econ
DESCRIPTION
TRANSCRIPT
MARKET
STRUCT
URE
S
Prepared by:Abayan, Axiel Chris
Dansalan, Gladys Joycedela Torre, Childeen Nova
Ngo, Sarah MaePalacio, Dorie Jane
Plana, Debby GilsylYap, Jennifer Joyce
BSA-2DECON 222 | TTH | J205 | 4:10 - 5:40
MONOPOLY
Pure Monopoly An industry with a single firm that produces a product for which there are no close substitutes and in which significant barriers to entry prevent other firms from entering the industry to compete for profits.
Natural Monopoly An industry that realizes such large economies of scale in producing its product that single-firm production of that good or service is most efficient.
Characteristics of a Monopoly
Single seller• The firm is the industry.
Unique good with no close substitutes
Price maker• The firm can change the price by
changing the quantity it produces. High barriers to entry
• New firms cannot enter the market• No immediate competitors
Some “non-price” competition
Drawing Monopolies
MR is below DemandP
Q
$100
80
60
40D
WHY IS MR LESS THAN DEMAND?
MR IS LESS THAN PRICE
P Qd TR MR
$11 0 - -
$10 1 10 10
$9 2 18 8
$8 3 24 6
$7 4 28 4
$6 5 30 2
$5 6 30 0
$4 7 28 -2
$10
$9 $9
$8 $8 $8
$7 $7 $7
$6 $6 $6 $6
$7
$6
$5$5 $5 $5 $5 $5
$4 $4 $4 $4 $4 $4 $4
Monopolies and Efficiency
Charge a higher price Under produce
• Not allocate efficient Produce at higher costs
• No productive efficiency Have little incentive to
innovate
Monopolies are inefficient because they…
Q
INEFFICIENCY OF PURE MONOPOLYP
DMR
S = MC
Pc
Pm
QcQm
At MR=MCA monopolist will sell less
units at a higher price than in competition
D
MC
MR
Q
200
175
150
125
100
75
50
25
0 1 2 3 4 5 6 7 8 9 10
Pri
ce,
costs
, an
d r
even
ue
Are Monopolies Productively Efficient? Does Price = Min ATC?
ATC
No. They are not producing at the lowest cost (min ATC)
D
MC
MR
Q
200
175
150
125
100
75
50
25
0 1 2 3 4 5 6 7 8 9 10
Pri
ce,
cost
s, a
nd
rev
enu
eDo Monopolies Have Allocative
Efficiency? Does Price = MC?
ATC
No. Price is greater. The monopoly is under producing.
Price Discrimination Charging different prices to different buyers.
Conditions for Price Discrimination
Firm must have monopoly power
Firm must be able to segregate the market
Consumers must not be able to resell product
Types of Price Discrimination
Personal Discrimination Separate price is charged from each buyer
according to the intensity of his desire or according to the size of his pocket.
Trade Discrimination It may take place when a monopolist
charges different prices according to the uses to which the commodity is put.
Place Discrimination It occurs when a monopolist charges
different prices for the same commodity at different places.
Degree of Price Discrimination
First Degree Price Discrimination This involves charging consumers
the maximum price that they are willing to pay.
Second Degree Price Discrimination This involves charging different
prices depending upon the quantity consumed.
Third Degree Price Discrimination This involves charging different
prices to different groups of people.
Examples of Price Discrimination
Retail price discrimination
Travel industry Coupons Premium pricing Segmentation by age
group Discounts Incentives for buyers
Financial aid in education
Haggling International price
discrimination Academic pricing Dual pricing Wage discrimination
The purpose of price discrimination
is generally to capture the
market's consumer surplus.
MONOPOLISTIC COMPETITION
Monopolistic Competition A common form of market structure characterized by a large number of firms, none of which can influence market price by virtue of size alone. Some degree of market power is achieved by firms producing differentiated products. New firms can enter and established firms can exit such an industry with ease.
