Download Monopolistic Competition

Chapter
Thirteen
Oligopoly and
Monopolistic
Competition
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排除發動抗爭。
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13–2
Oligopoly and Monopolistic
Competition
• Oligopoly
– A small group of firms in a market with
substantial barriers to entry
• Cartel
– A group of firms that explicitly agree to
coordinate their activities
• Monopolistic competition
– A market structure in which firms have
market power but no additional firm can
enter and earn positive profits
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13–3
Oligopoly and Monopolistic
Competition
• In this chapter, we examine eight main
topics
–
–
–
–
–
–
Market structures
Game theory
Cooperative oligopoly models
Cournot model of noncooperative oligopoly
Stackelberg model of noncooperative behavior
Comparison of collusive, Cournot, Stackelberg,
and competitive equilibria
– Monopolistic competition
– Bertrand price-setting model
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13–4
Market Structures
• Markets differ according to the number
of firms in the market, the ease with
which firms may enter and leave the
market, and the ability of firms in a
market to differentiate their products
from those of their rivals.
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13–5
Table 13.1 Properties of Monopoly,
Oligopoly, Monopolistic Competition,
and Competition
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13–6
Game Theory
• Strategy
– A battle plan of the actions a firm plans to
take to compete with other firms
• Game
– Any competition between players (firms) in
which strategic behavior plays a major role
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13–7
Game Theory
• We can think of oligopolies as engaging
in a game, which is any competition
between players (such as firms) in
which strategic behavior plays a major
role.
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13–8
Game Theory
• Game theory
– A set of tools that economists, political
scientist, political scientists, military
analysts, and others use to analyze
decision-making by players that use
strategies
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13–9
Game Theory
• When is an oligopolistic market in
equilibrium?
• John Nash (1951), a Nobel Prizewinning economist and mathematician,
defined an oligopolistic equilibrium: No
firm wants to change its strategy given
what everyone else is doing.
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13–10
Game Theory
• Nash equilibrium
– A set of strategies such that, holding the
strategies of all other firms constant, no
firm can obtain a higher profit by choosing
a different strategy
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13–11
Game Theory
• In a Nash equilibrium. No firm wants to
change its strategy because each firm is
using its best response—the strategy
that maximizes its profit, given its beliefs
about its rivals’ strategies.
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13–12
A Single-Period, Two-Firm, QuantitySetting Game
• We illustrate game theory and
determine the Nash equilibrium for a
duopoly: an oligopoly with two (duo-)
firms.
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13–13
A Single-Period, Two-Firm, QuantitySetting Game
• A profit matrix (or payoff matrix), such
as in Table 13.2, shows the strategies
the firms may choose and the resulting
profits.
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13–14
Table 13.2 Profit Matrix for a
Quantity-Setting Game
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13–15
A Single-Period, Two-Firm, QuantitySetting Game
• Because the firms choose their
strategies simultaneously, each firm
selects a strategy that maximizes its
profit given what it believes the other
firm will do.
→a noncooperative game of imperfect
information
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13–16
A Single-Period, Two-Firm, QuantitySetting Game
• Dominant strategy
– A strategy that strictly dominates (gives
higher profits than) all other strategies,
regardless of the actions chosen by rival
firms
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13–17
A Single-Period, Two-Firm, QuantitySetting Game
• Where a firm has a dominant strategy,
its belief about its rivals’ behavior is
irrelevant.
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13–18
A Single-Period, Two-Firm, QuantitySetting Game
• If United choose the high-output
strategy ( qU  64 ), American’s highoutput strategy maximizes its profit.
• If United chooses the low-output
strategy ( qU  48 ), American’s highoutput strategy maximizes its profit.
• Thus the high-output strategy is
American’s dominant strategy.
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13–19
Why Firms Do Not Cooperate in A
Single-Period Game
• They don’t cooperate due to a lack of
trust: Each firm uses the low-output
strategy only if the firms have a binding
agreement.
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13–20
Why Firms Do Not Cooperate in A
Single-Period Game
• Each firm has a substantial profit
incentive to cheat on the agreement.
