ECON 115. Industrial Organization
|
|
- Priscilla Hardy
- 5 years ago
- Views:
Transcription
1 ECON 115
2 1. Review Second Midterm 2. Final Problem Set (homework) 3. Predation and Limit Pricing 4. The Story of Alcoa 5. Alternative Views of Predation 6. Some Empirical Evidence
3 First Hour Review the midterm Hand out the problem set Introduction to predatory behavior. Limit pricing in theory. Credibility and capacity The story of Alcoa Second Hour Predatory conduct versus mergers: which is more effective? Imperfect information and predatory conduct Return to limit pricing Empirical analysis: testing for the presence of entry deterrence in the pharmaceutical business How to work a limit pricing problem
4 This is our final new lecture in IO. It will introduce the idea of predatory behavior; specifically limit pricing. We ll examine what limit pricing is, how it works and when it makes sense to use it. We will also look at two empirical examples of limit pricing. Limit pricing will be part of the final, so pay attention!
5 A firm that can restrict output to raise market price has market power. Microsoft (95% of operating systems in 2008!!) Campbell s (70% of can soup market) Why can t rivals compete away those positions? Why aren t new rivals lured in by high profits? Answer: firms with monopoly power may eliminate existing rivals prevent entry of new firms These actions are predatory conduct if they are profitable and if they drive out rivals. e.g., R&D to reduce costs is not predatory
6 Evolution of markets depends on many factors. Several stylized facts about entry Entry is common; Entrants are generally small-scale; Survival rate is low: >60% exit within 5 years; Entry is highly correlated with exit.
7 Interestingly, studies show that entry/exit is not consistent with the presence of excess profits. Rather, it seems to be an ongoing revolving door, which reflects repeated attempts by small firms to penetrate markets dominated by large firms. This does not necessarily prove predatory conduct. Surviving firms may possess superior technology, be more efficient or have better locations. But it may... Therefore, we need to understand predation if we are to identify it.
8 Predatory actions come in two broad forms: Limit pricing: prices so low that entry is deterred. Predatory pricing: prices so low that existing firms are driven out. Outcome of either action is the same: the monopolist retains control of the market. Legal action focuses on predatory pricing because there exists an identifiable victim: a firm that was in the market but has left.
9 We are going to consider a model of limit pricing using what was developed previously, specifically the Stackelberg Model. Recall that the Stackelberg leader chooses output first. We also assume that: The entrant believes that the leader is committed to this output choice; and the entrant has decreasing costs over some initial level of output.
10 Then the entrant s residual demand is $/unit R 1 = D(P) - Q 1 P d P e R 1 q e MR e MC e AC e These are the cost curves for the potential entrant With the residual demand R 1, the entrant can operate profitably. Entry is not deterred by the incumbent choosing Q 1. Q d R e Q d Assume that the incumbent D(P) = Market commits Demand Q 1 to output Q 1 Quantity 10
11 $/unit P d P e Then the entrant s marginal revenue is MR e R 1 q e MR e At price P e entry is unprofitable Q d MC e R e AC e Q d The entrant equates marginal revenue with marginal cost D(P) = Market Demand Q 1 By committing to output Q d the incumbent deters entry. Market price P d is the limit price Assume instead that the incumbent commits to output Q d Quantity The entrant s residual demand is R e = D(P) - Q d 11
12 Committing to output Q d may be aimed either at eliminating an existing rival or driving away a potential entrant. Either way, several questions arise: Is limit pricing more profitable than other strategies? Is the output commitment credible? If output is costly to adjust then commitment is possible. 10
13 For predation to be successful and rational, the incumbent must convince the entrant that after it enters, the second firm will not find the market a profitable one. How can the incumbent credibly make this threat? Limit pricing only works if an incumbent can commit to producing limit output even if entry occurs. Therefore, credibility may hinge on capacity. 13
14 One possible mechanism: install capacity in advance of production. Installed capacity represents a commitment to a minimum level of output. The lead firm can manipulate entrants and perhaps deter entry through its capacity choice. But is this credible? Yes, if capacity is costly to install and irreversible. 14
15 Why does the incumbent have a stronger incentive to invest early? the incumbent is protecting a valuable monopoly. the entrant is seeking a share of the market. so the incumbent s incentive is stronger. The incumbent is willing to incur initial losses to maintain market control. 15
16 Some anecdotal evidence Alcoa Evidence that it consistently expanded capacity in advance of demand Safeway in Edmonton Evidence it aggressively expanded store locations in response to potential entry. DuPont in titanium oxide Rapidly expanded capacity in response to increases in rivals costs 16
17 Safeway DuPont Market: Edmonton, Ontario Titanium Oxide At start of period : 1964 At start of period: 1970 Safeway 25 stores; competitors 21 Safeway expands outlets; targets competitors locations and growth areas. Competitors falter DuPont 34% of market share High production costs & regulations hamper competitors. DuPont expands production by 60% At end of period: 1973 At the end of period: 1977 Safeway 35 stores; competitors 10 DuPont has 46% market share.
