Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Oligopoly Continued Convert the Multi-Plant Monopoly into an Oligopoly To maximize profits, two conditions must be satisfied when a firm has two plants: Marginal costs of each plant must be equal: MCA = MCB Marginal revenue must equal each plant’s marginal cost: MR = MCA = MCB MCA MCB MCA MCB 100 100 100 80 80 80 60 60 60 40 40 40 20 20 20 qA 50 100 qA = 50 MCA = $60 D MR Q qB 50 100 150 200 qB = 100 MCB = $60 50 100 150 200 200 qA + qB = = 150 MR = $60 Owner retires and gives Plant A to his son Adam and Plant B to his daughter Beth Adam’s Firm Beth’s Firm Total Production qA = 50 qB = 100 Q = 150 MR = 60 MCA = $60 MCB = $60 P = $90 P = $90 Preview To cheat or not to cheat? If a firm believes that the other firm(s) will not retaliate, the firm has an incentive to cheat. retaliate aggressively, the firm does not have an incentive to cheat. As cheating and retaliation occurs: The joint profits of the firms fall. Consumer surplus rises. The gain in consumer surplus exceeds the loss in joint profits. Society as a whole becomes better off. Conflicting Interests of an Oligopolies and Cartels: Collective versus Individual It is in the collective interests of the firms in an industry to establish a cartel to maximize their joint profits by reducing production below the competitive level. But, if a cartel is established it may be in the individual interests of each firm to cheat on the cartel agreement by producing more to increase its individual profit. Scenario 1: No retaliation - Adam cheats and Beth does not retaliate? Quantity Slope of Demand Curve = .20 Adam Beth Joint Price To clear the market the quantity demanded must increase by 1 unit. Tomorrow 51 100 151 89.80 Today 50 100 150 90.00 The price must fall by .20, from $90.00 to $89.80. MCA = $60.00 Adam’s Adam’s Quantity Price Total Revenue = Price Quantity Tomorrow: Today: 51 50 Question: What does Adam’s marginal revenue (MRA) equal? Does Adam have an incentive to cheat if Beth does not retaliate? Yes 89.80 89.8051 89.80(1 + 50) = 89.80 + 90.00 89.8050 90.0050 Adam’s Marginal Revenue = 89.80 + 89.8050 90.0050 = 89.80 + (89.80 90.00)50 = 89.80 + (.20)50 TR tends to rise by 89.80, TR tends to fall by 10.00, the price, as a consequence as a consequence of the of the additional unit sold. lower price. Output Effect Price Effect MRA = Adam’s Marginal Revenue = 89.80 10.00 = $79.80 Adam produces one more unit of output and Beth does not retaliate: qA: 50 51 qB = 100 P: $90.00 $89.80 Adam’s Profit qA: 50 51 Increased by 1 MRA = $79.80 MR = Change in total revenue resulting from a one unit change in production Adam’s Profit Up by $19.80 Lab 18.1 Quantity Total Revenue Total Cost Profit Cons Surplus = MCA = $60.00 MC = Change in total cost resulting from a one unit change in production TR TC Produce 1 more unit Up by $79.80 Up by $60.00 Joint Profit Maximization Firm A Firm B Joint 50 100 150 4,500 9,000 3,000 5,000 1,500 4,000 Firm A Cheats Firm B Does Not Retaliate Firm A Firm B Joint 51 100 151 4,580 8,980 3,060 5,000 1,520 3,980 2,250 Consumer surplus increases by 22 2,372 Scenario 2: 1-For-1 Retaliation – Adam Cheats and Beth Retaliates Quantity Slope of Demand Curve = .20 Adam Beth Joint Price To clear the market the quantity demanded must increase by 2 units. Tomorrow 51 101 152 89.60 Today 50 100 150 90.00 The price must fall by .40, from $90.00 to $89.60. MCA = $60.00 Adam’s Adam’s Quantity Price Total Revenue = Price Quantity Tomorrow: 51 89.60 89.6051 89.60(1 + 50) = 89.60 + 89.6050 50 90.00 90.0050 Today: Question: What does Adam’s marginal revenue (MRA) equal? Does Adam still have an incentive to cheat? Yes Adam’s Marginal Revenue = 89.60 + 89.6050 90.0050 = 89.60 + (89.60 90.00)50 = 89.60 + (.40)50 TR tends to rise by 89.60, TR tends to fall by 20.00, the price, as a consequence as a consequence of the of the additional unit sold. lower price. Output Effect Price Effect MRA = Adam’s Marginal Revenue = 89.60 20.00 = $69.60 Adam produces one more unit of output and Beth does retaliate: qA: 50 51 qB = 101 P: $90.00 $89.60 Adam’s Profit qA: 50 51 