• In this type of game—called a
prisoner’s dilemma game—all players
have dominant strategies that lead to a
profit (or other payoff) that is inferior to
what they could achieve if they
cooperated and pursued alternative
strategies.
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13–21
Collusion in Repeated Games
• In a single-period game, one firm
cannot punish the other firm for
cheating in a cartel agreement.
• But of the firms meet period after period,
a wayward firm can be punished by the
other.
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13–22
Collusion in Repeated Games
• Supergame
– A game that is played repeatedly, allowing
players to devise strategies for one period
that depend on rivals’ actions in previous
periods
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13–23
Collusion in Repeated Games
• In a repeated game, a firm can
influence its rival’s behavior by signaling
and threatening to punish.
• AA may signal UA by producing low
output.
• In addition to or instead of signaling, a
firm can punish a rival for not restricting
output.
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13–24
Collusion in Repeated Games
• American will produce the smaller
quantity each period as long as United
does the same.
• If United produces the larger quantity in
period t , American will produce the
larger quantity in period t  1 and all
subsequent periods.
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13–25
Collusion in Repeated Games
• Thus United’s best policy is to produce
the lower quantity in each period unless
it cares greatly about current profit and
little about future profits.
• Thus if firms play the same game
indefinitely, they should find it easier to
collude.
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13–26
Collusion in Repeated Games
• Maintaining a cartel will be difficult if the
game has a known stopping point.
• If the players know that the game will
end but aren’t sure when, cheating is
less likely to occur.
• Collusion is therefore more likely in a
game that will continue forever or that
will end at an uncertain time.
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13–27
Cooperative Oligopoly Models
• We have seen that firms have an
incentive to form a cartel in which each
firm reduces its output so that firms’
individual and collective profits rise.
• Cartels often fail because a government
forbids them and because each firm in a
cartel has an incentive to cheat on the
cartel agreement by producing extra
output.
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13–28
Laws Against Cartels
• Virtually all industrialized nations have
antitrust laws—or, as they are known in
other countries, competition policies—
that limit or forbid some or all cartels.
• 台灣：公平交易法
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13–29
Laws Against Cartels
• Some cartels persist for three reasons.
• First, international cartels and cartels
within certain countries operate legally:
OECD
• Second, Some illegal cartels operate
believing that they can avoid detection
or that the punishment will be
insignificant.
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13–30
Laws Against Cartels
• Third, some firms are able to coordinate
their activity without explicitly colluding
and thereby running afoul of competition
laws.
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13–31
Why Cartels Form
• A cartel forms if members of the cartel
believe that they can raise their profits
by coordinating their actions.
• Although cartels usually involve
oligopolies, cartels may form in a
market that would otherwise be
competitive.
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13–32
Figure 13.1 Competition Versus Cartel
a) The marginal cost and average cost of
one of the n firms in the market are
shown. A competitive firm produces qc
units of output, whereas a cartel
member produces qm  qc . At the
cartel price, qm , each cartel member
has an incentive to increase its output
*
from qm to q (where the dotted line at
pmintersects the MC curve).
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13–33
Figure 13.1 Competition Versus Cartel
b) The competitive equilibrium, ec , has
more output and a lower price than the
cartel equilibrium, em .
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13–34
Figure 13.1 Competition Versus Cartel
(a) Firm
(b) Market
MC
S
pm
pm
AC
pc
pc
MCm
MCm
em
ec
Market demand
MR
qm qc q *
Quantity, q, Units
per year
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Qm
Qc
Quantity, Q, Units
per year
13–35
Why Cartels Fail
• Cartels fail if noncartel members can
supply consumers with large quantities
of goods.
• Each member of a cartel has an
incentive to cheat on the cartel
agreement.
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13–36
Why Cartels Fail
•
•
It is in each firm’s best interest for all other
firms to honor the cartel agreement—thus
driving up the market price—while it ignores
the agreement and makes extra, profitable
sales at the high price.
Fig. 13.1: At the cartel price, qm, each cartel
member has an incentive to increase its
output from qm to q* (where the dotted line
at pm intersects the MC curve).