Characteristics of Monopolistic Competition
Relatively large number of seller
Differentiated products Some control over price Easy entry and exit Non-price competition
(advertising)
Monopolistic Competition and Efficiency
No Productive Efficiency• Minimum ATC
No allocative efficiency• Price MC
Firm has excess capacity
Role of advertising
Firms produce differentiated products Face downward sloping demand curves Build up brand loyalty Gives them some influence over price
Engage in heavy advertising to
maintain brand loyalty
Concentration ratios are measures of the total output that is produced in an industry by a given number of firms in the industry. Concentration ratios are usually used to show the extent of market control of the largest firms in the industry and to illustrate the degree to which an industry is oligopolistic.
Low concentration ratios No concentration: 0% means perfect competition or at the very least
monopolistic competition. If for example CR4=0 %, the 4 largest firm in the industry would not have any significant market share.
Total concentration: 100% means an extremely concentrated oligopoly. If for example CR1= 100%, we talk of a monopoly.
Low concentration: 0% to 50%. This category ranges from perfect competition to oligopoly.
Medium concentration: 50% to 80%. An industry in this range is likely an oligopoly.
High concentration: 80% to 100%. This category ranges from oligopoly to monopoly.
Under MC concentration ratio tends to be
low so many firms operating in the market. A price change by one will have negligible effects on the demand for rival products
Drawing Monopolistic Competition
D
MR
$4
ATCP
rice
an
d C
ost
s
Q1
Short-RunEconomic
Profits
What Happens?
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
$2
MC
Quantity
$4
$2
D
MR
ATCP
rice
an
d C
ost
s
Q1
New Firms Enter
Quantity
MC
Short-RunEconomic
Profits
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
D
MR
$4
ATCP
rice
an
d C
ost
s
Q1
Normal Profit
$2
MC
$1
LONG- RUN EQUILIBRIUM
Quantity
D
MR
$7
Pri
ce a
nd
Co
sts
Q1
Short-RunEconomic
Loss
What happens? MC
$1
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
ATC
Quantity
D
MR
MC
ATCP
rice
an
d C
ost
s
Q3
Quantity
Long-Run EquilibriumNormalProfitOnly
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
$7
OLIGOPOLY
Oligopoly A form of market structure characterized by a few dominant firms. Products may be homogenous or differentiated. The behavior of any one firm in an oligopoly depends to a great extent on the behavior of others.
Characteristics of Oligopoly
A few large producers Identical or differentiated
products Mutual interdependence
• Firms use strategic pricing High entry barriers
COLLUDING OLIGOPOLY
Cartel (Collusion Model) A group of firms that gets together and makes joint price and output decisions to maximize joint profits.
Cournot Model A model of duopoly in which a series of output adjustment decisions leads to a final level of output between the output that would prevail if the market were organized competitively and the output that would be set by a monopoly.
A cartel is a group of producers that create a formal agreement to fix prices high.
Cartel = Colluding Oligopoly
CARTELS AND COLLUSION
1. Cartels set price and output at an agreed upon price
2. Firms require identical or highly similar demand and costs
3. Cartel must have a way to punish cheaters
4. Together they act as a monopoly
Colluding Oligopolists WillSplit the Monopoly Profits.
D
MC
ATC
MR
EconomicProfit
MR = MC
Pri
ce a
nd
co
sts
Q0
P0
A0
CARTELS AND OTHER COLLUSION
Assumptions of Cournot Model There are just two firms in the
industry- a duopoly.
Each firm takes the output of the other as given.
Both firms maximize profits.
NON COLLUDING OLIGOPOLY
Kinked Demand Curve Model A model of oligopoly in which the demand curve facing each individual firm has a “kink” in it. The kink results from the assumption that competitor firms will follow if a single firm cuts price but will not follow if a single firm raises price.
