Download monopolistic competition - Università degli Studi di Macerata

ECONOMICS
IRENE PINI
classe LMG/01
Facoltà di Giurisprudenza
Università degli studi di Macerata
I have chosen those three topics
for my short report:
- Monopolistic Competition;
- Oligopoly;
- Collusion and cartel.
MONOPOLISTIC COMPETITION
Monopolistic competition is a kind of imperfectly
competitive market, in which there are many firms
offering similar but not identical products.
(For instance, we can consider the market for
computer games, movies, books, CDs, and so on.)
Monopolistic vs Perfect
Competition
There are two differences between this two market
structures:
- excess capacity: a monopolistically competitive firm,
could increase the quantity it produces and lower the
average total cost of production;
- mark-up or marginal cost: while in a competitive firm
price equals marginal cost, in a monopolistically
competitive firm, price exceeds marginal cost, because
the firm always has some market power.
Monopolistic competition has both
positive and negative aspects:
Social inefficiencies:
-prices are higher than in the perfect competition;
-the number of firms may not be the “ideal” one, as
there may be too much or too little entry;
-firms that sell highly differentiated consumer
goods spend between 10 and 20% of role in
advertising.
The role of advertising and brand names:
- critics argue that firms use advertising and brand
names in order to manipulate people’s tastes, to take
advantage of consumers irrationality and to reduce
competition.
- on the other hand, defenders of advertising argue
that firms use them to provide information, to take
advantage of price differences, and to convey the
existence of new products;
so, each firm has less market power and new firms
are allowed to enter more easily.
Example:
For instance, imagine a famous brand name of
cookies. When you go to do shopping, you find lots
of cookies on the shelves.
The unfamiliar firms can offer the same food at
lower prices, but you have no way of knowing that.
By contrast, the brand name cookies offer a
consistent product across all cities in the country.
The brand name is useful to you to judge the
quality of what you are about to buy.
OLIGOPOLY
Oligopoly is another kind of imperfectly
competitive market, in which only a few sellers
offer similar or identical products.
When a market has only a small group of sellers,
there is tension between firms, as they face the
same problems; they observe the behaviour of
their rivals and act accordingly.
In an oligopoly, firms can non-cooperate if they act
by their own, without any agreement; this
behaviour often cause a price war.
On the other hand, if they cooperate, they make an
agreement called...
COLLUSION
It is an agreement about quantities to
produce or prices to charge.
CARTEL
The group of firms acting in unison.
The Nash equilibrium
In 50s the American mathematician John
Nash showed that in every game there are
economic actors interacting with one another
each choose their best strategy given the
strategies that all the other actors have chosen.
This equilibrium exist if no player change his strategy,
despite knowing the actions of their opponents. For
example, Paul and Harry can choose two alternatives:
A) gain €3 or B) lose €3.
If both players choose
strategy A, they gain €3:
this outcome represents
the Nash equilibrium. If
you reveal Paul's strategy
to Harry and vice versa,
you will see that no player
deviates from the original
choice.
The Game Theory
As the number of firms in oligopoly is small, each
firm must act strategically, and it has to consider
how its decisions might affect the production
decisions of all the other firms.
Game theory is the study of how people behave in
strategic situations, so when each person, when
deciding what action to take, must consider how
others might respond to that action.
The Prisoners' dilemma
The prisoners' dilemma is a particular game
between two captured prisoners that illustrates
why cooperation is difficult to maintain even when
is mutually beneficial.
Two criminals suspected of committing a crime. The
sentence each prisoner gets depends on the
strategy he or she chooses and the strategy chosen
by his or her partner in crime.
It doesn't matter what the other criminal do, the
dominant strategy for each prisoner is confessing,
and act for self-interest. Only with the cooperation
or altruism they can avoid a long time of detention.
In the oligopoly, the profit that each firm earns
depends on both its production decision and the
production decision of the other oligopolist.
Examples:
As an example of oligopoly, we mention the market
for tennis balls, power tools, computers and
aircrafts industries.
We can consider the market of cars too: in fact,
there are few car firms throughout the world (such
as BMW, Audi, Mercedes, Volkswagen, Volvo,
Pegeout, Renault, Nissan, Skoda) against the
demand for millions of cars every day.
THE END
thank you for your attention