18 The Story of Alcoa (Aluminum Company of America) Aluminum discovered in 1807 Charles Hall discovers 1 st successful method for making aluminum in Hall founds Pittsburg Reduction Company in 1888 (renamed Alcoa in 1907). At the time of the company s founding, there were no known end uses for aluminum and the company had 0 customers.
19 The Story of Alcoa, continued Alcoa proceeds to create the aluminum market. Develops and promotes uses for aluminum: Wire Medical instruments Cooking utensils Alcoa reduces production costs: It discovers and exploits cheap bauxite from Arkansas; It constructs its own dams to obtain cheap hydroelectric power.
20 The Story of Alcoa, continued From various business tried to enter and aluminum ingot market. None could dislodge Alcoa because: They constantly innovated to improve quality. They relentlessly drove down costs! Year Q (lb. of AL) P ($ per lb.) ,250 lb. $ ,000,000 lb. $.22
21 The History of Government vs. Alcoa 1912 Court extracts a consent degree no restrictive covenants [abandoned practice prior to 1912] 1925 FTC investigates charges of monopolization; in 1929, FTC exonerates Alcoa of charges. In 1937, the government again attacked Alcoa under the Sherman Antitrust Act.
22 In 1941, Judge Caffey ruled on the case and ultimately decided Alcoa was innocent of violating the Sherman Act. Dismissed Alcoa s use of restrictive agreements (it had a patent at the time). Found no monopoly over bauxite (controlled only 48% in Arkansas; nothing in other states). Found no monopoly over water power (had only 5 hydroelectric plants out of 1883 in the US).
23 Judge Caffey s ruling, continued. Dismissed Alcoa s monopoly of aluminum (found Alcoa made their own and nothing prevented other companies making aluminum). Found they were not illegally monopolizing aluminum sales (they earned their monopoly position through market competition). Found further there was substantial competition in the form of scrap and close substitutes such as steel, nickel, lead, copper.
24 Predictably, the government appealed Judge Caffey s ruling. The appeal was heard in 1944 and partially overturned. The appellate court s ruling was written by the famous American jurist, Learned Hand (real name).
25 Hand ruled Caffey had defined the aluminum ingot market incorrectly by excluding ingot made by Alcoa for its own use and including the scrap market. Once the former was included and the latter excluded, Hand transformed Alcoa s market share from 33% to 90%. (Substitute goods are often included in market definitions, so Hand was probably wrong.) Now supported by his analysis, Hand could rule that Alcoa was a monopoly.
26 Hand argued that Alcoa s superior skill, foresight and industry were exclusionary. He further argued they forestalled competition in part by stimulating demand and in anticipation doubled and redoubled its capacity. Thus Alcoa was condemned for being an efficient single supplier.
27 Ironically, the court refused to dissolve an aggregation which for so long has demonstrated its efficiency... Instead it hoped that many of the government s aluminum plants would be sold to other companies to create competition. That implemented after World War II, which enable Reynolds and Kaiser Aluminum to come into being.