1. Match price- If one firm cuts it’s prices, then the other firms follow suit causing inelastic demand
Kinked Demand Curve ModelNoncollusive firms are likely to react to
competitor’s pricing in two ways:
2. Ignore change- If one firm raises prices, others maintain same price causing elastic demand
D1
MR1Quantity
KINKED DEMAND THEORY:
Pri
ce
The demand and MR curves if other firms match lower pricing
If this firm lowers its price and
others follow, Qd will increase
mildly
MR2
D2
Quantity
KINKED DEMAND THEORY:
Pri
ce
The demand and MR curves if other firms ignore higher pricing
If this firm increases its price and others ignore it, Qd for this firm will decrease significantly
MR2D1
D2
MR1Quantity
Two sets of curves based on the pricing decisions of other firms
Pri
ce
The firm’s demand andmarginal revenue curves
MR2D1
D2
MR1Quantity
Pri
ce
Rivals tend tofollow a price cut
Two sets of curves based on the pricing decisions of other firms
MR2D1
D2
MR1Quantity
Pri
ce
Rivals tend tofollow a price cut
or ignore aprice increase
Two sets of curves based on the pricing decisions of other firms
MR2D1
D2
MR1Quantity
Effectively creatinga kinked demand curve
Pri
ce
Two sets of curves based on the pricing decisions of other firms
D
Quantity
Effectively creatinga kinked demand curve
Pri
ce
Two sets of curves based on the pricing decisions of other firms
MR2D1
D2
MR1Quantity
What about MR?
Pri
ce
Two sets of curves based on the pricing decisions of other firms
D
MR1Quantity
Since we use sections of both MR curves, the MR has a
vertical gap. P
rice MR2
Two sets of curves based on the pricing decisions of other firms
D
Quantity
Profit maximizationMR = MC occurs
at the kink.
KINKED DEMAND THEORY:NONCOLLUSIVE OLIGOPOLY
Pri
ce MR2
MR1
Kinked Demand Curve Assumption
The elasticity of demand in response to an increase in price is different from the elasticity of demand in response to a price cut.
Price Leadership Model A form of oligopoly in which one dominant firm sets prices and all the smaller firms in the industry follow its pricing policy.
Assumptions of Price Leadership Model
The industry is made up of one large firm and a number of smaller competitive firms.
The dominant firm maximizes profit subject to the constraint of market demand and subject to the behavior of the smaller and competitive firm.
The dominant firm allows allow the smaller firms to sell all they want at the price the leader has set.
Perfectly Contestable Market
A market in which entry and exit are costless.
Assumptions of Perfectly Contestable Market
Model The freedom of entry eliminates any
excess economic profits.
Inefficient enterprises cannot survive in a perfectly contestable industry because cost inefficiencies invite replacement of the existing firms by entrants that can provide the same outputs at lower cost and lower prices.
Game Theory Analyzes oligopolistic behavior as a complex series of strategic moves and reactive countermoves among rival firms. In game theory, firms are assumed to anticipate rival reactions.
Key Elements of a game
Players: Who is interacting? Strategies: What are their
options? Payoffs: What are their
incentives? Information: What do they
know? Rationality: How do they think?
Nash Equilibrium In game theory, the result of all players’ playing their best strategy given what their competitors are doing.
i.e.
Each firm has the knowledge about other firm’s strategy
Their actions are dependent on each other. (like in oligopoly)
Nash Equilibrium
example: Firm 2 (y)
Firm 1 (x)
(x, y) No price change
Price Increse
No price change 10, 10 100, -30
Price Increase -20, 30 140, 35
Here, no price changes is an equilibrium because neither firm can benefit by increasing its price if other firm does not.
Maximin Strategy In game theory, a strategy chosen to maximize the minimum gain that can be earned.
This strategy is based on the fact that sometimes it is more prudent to maximize the minimum gains achievable in a gaming situation.