Increased by 1 MRA = $79.80 MR = Change in total revenue resulting from a one unit change in production Adam’s Profit Up by $9.60 Lab 18.1 Quantity Total Revenue Total Cost Profit Cons Surplus = MCA = $60.00 MC = Change in total cost resulting from a one unit change in production TR TC Produce 1 more unit Up by $69.60 Up by $60.00 Joint Profit Maximization Firm A Firm B Joint 50 100 150 4,500 9,000 3,000 5,000 1,500 4,000 Firm A Cheats Firm B Retaliates 1-For-1 Firm A Firm B Joint 51 101 152 4,570 9,050 3,060 5,060 1,510 3,990 2,250 Consumer surplus increases by 60 2,310 Scenario 3: 3-For-1 Retaliation – Adam Cheats and Beth Retaliates Aggressively Quantity Slope of Demand Curve = .20 Adam Beth Joint Price To clear the market the quantity demanded must increase by 4 units. Tomorrow 51 103 154 89.20 Today 50 100 150 90.00 The price must fall by .80, from $90.00 to $89.20. MCA = $60.00 Adam’s Adam’s Quantity Price Total Revenue = Price Quantity Tomorrow: 51 89.20 89.2051 89.20(1 + 50) = 89.20 + 89.2050 Today: 50 Question: What does Adam’s marginal revenue (MRA) equal? Does Adam have an incentive to cheat? No 90.00 90.0050 Adam’s Marginal Revenue = 89.20 + 89.2050 90.0050 = 89.20 + (89.20 90.00)50 = 89.20 + (.80)50 TR tends to rise by 89.20, TR tends to fall by 40.00, the price, as a consequence as a consequence of the of the additional unit sold. lower price. Output Effect Price Effect MRA = Adam’s Marginal Revenue = 89.20 40.00 = $49.20 Adam produces one more unit of output and Beth does retaliate: qA: 50 51 qB = 101 P: $90.00 $89.60 Firm A Cheats Joint Profit Maximization Firm B Retaliates 3-For-1 Firm A Firm B Joint Firm A Firm B Joint Quantity 50 100 150 51 103 154 Total Revenue 4,500 9,000 4,549 9,188 Total Cost 3,000 5,000 3,060 5,182 Profit 1,500 4,000 5,500 1,489 4,006 5,495 Cons Surplus Lab 18.2 2,250 2,372 Consumer surplus increases by 122 Change from Joint Profit Maximization Firm A Firm B Joint Consumer Net Profit Profit Profit Surplus Firm A Cheats Firm B Retaliates 3-For-1 11 +6 5 +122 +117 Firms: Joint profit falls. Adam’s profit falls; Adam has no incentive to cheat. Consumers: Consumer Surplus rises. The increase in consumer surplus is greater than the fall in joint profits. Society as a whole (firms and consumers together) is better off. Summary Change from Joint Profit Maximization Firm A Firm B Joint Consumer Society as a Profit Profit Profit Surplus Whole Firm A Cheats +20 Firm B Does Not Retaliate Firm A Cheats +10 Firm B Retaliates 1-For-1 Firm A Cheats 11 +6 5 +122 +117 Firm B Retaliates 3-For-1 To cheat or not to cheat? If a firm believes that the other firm(s) will not retaliate, the firm has an incentive to cheat. retaliate aggressively, the firm does not have an incentive to cheat. As cheating and retaliation occurs: The joint profits of the firms fall. Consumer surplus rises. The gain in consumer surplus exceeds the loss in joint profits. Society as a whole becomes better off. Conflicting Interests of an Oligopolies and Cartels: Collective versus Individual It is in the collective interests of the firms in an industry to establish a cartel to maximize their joint profits by reducing production below the competitive level. But, if a cartel is established it may be in the individual interests of each firm to cheat on the cartel agreement by producing more to increase its individual profit. Question: What might affect a firm’s temptation to cheat? Government regulation. Personal ties. Threat of retaliation. Role of the Government Antitrust legislation: Broadly speaking antitrust legislation is designed to prevent a firm from becoming a monopoly or an oligopoly from colluding and acting as a cartel. Regulation Airline Deregulation Act: In 1978, Congress passed and President Carter signed the Airline Deregulation Act. This act phased in the deregulation of the industry: 1981 - CAB lost authority over domestic routes 1983 - CAB lost authority over airline prices 1984 - CAB was disbanded Year 1970 1978 1980 1985 1986 1987 1988 1989 Real Price (Price adjusted for inflation) (Cents per passenger mile) 15.5 13.0 13.7 11.4 10.2 10.0 10.4 10.6