28 We are going to finish with looking at limit pricing from three perspectives. (1)Why merging may be better than limit pricing to compete with potential new entrants. (2)Why asymmetric information may encourage firms to engage in limit pricing to deter entry. (3)Finally, we will look at a somewhat arcane example that gives some credence to the existence of predatory behavior. 28
29 Charges of predatory conduct are not new. Microsoft is only one of the latest examples. Claims go back to Standard Oil. More recent examples of predatory pricing are: Wal-Mart AT&T American Airlines Is predatory pricing believable? The logic is to price low to eliminate rivals and then to raise prices. Question: why don t rivals reappear? 29
30 There are theoretical doubts about predation. Theoretically, it is argued that predation is generally not subgame perfect. Selten: if a strategy chosen at the start of the game is optimal, it must be optimal throughout. This may be true with perfect information. McGee s ( 58, 80) also argued that predation is dominated by another strategy. Merger may be more profitable than predation. Therefore, predation should not happen. 30
31 Predatory pricing: myth or reality? To illustrate McGee, take this example: two period market inverse demand P = A B(q L + q F ) q L is output of leader and q F is output of follower leader is a Stackelberg quantity leader both leader and follower have constant marginal costs of c 31
32 An example of predation, continued At the Stackelberg equilibrium:* leader makes profit = (A c) 2 /8B follower makes (A c) 2 /16B if the leader were a monopolist it would make (A c) 2 /4B * Lecture 11, Slide 15 32
33 An example of predation, continued Suppose that the leader engages in predatory pricing in period 1 and sets output (A c)/b to drive price to marginal cost. The follower likely will not enter. Leader reverts to monopoly output in period 2; the follower still does not enter. Aggregate profit is (A c) 2 /4B 33
34 Alternatively, suppose that the leader offers to merge with the follower in period 1. Together they enjoy a monopoly in both periods. Aggregate profit = (A c) 2 /2B Therefore, the leader can make a merger offer that the follower will accept and be better off profit-wise. 34
35 Monopoly quantity = (A c)/2b Stackelberg Duopoly quantity L = (A c)/2b profit L = (A c) 2 /8B profit = (A c) 2 /4B quantity F = (A c)/4b profit F = (A c) 2 /16B
36 Merger is more profitable than predation, but: Merger may not be allowed by the authorities due to monopoly power. Also, what if additional potential entrants enter purely in the hope of being bought out? Main point remains: the threat of predation has to be credible if it is to work. 36
37 Suspicion of the reality of predation is associated with the Chicago School, which is very pro-market. Their thinking became dominant idea in the 70s and 80s. However, post-chicago economists have revitalized the idea of predation by focusing on imperfect information. We will examine two types of games: 1)Where the entrant has unique financial information about itself (but the bank doesn t!). 2)Where the entrant does not have good 37 information about its rival s costs.
