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Monopoly, Monopolistic

Competition, and Oligopolies


A Review

Efficiency
LMC

LATC

Consumer Surplus

P
Producer Surplus

D
Q
0

Q
o

Monopoly
$

$
SMC

SMC

LATC

LATC

SATC

SATC

D
D

Q
o

Qe
Positive Economic Profit

MR

Qe

MR
Zero Economic Profit

An algebraic exercise:
The following is the market demand for a patented cancer drug
produced by ABC pharmaceutical company.
Q = 100,000 100 P
ABCs production cost function for this drug is:
TC = 2,000,000 + 5Q + .04 Q2
Demand : P = 1000 - .01 Q
MR = 1000 - .02 Q
MC = 5 + .08 Q
Setting MR = MC,

5 + .08 Q = 1000 -.02 Q


.10 Q = 995
Qe = 9950
Pe = 900.05
Profit = P.Q TC
=8,995,999.75 2,000,000. 49,975. 3,996,001
= 2,950,023.75

Monopolistic Competition
The characteristics of a monopolistic market:
Many firms producing similar but differentiated
products
Relatively free entry and exit
Each firm perceives a demand curve reflecting
the relationship between its price the quantity
demanded of its own product.
The firm can influence the price by change the
quantity it supplies or by differentiating its
product from those of its competitors.
The firms output and price are in equilibrium
when the price the firm charges is consistent
with its market share

Monopolistic competition: A firms market


share
$

P1
P2

MS

MS`
Q

Q1

Q2

Q3

Demand facing firm:


$

p1
p2

MS1

MS2

MS3

MS4

MS5

a
c
b

p3

p4
p5

f
d
Q

q1 Qo

q2

q2

q3

q4

S-R Equilibrium
$

MS`

SMC
a

Pe
c

SATC

d`
Q
0

Qe
MR`

L-R Equilibrium
LMC

LAC

MS

Pe

d
o

qe

MR

Oligopoly
A few firms producing similar goods
Limited entries
Interdependence
The kinked demand curve model
The Cournot model
Price leadership models
The Game theory

The Cournot Model


$

P1

P2
Dm
0

50

75 MR
2

25
MR1

100

The Cournot Equilibrium


$

P3

Pe

25

50

75
MR1

37.5

Dm Q
100

25

50
33.3
Equilibrium

75
MR1

Dm Q
100

The Kinked Demand Curve Model


$

Pe

d`

a
MC4
MC3
MC2

MC1

D
Qe

MR

Tech-Based Price Leadership


$

Pb

MCb

Pa
MCa

D`

Qb Qa

QT
MR`

D
Q

Size-Based Leadership
$
Ss , MCs

MCL
Pb
e

Pe

DL
g
QL

Pf

h Dm

MRL
QeL
Leader

Qm
Qes
Qem
0
Market Demand and Small Firms Supply

Algebraic derivation of the


leaders demand:
If the market demand is Qdm = 1000 20
P and the small firms supply is:
Qss = -100 + 10 P,
the demand faced by the leader is:
QdL = Qdm Qss

= 1000 20 P ( -100 + 10 P ) = 1100 - 30 P

The Game Theory


The prisoners dilemma

Dominant Strategy

The Nash Equilibrium

The Prisoners Dilemma


Jill

Confess

Confess

Not confess

Jack: 2 years

Jack: 1 year
Jill: 10 yeas

Jill: 2 years
Jack

Not confess

Jack: 10 years
Jill: 1 year

Jack: 5 years
Jill: 5 years