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13–37
Why Cartels Fail
• As more and more firms leave the cartel,
the cartel price falls.
• If enough firms quit, the cartel collapses.
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13–38
Maintaining Cartels
• To keep firms violating the cartel
agreement, the cartel must be able to
detect cheating and punish violators.
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13–39
Detection
• Cartels may divide the market by region
or by customers, so that a firm that tries
to steal another firm’s customer is more
likely to be detected.
• Other cartels use industry organizations
to detect cheating. e.g. Market share,
“Low price” ads.
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13–40
Enforcement
• GE and Westinghouse “most-favorednation clauses”: If either company
cheats by cutting prices, it has to lower
prices to all previous buyers as well.
• Another means of enforcing a cartel
agreement is through threats of violence.
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13–41
Government Support
• Professional baseball teams have been
exempted from some U.S. antitrust laws
since 1922.
• As a result, they can use the courts to
help enforce certain aspects of their
cartel agreement.
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13–42
Entry and Cartel Success
• Barriers to entry that limit the number of
firms help the cartel detect and punish
cheating.
• The fewer the firms in a market, the
more likely it is that other firms will know
if a given firm cheats and the easier it is
to impose costs on that firm.
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13–43
Mergers
• If antitrust or competition laws prevent
firms from colluding, they may try to
merge instead.
• Recognizing this potential problem, U.S.
laws restrict the ability of firms to merge
if the effect would be anticompetitive.
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13–44
Cournot Model of Oligopoly
• Although there is only one model of
competition and one model of monopoly,
there are many models of
noncooperative oligopoly behavior.
• We examine two oligopoly models in
which firms choose quantities: the
Cournot and Stackelberg models.
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13–45
Cournot Model of Oligopoly
• If firms set output simultaneously and let
the market determine the price, a
Cournot model works well.
• If one firm can set output before other
firms, a Stackelberg model is
appropriate.
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13–46
Cournot Model of Oligopoly
• To simplify our analysis of the Cournot
oligopoly model, we examine a market
in which
– There are two firms, and no other firms
can enter.
– The firms sell identical (undifferentiated,
homogeneous) products.
– The firms compete in a market that lasts
for only one period, and the product or
service that they sell cannot be stored
and sold later.
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13–47
Cournot Model of Airline Market
• Cournot equilibrium (Nash equilibrium in
quantities)
– A set of quantities sold by firms such
that, holding the quantities of all other
firms constant, no firm can obtain a
higher profit by choosing a different
quantity.
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13–48
Figure 13.2 American Airlines’ ProfitMaximizing Output
a) If American is a monopoly, it picks its
profit-maximizing output, q A  96 units
(thousand passengers) per quarter, so
that its marginal revenue, MR, equals
its marginal cost, MC.
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13–49
Figure 13.2 American Airlines’ ProfitMaximizing Output
b) If American believes that United will fly
qU  64 units pre quarter, its residual
r
demand curve, D , minus qU .
American maximizes its profit
at qA  64 ,where its marginal
r
revenue, MR , equals MC.
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13–50
Figure 13.2 American Airlines’
Profit-Maximizing Output
(a) Monopoly
(b) Duopoly
339
339
275
243
211
MC
147
MC
147
q U = 64
MR
0
96
169.5
339
qA , Thousand American Airlines
passengers per quarter
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MR r
D
0
64
Dr
D
128 137.5
275 339
qA, Thousand American Airlines
passengers per quarter
13–51
Cournot Model of Airline Market
• Residual demand curve
– The market demand that is not met by
other sellers at any given price.
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13–52
Figure 13.3 American and United’s BestResponse Curves
• The best-response curves show the
output each firm picks to maximize its
profit, given its belief about its rival’s
output.
• The Cournot equilibrium occurs at the
intersection of the best-response curves.
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13–53
Figure 13.3 American and United’s
Best-Response Curves
192
American’
s best-response curve
96
64
Cournot equilibrium
48
United’
s best-response curve
0
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64
96
192
qA, Thousand American
passengers per quarter
13–54
Algebraic Approach
• The market demand function is
Q  339  p,
(13.1)
where price, p , is the dollar cost of a
one-way flight, and Q is total quantity of
the two airlines combined.