38 As we will see, these preemption games are ways of resolving the Chain-store paradox. By indicating where it is rational for incumbents to make investments that a) are not profitable but which are pursued nonetheless because b) they deter entry. 38
39 The first example of imperfect information assumes a 2-period game where the entrant faces financial constraints; it must borrow to finance entry. Bank because it lacks reliable information about the entrant requires success in the first period to fund the entrant in the second. 39
40 Incumbent therefore has incentive to take actions that increase probability of failure. By cutting prices low in the first period, the incumbent sacrifices profits but raises the probability of the entrant s failure. This increases its chances of being a monopolist in the second period. 40
41 A second example involves asymmetric information and limit pricing. Suppose an entrant does not have perfect information about the incumbent s costs. If the incumbent is low cost: do not enter If the incumbent is high-cost: enter A high-cost incumbent may have an incentive to pretend to be low cost to prevent entry perhaps by pricing as a low-cost firm. 41
42 Example of preemption using costs, continued. Incumbent has a monopoly in period 1; entry is threatened in period 2. Market closes at the end of period 2. Entrant observes incumbent s actions in period 1. These actions determine whether or not to enter in period 2. Incumbent is expected to be either a high-cost or low-cost firm. The entrant has no direct information on costs, but the entrant knows that there is a probability p that the incumbent is low-cost. Need to specify pay-offs in different situations. 42
43 Incumbent profits in period 1 (in $million) low-cost firm acting as low-cost monopolist: $100m high-cost firm acting as high-cost monopolist: $60m high-cost adopting low-cost monopoly price: $40m Incumbent profits in period 2 if no entry, profits according to true type (low or high cost) if entry occurs: low-cost incumbent: $50m high-cost incumbent: $20m Entrant s profits in period 2 competing against a low-cost incumbent: -$20 competing against a high-cost incumbent: $20m 43
44 Enter Incumbent: = 80 Entrant: 20 Nature High-Cost Low-Cost High Price I 1 Low Price E 3 E 4 Stay Out Enter Stay Out Incumbent: = 120 Entrant: 0 Incumbent: = 60 Entrant: 20 Incumbent: = 100 Entrant: 0 I 2 Low Price Enter Incumbent: = 150 Entrant: -20 E 5 Stay Out Incumbent: = 200 Entrant: 0 44
45 With no uncertainty the entrant enters if the incumbent is high-cost Enter With uncertainty and a low price the entrant does not know if he is at E 4 or E 5 Incumbent: = 80 Entrant: 20 Nature High-Cost Low-Cost High Price I 1 Low Price E 3 E 4 Stay Out Enter Stay Out Incumbent: = 120 Entrant: 0 Incumbent: = 60 Entrant: 20 Incumbent: = 100 Entrant: 0 I 2 Low Price Enter Incumbent: = 150 Entrant: -20 E 5 Stay Out Incumbent: = 200 Entrant: 0 45
46 Consider a high-cost incumbent high price in period 1 - entry happens, profits are 80 low price in period 1 - if no entry, profits are 100 low price in period 1 - if entry, profits are 60 A high-cost incumbent has an incentive to pretend to be low-cost. The entrant knows this. Therefore, a low-price in and of itself will not deter entry because it is not a true signal of the incumbent s type. Only the probability that low-price means lowcost deters entry. 46
47 Consider the profits of the entrant, given that the incumbent sets a low-price in period 1 if the incumbent is high-cost - profit is 20 with probability 1 - p if the incumbent is low-cost - profit is -20 with probability p so expected profit is 20(1 - p) - 20p = 20-40p Will the entrant not enter when it sees a low price? Only if p > ½ which means there is a sufficiently high probability that the incumbent is low cost. Provided that pretense is expected to work, a highcost incumbent has an incentive to set a limit price. 47
48 Monopoly power can persist even if the incumbent is high-cost. Entry only takes place if entrants believe that the incumbent is high-cost. Therefore, entry is more likely when incumbents are expected to be weak. 48
49 Note: the model shows how a high-cost firm can deter entry. However, to do this it must set a low price. This is how it fools the would-be entrant. The threat of entry forces the incumbent to price below the monopoly price it would otherwise set. This lower limit price therefore mitigates the resource misallocation effects of monopoly. 49
