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Competencia Monopolistica Y Politicas Publicas

Competencia Monopolistica Y Politicas Publicas

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Monopolistic Competition and Public Policy
Dennis S. Veliz

• What is an oligopoly? • Monopolistic competition • profit-maximizing decisions
of oligopolistic • Game Theory and the "prisoner's dilemma. • Applications in t
he Chilean economy. • References: Mankiw: Chapter 16


• Many sellers, homogeneous products.
• Few companies sell similar or identical products. • Collusion: Incentives to a

gree on pricing.
• Undertaking a price taker
• faces perfectly elastic demand
• Incentives to join the cartel and agree on the distribution of the market by a

cting in unison.
• There are no barriers to entry of new firms
• There are some restrictions on the entry that limit competition.

A product similar but not identical products similar or identical products
1 company
2 companies
Few companies
Many companies
Monopolistic competition (differentiated products)
Perfect Competition (identical products)
Profit maximization strategy.

• Why does not provide the level of production of perfect competition in an olig
opoly market?
Why try to maximize each company individually, which would provide a level of pr
oduction so high that together decrease the market price, reducing profits.

• If there are few companies, why not form a cartel and agree on the price and q

Collusion and Cartel Strategy
• Collusion means you agree to the price level that would maximize profits toget
her and therefore the output to automatically determine the price. • The formati

on of a cartel determines a strategy for joint profit maximization, and equal to the result of monopoly by charging a higher price than perfect competition and offering a lower production level.

In the absence of an agreement, why are unlikely to achieve the result of monopo
ly profits?

• Because if there were the monopoly price in the market, each firm would have a n incentive to offer the maximum amount possible to sell, which, if everyone act ed asíreduciría the price and lose both.

Nash equilibrium ("A Beautiful Mind")
• Firms choose the level of output that maximizes its profits, given the strateg
y we have chosen others. • interact in the market on different levels of product
ion, depending on the response of others, until the level of return achieved is
considered acceptable. • It is balanced because once production reached the leve
l of profit acceptable for everyone, there would be no incentive to change its d

Application: OPEC
• Internationally the most prominent case was the creation of cartel OPEC (Oil-e
xporting countries).•••• Year 1972 oil price = U.S. $ 2.64 / b Year 1974 = U
.S. $ 11.1 Year 1981 = $ 35 Year 1986 = $ 12.5. They left the cartel and compete
d individually

Why do not dominate the cartels?
• Because collusion is prohibited. • Because once created and agreed, each firm
has an incentive to abandon the agreement and pursue a single strategy. • Two ef
fects define the partnership strategy (creating cartel agreement) or to break th
e agreement (to compete individually):
- Effect Production: Because P> MC an increase in individual production at the c
urrent price (without the knowledge of others), raise profits - Price Effect: If
all they do, the increase in production will increase the amount offered in the
market, and reduce the price and the profits generated by the entire quantity s
old. If the number of companies grows, increase the incentives to act individual
ly, and that will matter unless the price effect, and it will be difficult to co
ntrol the cartel

• Study the behavior of individuals in strategic situations. • Each individual c
onsiders the responses of others to their own decisions. • Applications:
- JUMBO is a function of profit maximization, which is partly determined by the
actions taken by the Leader. - Idem Farmacias Ahumada, Salco Brand, Cruz Verde.
- Study groups: strategy group and individual study.

Application famous
• Theory of Games: "Game" between two captured prisoners to be shown the difficu
lty of maintaining cooperation, even when it suits them both. • Strategy dominan
t strategy is best for a player in a game, regardless of their chosen others.

The Prisoner's Dilemma
John's decision to confess
- Eight years for each

Do not confess
-John receives sentence of 20 years - Pedro goes free 1 year for each
Peter's decision to confess
- Juan goes free I confess - Peter receives sentence of 20 years.

-John and Peter are two offenders caught by police "The police have enough evide
nce to charge for illegal possession of weapons, sentences of 1 year c / u-addit
ion, suspects who committed an assault on a bank, but not sufficient evidence to
convict. "The police interrogated in separate rooms and offers the following tr
eatment of each: -" We ordered one year, however, if he confesses and commits th
e assault on his partner, you will be free and his partner will be sentenced to
20 years. If both confess receive a sentence of eight years, shortening the tria
l. " What decides each strategy?. Incentives to work and incentives to follow in
dividual strategy but with more risk.

The prisoner's dilemma in Universities
Universidad de Chile Decision scholarship Delivery
- Earn $ 800 million each

No delivery grant
-U de Chile earns $ 500 million - UC wins $ 1,500 million and UC UCH earn $ 1,20
0 ea

UC Decision
Delivery Delivery No scholarship award
- U de Chile win $ 1,500 million - UC wins $ 500 million

- Students with national scores on the PSU, they prefer to study at UCH and UC.
- However, "negotiate" his nomination, and applying for scholarships, regardless
of socioeconomic status. "At universities recruit them because they should furt
her improve its reputation and, consequently, may increase its tariffs to all st
udents, obtaining more revenue to finance investment. "They have individual ince
ntives to provide scholarships and attract students. However, if the two univers
ities give scholarships, cease to receive some income and therefore earnings wil
l be lower if not agreed to provide scholarships to any student. - But if we ado
pt the agreement, each would have an incentive not to respect it

Public Policy

Types of regulation of natural monopolies
Include two additional types of regulation:
- Structural adjustment related to the organizational forms taken by the market,
ie, restrictions on income and measures of functional separation. Determine wha
t types of agents or operators may participate in the activity?. Example: Polici
es that require water companies to operate in the market. - Regulation of conduc
t, coupled with the market behavior - ie, regulation of prices, quality of servi
ces and investment. Sets the behaviors allowed to operators in selected activiti
es. Example, clear pricing rules.

Terms of privatization of water services and sewerage.
• Two key policy alternatives:
- Property of the State, as has happened historically in most countries. - Regul
ation of privately owned monopolies, as in the United States to boost production

• Regulation is essential because water utilities are responsible for providing essential and indispensable to society and productive activities • Performance e conomic and social implications far more profound than those that characterize m ost other economic activities.

• It is therefore imperative to establish an appropriate regulatory framework be
fore allowing private sector participation in water services and sewerage.

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