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13–55
Algebraic Approach
• The residual demand American faces is
qA  Q( p)  qU  339  p   qU .
Using algebra, we can rewrite this
inverse residual demand function as
p  339  qA  qU .
(13.2)
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13–56
Algebraic Approach
• If a demand curve is linear, the
corresponding marginal revenue curve
is twice as steep.
• Thus the marginal revenue function is
r
MR  339  2q A  qU .
(13.3)
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13–57
Algebraic Approach
• American Airlines’ best response—its
profit-maximizing output, given qU —is
the output that equates its marginal
revenue, Equation 13.3, and its
marginal cost:
r
MR  339  2q A  qU  147  MC. (13.4)
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13–58
Algebraic Approach
• We can write American’s best-response
output, q A ,as a function of qU :
1
q A  96  qU .
(13.5)
2
• By the same reasoning, United’s bestresponse function is
1
qU  96  q A .
(13.6)
2
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13–59
Algebraic Approach
• A Cournot equilibrium is a pair of
quantities, q A and qU , such that
Equations 13.5 and 13.6 both hold:
Each firm is on its best-response curve.
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13–60
Comparing the Cournot and Cartel
Models
• The Cournot equilibrium is the only
plausible Nash outcome of oligopoly
firm set quantities independently in a
one-period game.
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13–61
Figure 13.4a Duopoly Equilibria
• The intersection of the best-response
curves determines the Cournot
equilibrium.
• The possible cartel equilibria lies on the
contract curve.
• If the firms act as price takers, each firm
produces where its residual demand
equals its marginal cost.
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13–62
Figure 13.4a Duopoly Equilibria
(a) Equilibrium Quantities
192
American’
s best-response curve
96
Contract
curve
Price-taking equilibrium
Cournot equilibrium
64
Stackelberg equilibrium
48
Cartel
equilibrium
0
48
United’
s best-response curve
64
96
192
qA, Thousand American passengers per quarter
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13–63
Figure 13.4b Duopoly Equilibria
• The highest possible profit for the two
firms combined is given by the profit
possibility frontier.
• It reflects all the possible collusive
equilibria, including the one indicated
where the firms split the market equally.
• All equilibria except collusive ones lie
within the profit possibility frontier.
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13–64
Figure 13.4b Duopoly Equilibria
πu, $ million profit of United Airlines
(b) Equilibrium Profits
9.2
Profit possibility frontier
Cartel profits
4.6
4.1
Cournot profits
2.3
Stackelberg
profits
American monopoly
profit
Price-taking profits
0
4.1 4.6
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9.2
πA, $ million profit of American Airlines
13–65
The Cournot Equilibrium and the
Number of Firms
• The marginal revenue for a typical
Cournot firm is MR  p(1  1/  r ) , where
 r is the elasticity of the residual
demand curve the firm faces.
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13–66
The Cournot Equilibrium and the
Number of Firms
•  r  n , where  is the market elasticity
of demand and n is the number of firms
with identical cost. Thus we can write a
typical Cournot firm’s profit-maximizing
condition as
1 

(13.8)
MR  p 1    MC.

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n 
13–67
The Cournot Equilibrium and the
Number of Firms
• A Cournot firm’s Lerner Index depends
on the elasticity the firm faces:
p  MC
1
 .
(13.9)
p
n
• As the number of firms grows large, the
residual demand elasticity a firm faces
approaches  , so the Lerner Index
approaches zero, which is the same as
with price-taking, competitive firms.
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13–68
Table 13.3 Cournot Equilibrium
Varies with the Number of Firms
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13–69
Stackelberg Model of Noncooperative
Behavior
• Suppose, however, that one of the firms,
called the leader, can set its output
before its rival, the follower, sets its
output.
• This type of game, in which the players
make decisions sequentially, arises
naturally if one firm enters a market
before another.
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13–70
Figure 13.5 Stackelberg Game Tree
• The game tree shows the order of the
firms move, each firm’s possible
strategies at the time of its move, and
the resulting profits.