50 The evidentiary requirements for prosecuting predatory pricing cases are high. Pricing below cost (Areeda and Turner) The predator had a reasonable expectation of recouping the losses. Very hard to distinguish predation from other pro-competitive behavior Hard to measure marginal cost Learning curves, network effects, and other externalities 50
51 It is difficult to test in a statistical sense for systematic entry deterrence. We need to identify markets: where entry was likely; and where the incumbent could do something to limit entry where deterrent actions can be identified Incumbent may not take any action if entry is not likely or if there is little it can do to stop entry. Incumbent may take action if entry is fairly likely in an effort to limit the number coming in. Efforts by incumbent to build brand loyalty may seem like entry deterrence but it may instead result in incumbent not needing to price aggressively when a rival enters, which makes entry easier. 51
52 Ellison and Ellison (2006) try to overcome these issues in a recent study of the pharmaceutical industry They look at the advertising behavior of companies in the case of 64 drugs about to lose their patents. Their first step is to identify those markets where entry following patent expiration was likely. 52
53 What is predatory or entry-deterring behavior here? Ellison and Ellison focus on advertising. They note that when one firm advertises a prescription drug, the benefits of that advertising spill over to rivals. The decision-makers with respect to pharmaceuticals are doctors. They will have a keen sense of the chemical identity of generic competitors. If an advertisement trumpets the ability of a particular statin to lower cholesterol, doctors understand that near identical statins will have the same effect. In this environment, an incumbent wishing to deter entry may advertise LESS. 53
54 Ellison & Ellison (2006) estimate the following equation: Advertising it Advertising i 1 = [ 1 Low + 2 Medium + 3 High]Time + i The dependent variable measures advertising for each firm i in each of the 12 months just prior to the patent expiration relative to the average level of advertising in each of the 24 months before that. 54
55 On the right-hand-side, the coefficient on the-time-topatent-expiration variable depends on what probability of entry category for that market Ellison and Ellison argue any entry-deterring efforts will only occur in the middle group. No need to deter entry when probability is Low Impossible to deter entry when probability is High So, given our understanding of entry deterrence, advertising should be low in Medium probability markets. That is, 2 should be negative. 55
56 Ellison & Ellison (2006) estimates are shown below: Advertising Intensity Time Trend By Category of Entry Probability, 64 Pharmaceutical Markets Coefficient Estimated Value Standard Error is significantly negative. Firms facing a medium probability of entry after patent expiration do reduce their advertising in the months prior to that date. Some mild support for entry deterring behavior 56
57 Next week we collect the problem set, hand out the Take-home Final, and summarize what we ve learned. 57
Entry Deterrence and Predation. Chapter 9: Entry Deterrence and Predation
Entry Deterrence and 1 Introduction A firm that can restrict output to raise market price has market power Microsoft (95% of operating systems) and Campbell s (70% of tinned soup market) are giants in
More informationECON 115. Industrial Organization
ECON 115 Industrial Organization 1. Cournot and Bertrand Reprised 2. First and Second Movers 3. The Stackelberg Model 4. Quantity vs. Price Competition 5. Credibility 6. Preparing for the 2 nd Midterm
More informationEconomics of Strategy Fifth Edition. Besanko, Dranove, Shanley, and Schaefer. Chapter 11. Entry and Exit. Copyright 2010 John Wiley Sons, Inc.
Economics of Strategy Fifth Edition Besanko, Dranove, Shanley, and Schaefer Chapter 11 Entry and Exit Slides by: Richard Ponarul, California State University, Chico Copyright 2010 John Wiley Sons, Inc.
More informationChapter 11 Entry and Exit
Chapter 11 Entry and Exit Prof. Jepsen ECO 610 Lecture 7 December 12, 2012 John Wiley and Sons Outline Barriers to entry Barriers to exit Entry-deterring strategies Exit-promoting strategies Forms of Entry
More informationChapter 12: Limit Pricing and Entry Deterrence
Chapter 12: Limit Pricing and Entry Deterrence Learning Objectives: Students should learn to: 1. Define and give examples of predatory conduct. 2. Explain stylized facts about the entry of firms into industries.