Maximin Strategy
In this example, Businessman M loves selling Meat, and Businessman P loves selling potatoes. As a consequence, let's assume they have the following payoff matrix (the number before the comma is the payoff in dollars for Businessman M and the number after the comma is the payoff in dollars for Businessman P):
(x, y) Businessman P (y)
Businessman M (x)
Sells Meat Sells Potatoes
Sells Meat 150000, 80000 200000, 120000
Sells Potatoes 130000, 100000 110000, 20000
As you can see, businessman M has a dominant strategy of selling meat. Why? Because irrespective of what P sells, M comes out ahead by selling meat. If M sells potatoes, he can mor $110,000. Both these amounts are less than $150,000 (and $200,000) which M can make by selling M. However, P does not have a dominant strategy; his fortunes are tied to what M does.
Let's first consider the Nash Equilibrium for this game. If P assumes that M is rational and will maximize his profits by pursuing the dominant strategy of selling meat, P will respond by selling potatoes.
So the top right-hand quadrant is the Nash Equilibrium here; both M and P maximize their profits. M can make $200,000 and P can make $120,000.
The whole concept of Nash Equilibrium is based on the fact that both M and P behave rationally. However, can P always count on M being rational? Suppose M starts following a Guru, who convinces M that he should not only give up eating meat, but he should stop selling it as well. Even though not rational, if M starts selling potatoes; if P has the strategy of selling potatoes, it can be extremely costly for P. Why? Because M will make $110,000; where as P will make only $20,000.
Let's further assume that P lives in a nice home and makes a mortgage payment of $3000 per month. With $20,000 yearly profit, P can't pay that mortgage, and will be foreclosed. So, CAN P TAKE THE RISK OF SELLING POTATOES, IF HE IS CONSERVATIVE AND AFRAID THAT M MAY NOT BEHAVE RATIONALLY? No.
So, what does P do?
So, what does P do?
P will sell meat, for he is assured of making at least $80,000. In this scenario, P is pursuing a Maximin Strategy of maximizing the minimum gains that can be earned.
Please note that even though it is not a profit-maximizing strategy, the Maximin strategy ensures that P will not be on the streets!
Prisoners’ Dilemma A game in which the players are prevented from cooperating and in which each has a dominant strategy that leaves them both worse off than if they could cooperate.
Prisoner’s Dilemma
Situation
There are two prisoners whose aim is to minimize the years of imprisonment. They have committed a crime jointly.
Each prisoner is interviewed separately and there are not any contacts whatsoever between them.
They decide individually to confess or deny the crime taking into account possible decisions of the other prisoner (strategic game).
Each prisoner chooses his dominant strategy, that is the behavior giving the best result regardless of the decision of the other prisoner.
Two prisoners are interrogated separately, they have no idea whether the other prisoner will confess or not.
Dominant Strategy In game theory, a strategy that is best no matter what the opposition does.
One firm will be in dominant position in terms of changes in strategy.
Dominant Strategy(x, y)
Student 2 (y)
Student 1 (x)STRATEGY Study Don’t Study
Study A, A B, D
Don’t Study D, B F, F If student 1 goes first and chooses to study, student 2 will also choose to study. This gives student 2 an A rather than the D they would have received if they did not study.
If student 1 chooses to not study, student 2 will choose to study so they get a B instead of an F. Student 2 obviously has a dominant strategy - to study.
If this game is played again with student 2 leading, student 1 would also have the dominant strategy of studying.
This dominant strategy also marks this game's Nash equilibrium, or the "set of strategies in which no player can improve her payoff by unilaterally changing her own strategy, given the other players' strategies" (Baye, 357).
http://www.slideshare.net/sarir19/game-theory-presentation-presentation
http://www.authorstream.com/Presentation/Darshak89-264364-game-theory-economics-eco-mix-straregy-strategy-competition-education-ppt-powerpoint/
http://mba651fall2007.wikispaces.com/dominant+strategy
http://www.franteractive.net/maximin.html