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13–71
Figure 13.5 Stackelberg Game Tree
Follower ’
s decision
Leader’
s decision
Profits (πA, πU)
48
48
United
64
96
48
American
64
United
64
96
48
96
United
64
96
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(4.6, 4.6)
(3.8, 5.1)
(2.3, 4.6)
(5.1, 3.8)
(4.1, 4.1)
(2.0, 3.1)
(4.6, 2.3)
(3.1, 2.0)
(0, 0)
13–72
Stackelberg Game Tree
• If American choose 48, United will set
64, so American’s profit will be $3.8
million.
• If American choose 64, United will set
64, so American’s profit will be $4.1
million.
• If American choose 96, United will set
48, so American’s profit will be $4.6
million.
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13–73
Stackelberg Game Tree
• Thus to maximize its profit, American
choose 96. United responds by selling
48.
• This outcome is a Stackelberg (Nash)
equilibrium.
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13–74
Figure 13.6 Stackelberg Equilibrium
a) The residual demand the Stackelberg
leader faces is the market demand
minus the quantity produced by the
follower, qU , given the leader’s
quantity, q A. The leader chooses q A so96
r
that its marginal revenue,
, equals
MR
its marginal cost. The total
output, Q  144, is the sum of the
output of the two firms.
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13–75
Figure 13.6 Stackelberg Equilibrium
b) The quantity the follower produces is
its best response to the leader’s output,
as given by its Cournot best-response
curve.
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13–76
Figure 13.6
Stackelberg
Equilibrium
(a) Residual Demand American Faces
339
243
Dr
195
MR r
MC
147
qU = 48
D
0
qA = 96 Q = 144
192
(b) United’
s Best-Response Curve
339
qA, Thousand American passengers per quarter
96
qU = 48
0
United’
s best-response curve
qA = 96
192
qA, Thousand American passengers per quarter
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13–77
Why Moving Sequentially is Essential
• The answer is that when the firms move
simultaneously, United doesn’t view
American’s warning that it will produce a
large quantity as a credible threat.
• If United believed that threat, it would
indeed produce the Stackelberg follower
output level.
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13–78
Figure 13.7 Effect of a Government
Subsidy on a Cournot Equilibrium
a) A government subsidy that lowers
United’s marginal cost from MC 1  $147
2
MC
 $99 cause United’s bestto
response output to American’s qA  64
to rise from qU  64 to 88.
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13–79
Figure 13.7 Effect of a Government
Subsidy on a Cournot Equilibrium
b) If both airlines’ marginal costs are
$147, the Cournot equilibrium is e1 . If
United’s marginal cost falls to $99, its
best-response function shifts outward.
It now sells more tickets in response to
any given American output than
previously. At the new Cournot
equilibrium, e2 , United sells qU  96 ,
while American sells only qA  48 .
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13–80
Figure 13.7 Effect of a Government
Subsidy on a Cournot Equilibrium
(a) United’
s Residual Demand
339
275
qA = 64
147
MC1
99
MC 2
MR r
0
64 88
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137.5
Dr
D
275
339
qU, Thousand United
passengers per quarter
13–81
Figure 13.7 Effect of a Government
Subsidy on a Cournot Equilibrium (cont’d)
(b) Best-Response Curves
192
American’
s best-response curveMC
( = $147)
120
96
88
64
e
2
e
1
United’
s new best-response
MC
curve ( = $99)
48
0
United’
s original best-response
MC
curve ( = $147)
48 64 96
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192
240
qA, Thousand American
passengers per quarter
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Comparison of Collusive, Cournot,
Stackelberg, and Competitive Equilibria
• The duopoly Cournot and Stackelberg
equilibria (in the table, American is the
leader) lie between the extreme cases
of monopoly or cartel and price taking.
The Stackelberg equilibrium is closer to
the price-taking equilibrium than the
Cournot equilibrium in terms of total
output, price, consumer surplus, welfare,
and deadweight loss.
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Table 13.5 Comparison of Airline
Market Structures
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Monopolistic Competition
• Monopolistically competitive markets do not
have barriers to entry, so firms enter the
market until no new firm can enter profitably.