More informationTerry College of Business - ECON 7950
Terry College of Business - ECON 7950 Lecture 14: Entry and Exit Primary reference: Besanko et al, Economics of Strategy, Ch. 11 Entry and Exit Entry and exit are pervasive. Consider Dunne, Roberts and
More informationUNIVERSITY OF CAPE COAST CAPE COAST - GHANA BASIC OLIGOPOLY MODELS
UNIVERSITY OF CAPE COAST CAPE COAST - GHANA BASIC OLIGOPOLY MODELS Overview I. Conditions for Oligopoly? II. Role of Strategic Interdependence III. Profit Maximization in Four Oligopoly Settings Sweezy
More informationPrinciples of Economics. January 2018
Principles of Economics January 2018 Monopoly Contents Market structures 14 Monopoly 15 Monopolistic competition 16 Oligopoly Principles of Economics January 2018 2 / 39 Monopoly Market power In a competitive
More informationECON 115. Industrial Organization
ECON 115 Industrial Organization 1. The Take-home Final (Final Essay) 2. What have we learned in Industrial Organization? What are the major takeaways? The Final: write a short essay about a firm s or
More informationEcon8500_Imperfect_Competition
Name: Class: Date: ID: A Econ8500_Imperfect_Competition Multiple Choice Identify the choice that best completes the statement or answers the question. 1. In the quasi-competitive model a. firms believe
More informationIntroduction to Industrial Organization Professor: Caixia Shen Fall 2014 Lecture Note 1
Part 1: Introduction to this course Introduction to Industrial Organization Professor: Caixia Shen Fall 2014 Lecture Note 1 1. What is Industrial Organization? Industrial organization is concerned with
More informationECON6021. Market Structure. Profit Maximization. Monopoly a single firm A patented drug to cure SARS A single power supplier on HK Island
Market Structure ECON6021 Oligopoly Monopoly a single firm A patented drug to cure SARS A single power supplier on HK Island Oligopoly a few major players The top 4 cereal manufacturers sell 90% of all
More informationWJEC (Wales) Economics A-level
WJEC (Wales) Economics A-level Microeconomics Topic 2: Market Structures 2.5 Monopoly Notes Characteristics of monopoly: Monopolies can be characterised by: o Profit maximisation. A monopolist earns supernormal
More informationManagerial Economics & Business Strategy Chapter 9. Basic Oligopoly Models
Managerial Economics & Business Strategy Chapter 9 Basic Oligopoly Models Overview I. Conditions for Oligopoly? II. Role of Strategic Interdependence III. Profit Maximization in Four Oligopoly Settings
More informationANTITRUST ECONOMICS 2013
ANTITRUST ECONOMICS 2013 David S. Evans University of Chicago, Global Economics Group Elisa Mariscal CIDE, ITAM, CPI TOPIC 3: DEMAND, SUPPLY AND STATIC COMPETITION Date Topic 3 Part 2 14 March 2013 2 Overview
More informationWJEC (Eduqas) Economics A-level
WJEC (Eduqas) Economics A-level Microeconomics Topic 6: Market Structures 6.5 Monopoly Notes Characteristics of monopoly: Monopolies can be characterised by: o Profit maximisation. A monopolist earns supernormal
More information- pure monopoly: only one seller of a good/service with no close substitutes
Micro 101, Chapter 10 1 Chapter 10: Monopoly Main objectives: 1. Define what constitutes a monopoly - pure monopoly: only one seller of a good/service with no close substitutes 2. Describe types of barriers
More informationChapter 13. Game Theory. Gaming and Strategic Decisions. Noncooperative v. Cooperative Games
Chapter 13 Game Theory Gaming and Strategic Decisions Game theory tries to determine optimal strategy for each player Strategy is a rule or plan of action for playing the game Optimal strategy for a player
More informationPerfect Competition Chapter 7 Section 1
Perfect Competition Chapter 7 Section 1 Four Conditions of Perfect Perfect competition is a market structure in which a large number of firms all produce the same product. Many buyers and sellers Identical
More informationSyllabus item: 57 Weight: 3
1.5 Theory of the firm and its market structures - Monopoly Syllabus item: 57 Weight: 3 Main idea 1 Monopoly: - Only one firm producing the product (Firm = industry) - Barriers to entry or exit exists,
More informationPredatory pricing. Cédric Argenton. March Tilburg University. CA (Tilburg University) Predatory pricing 03/15 1 / 18
Predatory pricing Cédric Argenton Tilburg University March 2015 CA (Tilburg University) Predatory pricing 03/15 1 / 18 Predation A running theme in competition policy is the diffi culty to distinguish
More informationAQA Economics A-level
AQA Economics A-level Microeconomics Topic 5: Perfect Competition, Imperfectly Competitive Markets and Monopoly 5.6 Monopoly and monopoly power Notes Characteristics of monopoly: Monopolies can be characterised
More informationJoven Liew Jia Wen Industrial Economics I Notes. What is competition?
