHAVIOR Monopolistic Competition A Game-Theory Overview Characteristics RareAir’s Price Strategy Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 17 Next Slide Uptown’s Price Strategy Monopolistic Competition and Efficiency High A $12 Low B $15 High $12 C $6 $6 D Low $15 Copyright McGraw-Hill/Irwin, 2005 $8 $8 OLIGOPOLY BEHAVIOR Monopolistic Competition A Game-Theory Overview Characteristics RareAir’s Price Strategy Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 18 Next Slide Uptown’s Price Strategy Monopolistic Competition and Efficiency High A $12 Low B $15 High $12 C $6 $6 D Low $15 Copyright McGraw-Hill/Irwin, 2005 $8 $8 Greatest Combined Profit OLIGOPOLY BEHAVIOR Monopolistic Competition A Game-Theory Overview Characteristics RareAir’s Price Strategy Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 19 Next Slide Uptown’s Price Strategy Monopolistic Competition and Efficiency High A $12 Low B $15 High $12 C $6 $6 D Low $15 Copyright McGraw-Hill/Irwin, 2005 $8 $8 Independent Actions Stimulate Response OLIGOPOLY BEHAVIOR Monopolistic Competition A Game-Theory Overview Characteristics RareAir’s Price Strategy Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 20 Next Slide Uptown’s Price Strategy Monopolistic Competition and Efficiency High A $12 Low B $15 High $12 C $6 $6 D Low $15 Copyright McGraw-Hill/Irwin, 2005 $8 $8 Independent Actions Stimulate Response Gravitating to the Worst Case OLIGOPOLY BEHAVIOR Monopolistic Competition A Game-Theory Overview Characteristics RareAir’s Price Strategy Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 21 Next Slide Uptown’s Price Strategy Monopolistic Competition and Efficiency High A $12 Low B $15 High $12 C $6 $6 D Low $15 Copyright McGraw-Hill/Irwin, 2005 $8 $8 Collusion Invites a Different Solution OLIGOPOLY BEHAVIOR Monopolistic Competition A Game-Theory Overview Characteristics RareAir’s Price Strategy Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 22 Next Slide Uptown’s Price Strategy Monopolistic Competition and Efficiency High A $12 Low B $15 High $12 C $6 $6 D Low $15 Copyright McGraw-Hill/Irwin, 2005 $8 $8 Collusion Invites a Different Solution OLIGOPOLY BEHAVIOR Monopolistic Competition A Game-Theory Overview Characteristics RareAir’s Price Strategy Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 23 Next Slide Uptown’s Price Strategy Monopolistic Competition and Efficiency High A $12 Low B $15 High $12 C $6 $6 D Low $15 Copyright McGraw-Hill/Irwin, 2005 $8 $8 Collusion Invites a Different Solution But, the incentive to cheat is very real THREE OLIGOPOLY MODELS No Standard Model due to... Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Diversity of Oligopolies Complications of Interdependence Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 24 Next Slide Alternative Models: 1 – Kinked Demand Curve 2 – Cartels and Collusion 3 – Price Leadership Copyright McGraw-Hill/Irwin, 2005 KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Monopolistic Competition Characteristics The firm’s demand and marginal revenue curves Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Price Oligopoly Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 25 Next Slide D1 Quantity Copyright McGraw-Hill/Irwin, 2005 MR1 KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Monopolistic Competition Characteristics The rival’s demand and marginal revenue curves Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Price Oligopoly Cartels and Collusion D2 Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 26 Next Slide D1 Quantity Copyright McGraw-Hill/Irwin, 2005 MR1 MR2 KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Rivals tend to follow a price cut Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Price Oligopoly Cartels and Collusion D2 Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 27 Next Slide D1 Quantity Copyright McGraw-Hill/Irwin, 2005 MR1 MR2 KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Rivals tend to follow a price cut or ignore a price increase Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Price Oligopoly Cartels and Collusion D2 Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 28 Next Slide D1 Quantity Copyright McGraw-Hill/Irwin, 2005 MR1 MR2 KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Monopolistic Competition Characteristics Effectively creating a kinked demand curve Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Price Oligopoly Cartels and Collusion D2 Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 29 Next Slide D1 Quantity Copyright McGraw-Hill/Irwin, 2005 MR1 MR2 KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Monopolistic Competition Characteristics Effectively creating a kinked demand curve Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Price Oligopoly Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 30 Next Slide D Quantity Copyright McGraw-Hill/Irwin, 2005 KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Monopolistic Competition Characteristics Effectively creating a kinked demand curve Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency MC1 Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Price Oligopoly MR2 Cartels and Collusion MC2 Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 31 Next Slide D Quantity Copyright McGraw-Hill/Irwin, 2005 MR1 KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Profit maximization MR = MC occurs at the kink Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency MC1 Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Price Oligopoly MR2 Cartels and Collusion MC2 Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 32 Next Slide D Quantity Copyright McGraw-Hill/Irwin, 2005 MR1 KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Monopolistic Competition Characteristics This behavior can set off a price war. Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency MC1 Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Price Oligopoly MR2 Cartels and Collusion MC2 Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 33 Next Slide D Quantity Copyright McGraw-Hill/Irwin, 2005 MR1 CARTELS AND OTHER COLLUSION Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly is conducive to collusion. If a few firms face identical or highly similar demand and costs... Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 34 Next Slide they will tend to seek joint profit maximization. Graphically… Copyright McGraw-Hill/Irwin, 2005 CARTELS AND OTHER COLLUSION Colluding Oligopolists Will Split the Monopoly Profits Economic Profit MC Monopolistic Competition Characteristics Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Price and costs Price and Output in Monopolistic Competition P0 ATC A0 D Key Terms Previous Slide End Show 12 - 35 Next Slide MR = MC MR Q0 Copyright McGraw-Hill/Irwin, 2005 CARTELS AND OTHER COLLUSION Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 36 Next Slide Overt Collusion •Cartels Defined •The OPEC Cartel Covert Collusion •Recent Examples •U.S. Illegality •Tacit Understandings Copyright McGraw-Hill/Irwin, 2005 CARTELS AND OTHER COLLUSION Obstacles to Collusion Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 37 Next Slide • Demand and Cost Differences • Number of Firms • Cheating • Recession • Potential Entry • Antitrust Law Copyright McGraw-Hill/Irwin, 2005 PRICE LEADERSHIP MODEL Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 38 Next Slide Leadership Tactics •Infrequent Price Changes •Communications •Limit Pricing Breakdowns in Price Leadership-Price Wars Copyright McGraw-Hill/Irwin, 2005 OLIGOPOLY AND ADVERTISING Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 39 Next Slide Less Easily Duplicated Adequate Resources Positive Effects of Advertising Potential Negative Effects of Advertising Brand Development Copyright McGraw-Hill/Irwin, 2005 OLIGOPOLY AND EFFICIENCY Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Productive Efficiency P = Minimum ATC Oligopoly: No Productive Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 40 Allocative Efficiency P = MC Oligopoly: No Allocative Efficiency Next Slide Qualifications Copyright McGraw-Hill/Irwin, 2005 monopolistic competition product differentiation nonprice competition excess capacity oligopoly homogeneous oligopoly differentiated oligopoly strategic behavior mutual interdependence concentration ratio Copyright McGraw-Hill/Irwin, 2005 interindustry competition import competition Herfindahl index game-theory model collusion kinked-demand curve price war cartel tacit understandings price leadership BACK END Next... Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 12 - 42 Next Slide Technology, R&D, and Efficiency Chapter 13 Copyright McGraw-Hill/Irwin, 2005