• In contrast to competitive firms (which face
horizontal residual demand curves and
charge prices equal to marginal cost),
monopolistically competitive firms face
downward-sloping residual demand curves,
so they charge prices above marginal cost.
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台灣的獨占性競爭產業
資料來源：「產業經濟學」，陳正倉、林恵玲、陳忠榮、莊春發合著
© 2007 Pearson Addison-Wesley. All rights reserved.
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個案研究－台灣本國銀行的獨占性競爭
• 台灣本國銀行業(產業代號6512)在民國85年時共有42
家，CR1 為10.14%，CR4 為34.89%。在91年底時共有
52家，分支機構(分行)共3, 068家。對多數的存款人而
言，銀行是個提供存款服務的廠商，絕大部分的銀行
其存款利率相同，即使有差異，也非常小，而銀行員
的服務也大致相同，因此銀行是一個獨占性競爭的產
業。最特別的是，由於銀行及其分支機構多，因此短
短不到500公呎的一條街上，就有好幾家銀行(例如台
北市館前路、羅斯福路3段)。存款戶在選擇銀行時，
主要的考慮因素大概就是距離住家或辦公室的遠近(當
然還有一些其他因素，如服務態度、等候時間等等)。
距離近，則存提款、辦理轉帳繳稅、繳費很方便，距
離遠，則耗時費事。而銀行為了能夠吸收最多的客戶，
也就朝人口聚集最多的地點設立分行，這是為什麼短
短一條街有很多家銀行的緣故。
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Monopolistically Competitive
Equilibrium
• In a monopolistically competitive market,
each firm tries to maximize its profit;
however, each makes zero economic
profit due to entry.
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Monopolistically Competitive
Equilibrium
• Two conditions hold in a
monopolistically competitive equilibrium:
Marginal revenue equals marginal cost
(because firms set output to maximize
profit), and price equals average cost
(because firms enter until no further
profitable entry is possible).
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Monopolistically Competitive
Equilibrium
• Minimum Efficient Scale (full capacity)
– The smallest quantity at which the
average cost curve reaches its minimum
• Because a monopolistically competitive
equilibrium occurs in the downwardsloping section of the average cost
curve, a monopolistically competitive
firm operates at less than full capacity in
the long run.
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Figure 13.8 Monopolistically
Competitive Equilibrium
• A monopolistically competitive firm,
r
facing residual demand curve D , sets
its output where its marginal revenue
r
equals its marginal cost: MR  MC.
Because firms can enter this market,
the profit of the firm is driven to zero, so
price equals the firm’s average cost:
p  AC.
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Figure 13.8 Monopolistically
Competitive Equilibrium
MC
p
AC
p = AC
MR r = MC
MR r
q
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Dr
q, Units per year
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Fixed Costs and the Number of Firms
• The number of firms in a
monopolistically competitive equilibrium
depends on firms’ costs. The larger
each firm’s fixed cost, the smaller the
number of monopolistically competitive
firms in the market equilibrium.
• Although entry is free, if the fixed costs
are high, few firms may enter.
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Figure 13.9 Monopolistic
Competition Among Airlines
a) If each identical airline has a fixed cost
of $2.3 million and there are two firms
in the market, each firm flies q  64
units (thousands of passengers) per
quarter at a price of p  $211 per
passenger and makes a profit of $1.8
million. This profit attracts entry.
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Figure 13.9 Monopolistic
Competition Among Airlines
b) After a third firm enters, the residual
demand curve shifts, so each flies
q  48 units at p  $195 and makes
zero profit, which is the
monopolistically competitive
equilibrium.
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Figure 13.9 Monopolistic
Competition Among Airlines
(b) Three Firms in the Market
(a) Two Firms in the Market
300
300
275
π= $1.8 million
243
211
183
195
AC
MC
147
AC
MC
147
D r for 2 firms
D r for 3 firms
MR r for 2 firms
0
64
137.5
275
q, Thousand passengers
per quarter
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MR r for 3 firms
0
48
121.5
243
q, Thousand passengers
per quarter
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Bertrand Price-Setting Model
• In 1883, Joseph Bertrand argued that
oligopolies set prices, and then
consumers decide how many units to
buy. The resulting Nash equilibrium is
called a Bertrand equilibrium: a set of
prices such that no firm can obtain a
higher profit by choosing a different
price if the other firms continue to
charge these prices.