Industrial Economics I Notes What is competition? Competition in markets is generally considered a good thing (welfare economics) Competition authorities look at whether change in market structure or firm
More information1-4. Nash Equilibrium outcome of a game theory model where all players are doing the best they can given the actions of all other players.
Econ147 Final: Page 1 of 7 NAME: KEY onor Pledge Economics 147 Spring 05 FINAL EXAM John Stewart INSTRUCTIONS: - Answer each of the questions in the space provided. If additional space is required, use
More informationEdexcel (A) Economics A-level
Edexcel (A) Economics A-level Theme 3: Business Behaviour & the Labour Market 3.4 Market Structures 3.4.5 Monopoly Notes Characteristics of monopoly: Monopolies can be characterised by: o Profit maximisation.
More informationEconS Asymmetric Information
cons 425 - Asymmetric Information ric Dunaway Washington State University eric.dunaway@wsu.edu Industrial Organization ric Dunaway (WSU) cons 425 Industrial Organization 1 / 45 Introduction Today, we are
More information29/02/2016. Market structure II- Other types of imperfect competition. What Is Monopolistic Competition? OTHER TYPES OF IMPERFECT COMPETITION
Market structure II- Other types of imperfect competition OTHER TYPES OF IMPERFECT COMPETITION Characteristics of Monopolistic Competition Monopolistic competition is a market structure in which many firms
More informationEconomics. Monopolistic Perfect Competition. Monopolistic Competition. Monopolistic Competition 11/29/2013. The Big Picture. Perfect Competition
16 Modified by Joseph Tao-yi Wang Ron Cronovich The Big Picture Chapter 13: The cost of production Now, we will look at firm s revenue But revenue depends on market structure 1. Competitive market (chapter
More informationEdexcel (B) Economics A-level
Edexcel (B) Economics A-level Theme 4: Making Markets Work 4.1 Competition and Market Power 4.1.1 Spectrum of competition Notes Characteristics of monopoly, oligopoly, imperfect and perfect competition
More informationA monopoly market structure is one characterized by a single seller of a unique product with no close substitutes.
These notes provided by Laura Lamb are intended to complement class lectures. The notes are based on chapter 12 of Microeconomics and Behaviour 2 nd Canadian Edition by Frank and Parker (2004). Chapter
More informationECON 4100: Industrial Organization. Lecture 1- Introduction and a review of perfect competition versus monopoly
ECON 4100: Industrial Organization Lecture 1- Introduction and a review of perfect competition versus monopoly 1 Introductory Remarks Overview study of firms and markets strategic competition Different
More informationOligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry s output.
Topic 8 Chapter 13 Oligopoly and Monopolistic Competition Econ 203 Topic 8 page 1 Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry
More informationChapter 14 TRADITIONAL MODELS OF IMPERFECT COMPETITION. Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved.
Chapter 14 TRADITIONAL MODELS OF IMPERFECT COMPETITION Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved. 1 Pricing Under Homogeneous Oligopoly We will assume that the
More informationLoss Leading as an Exploitative Practice
Loss Leading as an Exploitative Practice Patrick Rey Toulouse School of Economics based on joint work with Zhijun Chen (University of Auckland and Ecole Polytechnique) Bergen, September 2011 atrick Rey
More informationAQA Economics A-level
AQA Economics A-level Microeconomics Topic 5: Perfect Competition, Imperfectly Competitive Markets and Monopoly 5.5 Oligopoly Notes Characteristics of an oligopoly: High barriers to entry and exit There
More informationDRAFT. Mike Walker A brief survey of the economic thinking on bundling and tying
DRAFT BUNDLING: ARE US AND EUROPEAN VIEWS CONVERGING? Mike Walker 1 I argue below that the US and EU approaches to bundling and tying are probably quite similar, but that neither is actually conducive
More informationINTERMEDIATE MICROECONOMICS LECTURE 13 - MONOPOLISTIC COMPETITION AND OLIGOPOLY. Monopolistic Competition
13-1 INTERMEDIATE MICROECONOMICS LECTURE 13 - MONOPOLISTIC COMPETITION AND OLIGOPOLY Monopolistic Competition Pure monopoly and perfect competition are rare in the real world. Most real-world industries
More informationEcon8500_Game_Theory. Name: Class: Date: Multiple Choice Identify the choice that best completes the statement or answers the question.
