Professional Documents
Culture Documents
Chapters 9 & 10
Imperfect competition
Outline
2
Monopoly
Monopoly power
Barriers to entry
Natural monopoly
Profit maximization by a monopolist
Efficiency of imperfect competition
Pure monopoly
Oligopoly
Monopolistic competition
Pure Monopoly
6
Local/regional monopoly
Firms with a lot of market power
Market Power
7
A firms ability to raise the price of a good without losing all its
sales
It does not mean that a firm can sell any quantity at any price it
wishes (if firms raise price, quantity demanded falls).
Barriers to Entry
9
Economic barriers
Exclusive control over inputs (DeBeers, ALCOA)
Economies of scale (lower average costs)
Natural monopoly
Legal barriers
Patents
Technological barriers
Tech superiority
Tech may give rise to natural monopoly
to scale)
Natural Monopoly
12
Returns to Scale
13
Returns to scale
14
Restrict output
Stimulate demand
Marginal Revenue
The change in a firms total revenue that results from a oneunit change in output
For a monopolist
Price Discrimination
The practice of charging different buyers different prices for
essentially the same good or service
Profit Maximization
23
Profit-Maximizing Rule
25
MR = MC
A monopolist sets the price off of the demand curve
at its profit-maximizing output
MB = MC
Chapter 10:
Thinking Strategically
29
Oligopoly
30
differentiation
Chips
Soda
Beer
Airlines
Insurance
Cell phone providers
Automobiles
Cigarettes
Athletic shoes
Online travel booking sites
Profit in oligopoly?
31
Why?
share to firm A.
If B and C ignore the price change by A, then they maintain the higher price because they
2. If firm A raises price then B and C can follow the price change or ignore it.
If B and C follow then they also raise price because they dont believe that people will
If B and C ignore the price change by A, then they maintain the lower price because they
believe that people will switch, and they can capture some of firm As market share by
having a lower price.
Theory of Games
37
Game theory
38
History:
Game Theory
39
Elements of a Game
40
Basic elements
The players
The strategies
The payoffs
Payoff matrix
The fundamental tool of game theory.
This is simply a way of organizing the potential outcomes
of a given game in a table that describes the payoffs in a
game for each possible combination of strategies
Strategies
41
Dominant strategy
Dominated strategy
Nash Equilibrium
Example continued
43
Firm B
Dont Advertise
Dont
Advertise
Advertise
A profit = $50
A loss = $25
B profit = $50
B profit = $75
A profit = $75
A profit = $10
B loss = $25
B profit = $10
Firm A
Advertise
The cops pick you up, and immediately after your arrest you and Bugsy are
separated and questioned individually by the DA. Without a confession, the DA
has insufficient evidence for a conviction. During your interrogation, you are told
the following:
The police do have sufficient evidence to convict you and Bugsy of a lesser crime.
If you and Bugsy both confess to the liquor store heist, you will each get a 5 year
sentence.
If neither of you confesses, you will each be charged with the lesser crime, and sent
up the river for 1 year.
If Bugsy confesses (turns states evidence) and you do not, Bugsy will go free while
you will be convicted of the liquor store robbery and get sent to the big house for 7
years.
Bugsy is told the exact same information.
What will you do?
You
Dont Confess
Dont
Confess
Bugsy
Confess
Confess
Bugsy = 1 year
Bugsy =7 years
You = 1 year
You = Free
Bugsy = Free
Bugsy =5 years
You = 7 years
You = 5 years
Prisoners Dilemma
47
Prisoners Dilemma
There are some games where one player does not have a dominant
strategy but the outcome is predictable
49
A
Left
Top
B
Bottom
Right
B: +100
B: +100
A: 0
A: +100
B : -100
B: +200
A:0
A: +100
One more
50
Left
Top
Right
B: +100
B: + 100
A: 0
A: +100
B: -10,000
B: + 200
A: 0
A: + 100
B
Bottom
Cartels
51
Cartel
Collusion
53
Overt collusion is illegal in the US.
Most cartels fail. This is because 3 things are needed for a cartel to be successful, and
tough to do because different firms will have different cost structures and different
assessments of market demand, so what is the profit-maximizing price and quantity for
one firm is not likely to be the profit-maximizing combination for another firm.
2nd, the cartel members must adhere to the agreed upon price and production levels no
cheating. But each firm knows that if it cheats and the others do not, that they can have
higher profits.
3rd, there must be the potential for monopoly power the market demand curve must be
relatively inelastic so that there are potential gains from increasing price it has to be a
good with few substitutes.
Example: collusion
55
Practice
58
Exam 2
59
25 short answer
2 essays (with options)