Download Imperfect competition

IMPERFECT
COMPETITION
Oligopoly, Game Theory, and Monopolistic Competition
Mods 64-68
MARKET STRUCTURE: OLIGOPOLY
•
Introduction to Oligopoly
• Two major characteristics make up an
oligopoly
• “Few” sellers
• Interdependence of sellers
• Most often is a collusion
(cartel)
• Non-cooperative
behavior can exist too,
often to the detriment
of the market
MARKET STRUCTURE: OLIGOPOLY
• Issue with an oligopoly
• With few firms its easier to
collude, but often firms are
non-cooperative leading to a
less than ideal agreement
• Also, the US gov’t and others
strictly prevent legal contracts
outlining collusion
• Problems with Monsanto
and Pioneer
MARKET STRUCTURE: OLIGOPOLY
•
Price and Quantity Competition within
Oligopolies
• Bertrand Model (Price)
• Oligopolies will compete by
slightly undercutting prices to
steal customers until price = MC,
similar to a perfectly competitive
market
• Cournot Model (Quantity)
• Similar to Bertrand but focuses
on limiting quantity to raise
prices and maximize profit
MARKET STRUCTURE: OLIGOPOLY
• Airline price wars currently in Europe, India
• Its easier for each company
to undercut the others and
steal the consumers
MARKET STRUCTURE: OLIGOPOLY
•
Game Theory
• Realization that profit depends on your
own action as a firm, as well as other
firms, leads to thinking of profit making
as a game
• Interdependence and behavior
studies can be summed up through
the study of Game Theory
• Has applications in economics,
business, military strategy, and
politics
• And dating….
MARKET STRUCTURE: OLIGOPOLY
•
Game Theory in economics
• Based around the choices (often
between two firms) in an oligopoly
• Focuses on interdependence
• Payoff matrix
• Based around two firms, each with
choices regarding profit and
collusion
• Each firm has an incentive to cheat
MARKET STRUCTURE: OLIGOPOLY
MARKET STRUCTURE: OLIGOPOLY
•
Game Theory in Economics
•
There are multiple elements and terms associated
with game theory:
• Payoff – depends on actions of self and
other firms
• Dominant Strategy – the action taken
regardless of the other player’s actions
• Prisoner’s dilemma?
• Confess or stay quiet and trust
the other person?
• Nash Equilibrium (given non-cooperative
equilibrium)
• Best action that maximizes a payoff
given the actions of others
MARKET STRUCTURE: OLIGOPOLY
•
Overcoming Game Theory
• Oligopolists make different choices in
that their “game” is not a one-shot
game, but occurs in the long run
• Effects of actions on future
actions is important
• Its not a good idea to
continuously betray the other
players in the game
MARKET STRUCTURE: OLIGOPOLY
•
Tit-for-tat
•
Behaving cooperatively at first, but the
doing whatever the other firm does over
time
•
Historical example:
• Athens and Sparta during the
Peloponnesian Wars
•
In the long run, oligopolists expect to
compete over long periods of time, each
individual firm will eventually do what’s best
for themselves AND the other firms – tacit
collusion
•
Tacit Collusion – firms limit production
and raise prices in a way that raises
each other’s profits, even though they
have not made any formal agreements
CARD GAME RULES:
YOU
OPPONENT
Results
B
B
= $3 each person
R
R
= $2 each person
B
R
= $0 for you, $5 for your
opponent
R
B
= $5 for you, $0 for your
opponent
MARKET STRUCTURE: OLIGOPOLY
•
Oligopoly in Practice
• History
• Trusts, anti-trust legislation,
eliminated legal cartels and
monopolies
• Rockefeller and
Standard Oil
• Modern Day: Microsoft
• Used for oligopolies as well
MARKET STRUCTURE: OLIGOPOLY
•
Real world functions of oligopolies
• Large number of firms? Small?
• Make collusion more difficult,
so we see it more with 2-3
firms, rather than 10
• Complex products (differentiated)
• Keeping track of other firms
production is harder the more
complex the product offerings
are (ex: Walmart)
MARKET STRUCTURE: OLIGOPOLY
• Bargaining Power of Buyers in an Oligopoly
• Buyers are usually not consumers, but other large retailers and buyers
• Target, Wal-Mart, bargain with wholesalers and producers to offer
low prices
• Product differentiation
• Many firms will go to considerable lengths to differentiate products in an
oligopoly, even though the products are not that different
MARKET STRUCTURE: OLIGOPOLY
• Non-Price competition
• Add features to compete, not changing prices of production levels
• GM and the car companies
• Cell phones
• Anything Apple puts out
MARKET STRUCTURE: MONOPOLISTIC
COMPETITION
• Introduction to Monopolistic Competition
• Combines features of monopoly and perfect competition
• Each firm offers a distinct product
• Faces competition, and prices/products depends
somewhat on other firms
• Many producers, so no collusion like in an oligopoly
MARKET STRUCTURE: MONOPOLISTIC
COMPETITION
• Short-Run
• Similar rules to previous markets
• MC = MR is the profit maximization point
• Like a monopoly, the demand curve is used to determine price
• ATC, MC are important for understanding loss/profit
MARKET STRUCTURE: MONOPOLISTIC
COMPETITION
MARKET STRUCTURE: MONOPOLISTIC
COMPETITION
• Long-Run
• Long-Run is established when enough time has elapsed to allow
firms to enter/exit the industry
• Free entry in monopolistic competition
• Zero-profit (normal profit) – like PC, firms will enter and exit until
firms reach normal profit
• Zero-profit looks a little different in mono. Comp.
• The demand curve must be TANGENT to the ATC
• Like monopolies but w/o monopolistic profit
MARKET STRUCTURE: MONOPOLISTIC
COMPETITION
MARKET STRUCTURE: MONOPOLISTIC
COMPETITION
• Long-Run
• Long-Run Equilibrium – Price, MC, and ATC
• In mono. Comp. the min. cost output is NOT achievable
• Price and advertising
• In mono. Comp., price CANNOT be cut to lure in
customers, therefore, advertising, features,
convenience, etc. is used to attract customers
MARKET STRUCTURE: MONOPOLISTIC
COMPETITION
MARKET STRUCTURE: MONOPOLISTIC
COMPETITION
• Is mono. comp. inefficient?
• Price is above MC, which means some people are not willing
to pay that price (consumer surplus is lost)
• Too many product varieties
• Paradox of Choice
• In reality, the trade-off is for convenience, opportunity cost,
of the consumer
• Most economists recognize these issues, but do not feel
it is a large problem
MARKET STRUCTURE: MONOPOLISTIC
COMPETITION
•
Advertising (Oligopoly and Monopolistic
Competition
• Basic premise behind advertising?
• Inform customers about your
product, only way to gain market
share
• Why are we influenced by ads, brand
names, celebrities?
• We are NOT as rational as
economists like to think
• Shouldn’t price, efficiency, and
quality be enough to dictate our
purchases?
MARKET STRUCTURE: MONOPOLISTIC
COMPETITION
• Brand names
• Are brand names
unnecessary, or do they serve
a purpose?
• What do you own that is
brand name, what do you
own that is generic?
• Differentiate your product through
…how?
• Type/style, location, quality
MARKET STRUCTURE: MONOPOLISTIC
COMPETITION ACTIVITY
• You and your business partners must differentiate your product from the
other corporations in our oligopoly!
• You all have the same product, all at same price of $100.00:
• Watches
• There are two ways you can do this:
• Advertising
• Feature competition
• Differentiate by: location,
style/type, quality