Slide 1 Copyright © 2004 McGraw-Hill Ryerson Limited

Appendix 13

Additional Models of Oligopoly

and Monopolisti

c Competition

Slide 2 Copyright © 2004 McGraw-Hill Ryerson Limited

FIGURE A.13-1

Sharing a Market with Increasing Returns

With two firms in the market, costs are higher than with one. Yet there may be no tendency for one firm to drive the other out of business.

Slide 3 Copyright © 2004 McGraw-Hill Ryerson Limited

FIGURE A.13-2

The Monopolistic Competitor’s Two Demand Curves

The demand facing any one firm will be more elastic if others hold prices constant (dd) than if all firms vary prices in unison (DD).

Slide 4 Copyright © 2004 McGraw-Hill Ryerson Limited

FIGURE A.13-3

Short-Run Equilibrium for the Chamberlinian Firm

The Chamberlinian monopolistically competitive firm maximizes economic profit in the short run by equating marginal revenue and short-run marginal cost. Economic profit is P, the area of the shaded rectangle.

Slide 5 Copyright © 2004 McGraw-Hill Ryerson Limited

FIGURE A.13-4

Long-Run Equilibrium in the Chamberlin Model

Entry occurs, shifting dd leftward until it becomes tangent to the LAC curve. The firm produces Q*, sells for P*, and earns zero economic profit.

Slide 6 Copyright © 2004 McGraw-Hill Ryerson Limited

FIGURE A.13-5

Total Cost as a Function of Both Price and Distance

The total cost of a meal is the price charged by the restaurant plus the transportation cost incurred in getting there.

Slide 7 Copyright © 2004 McGraw-Hill Ryerson Limited

FIGURE A.13-6

The Breakeven Point of a Low-Priced Restaurant

The restaurant at 0 is charging a price (P) lower than the price charged by its competitor at 1/N. The total cost of a meal at the two restaurants will therefore be the same at X, which lies to the right of the halfway point.

Slide 8 Copyright © 2004 McGraw-Hill Ryerson Limited

FIGURE A.13-7

The Profit-Maximizing Restaurant

The more the restaurants on either side charge, the higher the profit-maximizing price will be. The profit-maximizing price also rises with transportation cost, t, and with the marginal cost of producing meals, M.

Slide 9 Copyright © 2004 McGraw-Hill Ryerson Limited

FIGURE A.13-8

Distributing the Cost of Variety

The buyers who care most about variety will generally choose the model with premium features. By pricing its models differently, the seller recovers most of the extra costs of variety from the buyers who are most responsible for their incurrence.

Slide 10 Copyright © 2004 McGraw-Hill Ryerson Limited

ANSWER A.13-1