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Transcript
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