Professional Documents
Culture Documents
Competition
Imperfect Competition
Monopolistic
Competition
MONOPOLISTIC COMPETITION
• Assumptions of monopolistic
competition
• Equilibrium of the firm
– short run
MR = MC
Short-run equilibrium of the firm
under monopolistic competition
£ MC
AC
Ps
ACs
AR = D
MR
O Qs Q
MONOPOLISTIC COMPETITION
• Assumptions of monopolistic
competition
• Equilibrium of the firm
– short run
MR = MC
– long run
MR = MC; AR = AC
Long-run equilibrium of the firm
under monopolistic competition
£
LRMC
LRAC
PL
ARL = DL
MRL
O QL Q
MONOPOLISTIC COMPETITION
• Assumptions of monopolistic
competition
• Equilibrium of the firm
– short run
MR = MC
– long run
MR = MC; AR = AC
– under-utilisation of capacity in long run
Under-utilisation of capacity in the long run
£
LRAC
DL under monopolistic
competition
O Q1 Q2 Q
MONOPOLISTIC COMPETITION
LRAC
P1
P2
DL under perfect
competition
DL under monopolistic
competition
O Q1 Q2 Q
MONOPOLISTIC COMPETITION
Oligopoly
OLIGOPOLY
Industry D = AR
O Q
Profit-maximising cartel
£
Industry MC
P1
Industry D = AR
Industry MR
O Q1 Q
OLIGOPOLY
20
First oil from
North Sea
15
New OPEC
Cease-fire in quotas
10 Iran-Iraq war Recession
in Far East
5 Yom Kippur
War: Arab oil
embargo
0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00
Oil Prices
$ per barrel
35 Actual price
Iraq invades OPEC’s first
Iran quotas Cost in 1973 prices
30 World-wide
Iraq invades slowdown
Kuwait
25 Revolution World-wide
in Iran recovery
20
First oil from
North Sea
15
New OPEC
Cease-fire in quotas
10 Iran-Iraq war Recession
in Far East
5 Yom Kippur
War: Arab oil
embargo
0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00
OLIGOPOLY
• Tacit collusion
– price leadership
• dominant firm
Dominant firm price leadership
£
Sall other firms
P1
a
Dmarket
Dleader
b
P2
O Q
Division of the market between leader and followers
Dominant firm price leadership
£
MCleader Sall other firms
l f t
PL
Dmarket
Dleader
MRleader
O QL QF QT Q
Determination of price and output
Price leader aiming to maximise profits for a given market share
£
Assume constant
market share
for leader
AR = D market
AR = D leader
MR leader
O Q
Price leader aiming to maximise profits for a given market share
£
MC
l t
PL
AR = D market
AR = D leader
MR leader
O QL QT Q
OLIGOPOLY
• Tacit collusion
– price leadership
• dominant firm
• barometric
OLIGOPOLY
• Tacit collusion
– price leadership
• dominant firm
• barometric
– rules of thumb
OLIGOPOLY
• Tacit collusion
– price leadership
• dominant firm
• barometric
– rules of thumb
• Tacit collusion
– price leadership
• dominant firm
• barometric
– rules of thumb
4 AR
2
MR
0
1000 2000 3000 Q
The Industry
The incentive for a firm to produce more than its quota,
or undercut the cartel’s price
£
Firm is tempted MC
to increase
12 output to 600
10 Cartel Price
(= MR if price remains fixed)
8
4 AR
2
MR
0
200 400 600 800 Q
Firm A
OLIGOPOLY
X’s price
£2.00 £1.80
A B
£2.00 £10m each £5m for Y
£12m for X
Y’s price
C D
£1.80 £12m for Y £8m each
£5m for X
OLIGOPOLY
X’s price
£2.00 £1.80
A B
£2.00 £10m each £5m for Y
£12m for X
Y’s price
C D
£1.80 £12m for Y £8m each
£5m for X
OLIGOPOLY
Amanda's alternatives
Not confess Confess
Not
A B Nigel gets
Each gets 10 years
confess Amanda gets
1 year
Nigel's 3 months
alternatives C Nigel gets D
3 months Each gets
Confess 3 years
Amanda gets
10 years
OLIGOPOLY
r Boeing –£10m
(1)
ate Airbus –£10m
Airbus 00 se
5
decides
B1 400
sea
r ter Boeing +£30m (2)
a te
se
Airbus +£50m
0
50
Boeing
decides A 40
0s Boeing +£50m
ea ate
r (3)
te s e Airbus +£30m
r 5 0 0
B2 400
sea
Airbus ter
decides Boeing –£10m
Airbus –£10m
(4)
OLIGOPOLY
Current price
and quantity
give one point
on demand curve
P1
O Q1 Q
Kinked demand for a firm under oligopoly
£
D
P1
D
O Q1 Q
Kinked demand for a firm under oligopoly
£
P1
a
D = AR
b
O Q1 Q
MR
OLIGOPOLY
– stable prices
Stable price under conditions of a kinked demand curve
£
MC2
P1 MC1
a
D = AR
b
O Q1 Q
MR
OLIGOPOLY
– stable prices
– disadvantages
Price Discrimination
PRICE DISCRIMINATION
P1
O 200 Q
First-degree price discrimination
P
P1
O 200 Q
PRICE DISCRIMINATION
P1
O 200 Q
Third-degree price discrimination
P
P2
P1
O 150 200 Q
PRICE DISCRIMINATION
D = MR
O Q1 Q
PRICE DISCRIMINATION
DX
O O O
MRX
(a) Market X
Profit-maximising output under
third degree price discrimination
DY
DX MRY
O O O
MRX
DY
DX MRY MRT
O O O
MRX
MC
DY
DX MRY MRT
O O O
MRX
MC
DY
DX MRY MRT
O O O 3000
MRX
MC
5
DY
DX MRY MRT
O O O 3000
MRX
MC
5
DY
DX MRY MRT
O 1000 O O 3000
MRX
MC
5
DY
DX MRY MRT
O 1000 O 2000 O 3000
MRX
MC
5
DY
DX MRY MRT
O 1000 O 2000 O 3000
MRX
MC
9
7
5
DY
DX MRY MRT
O 1000 O 2000 O 3000
MRX