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Figure 13.10 Bertrand Equilibrium
with Identical Products
• With identical products and constant
marginal and average cost of $5, Firm
1’s best-response curve starts at $5 and
then lies slightly above the 45o line. That
is, Firm 1 undercuts its rival’s price as
long as its price remains above $5. the
best-response curves intersect at e , the
Bertrand or Nash equilibrium, where
both firms charge $5.
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Figure 13.10 Bertrand Equilibrium
with Identical Products
Firm 1’
s best-response curve
10
Firm 2’
s best-response curve
e
5
45° line
0
5
9.99 10
p , Price of Firm 1, $ per unit
1
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Bertrand Equilibrium with Identical
Products
• In this equilibrium, each firm makes
zero profit. Thus the Bertrand
equilibrium when firms produce identical
products is the same as the price-taking,
competitive equilibrium.
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Bertrand Versus Cournot
• The Bertrand equilibrium differs
substantially from the Cournot equilibrium.
• When firms produce identical products and
have a constant marginal cost, the
Cournot model is more plausible than the
Bertrand.
• The Bertrand model—unlike the Cournot—
appears inconsistent with real oligopoly
markets in at least two ways.
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Bertrand Versus Cournot
• First, the Bertrand model’s “competitive”
equilibrium price is implausible. If there
is only a small number of firms, why
would they compete so vigorously that
they would make no profit?
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Bertrand Versus Cournot
• Second, the Bertrand equilibrium price,
which depends only on cost, is
insensitive to demand conditions and
the number of firms.
• As a result, it seems more likely that
when firm’s products are identical, firms
set quantities rather than prices.
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Bertrand Equilibrium with
Differentiated Products
• Markets with differentiates goods, the
Bertrand equilibrium is plausible, and
the two “problems” of the
homogeneous-goods model disappear:
Firms set prices above marginal cost,
and prices are sensitive to demand
conditions.
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Bertrand Equilibrium with
Differentiated Products
• Many economists believe that pricesetting models are more plausible than
quantity-setting models when goods are
differentiated.
• The Bertrand best-response curves
have different slopes than the Cournot
best-response curves.
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Bertrand Equilibrium with
Differentiated Products
• The Cournot curves slope downward,
showing that a firm produces less the
more its rival produces. The Bertrand
best-response curves slope upward,
indicating that a firm charges a higher
price the higher the price its rival
charges.
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Figure 13.11 Bertrand Equilibrium
with Differentiated Products
• If both firms have a constant marginal
cost of $5, the best-response curves of
Coke and Pepsi intersect at e1, where
each sets a price of $13 per unit. If
Coke’s marginal cost rises to $14.5, its
best-response function shift upward. In
the new equilibrium, e2 , Coke charges a
higher price, $18, than Pepsi, $14.
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Figure 13.11 Bertrand Equilibrium
with Differentiated Products
25
Pepsi’
s best-response
curve (MCp = $5)
e
18
e
13
0
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Coke’
s best-response
curve (MCc = $14.50)
2
1
13 14
Coke’
s best-response
curve (MCc = $5)
25
pp, Price of Pepsi, $ per unit
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Differentiating Products
• If Bertrand model demonstrates that
firms can profit from selling
differentiated produces. If products are
homogeneous, Bertrand firms cannot
charge above marginal cost. With
differentiated products, they can charge
prices above marginal cost and make
larger profits.
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Product Differentiation and Price
• The reason differentiation allows a firm
to charge a higher price is that the
residual demand curve the firm faces
(the market demand minus the quantity
supplied by rivals at each price) become
less elastic.
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Product Differentiation and
Welfare
• Although differentiation leads to high
prices, which harm consumers,
differentiation is desirable in its own
right. Consumers value having a choice,
and some may greatly prefer a new
brand to existing ones.
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