Name: Class: Date: ID: A Econ8500_Game_Theory Multiple Choice Identify the choice that best completes the statement or answers the question. 1. A common assumption about the player in a game is that a.
More informationChapter 12. Monopoly. Chapter Outline. Key Ideas. Key Ideas. Introducing a New Market Structure. Evidence-Based Economics Example 11/25/2016
Chapter 12 Modified by Chapter Outline 1. Introducing a New Market Structure 2. 3. 4. Choosing the Optimal Quantity and Price 5. The "Broken" Invisible Hand: The Cost of 6. 7. Government Policy toward
More informationECON 115. Industrial Organization
ECON 115 Industrial Organization 1. Review of the First Midterm 2. Review of Price Discrimination, Product Differentiation & Bundling 3. Introduction to Oligopolies 4. Introduction to Game Theory and Cournot
More informationEconomics. Monopolistic Competition. Firms in Competitive Markets. Monopolistic Competition 11/22/2012. The Big Picture. Perfect Competition
16 Modified by Joseph Tao-yi Wang Ron Cronovich The Big Picture Chapter 13: The cost of production Now, we will look at firm s revenue But revenue depends on market structure 1. Competitive market (chapter
More informationMARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 3 rd Edition
Chapter 17 MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 3 rd Edition Chapter Summary Now that you understand the model of a perfectly competitive market, this chapter complicates
More informationChapter 15 Oligopoly
Goldwasser AP Microeconomics Chapter 15 Oligopoly BEFORE YOU READ THE CHAPTER Summary This chapter explores oligopoly, a market structure characterized by a few firms producing a product that mayor may
More informationTHE RESULTS OF COMPETITION: WINNERS AND LOSERS
Firms compete with the other firms within their competitive neighborhood, which might include both firms operating in the same industry along with firms operating in other, but related, industries. However,
More informationMonopoly. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University
15 Monopoly PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 Market power Why Monopolies Arise Alters the relationship between a firm s costs and the selling price Monopoly
More informationEco 300 Intermediate Micro
Eco 300 Intermediate Micro Instructor: Amalia Jerison Office Hours: T 12:00-1:00, Th 12:00-1:00, and by appointment BA 127A, aj4575@albany.edu A. Jerison (BA 127A) Eco 300 Spring 2010 1 / 61 Monopoly Market
More informationChapter 24. Introduction. Learning Objectives. Monopoly
Chapter 24 Monopoly Introduction States have various licensing requirements for individuals who wish to practice specific professions. For example, Ohio requires a $100 license fee to become a kick boxer.
More informationfull file at
Chapter 10 Monopolistic Competition and Oligopoly CHAPTER SUMMARY The characteristics of the monopolistically competitive and the oligopoly are introduced and compared with the other market structures.
More informationVertical Restraints, Exclusive Dealing, and Competition on the Merits
Vertical Restraints, Exclusive Dealing, and Competition on the Merits Global Antitrust Institute Hawaii November 2015 October 30, 2012 1 The Economics of Vertical Restraints 2 Vertical Restraints Definition:
More informationIntroduction to Monopolistic Competition
Printed Page 659 Introduction to Monopolistic Competition How prices and profits are determined in monopolistic competition, both in the short run and in the long run How monopolistic competition can lead
More informationEdexcel Economics A-level
Edexcel Economics A-level Unit 3: Business Behaviour Topic 3: Market Structures and Contestability 3.4 Monopoly Notes Characteristics of monopoly: Monopolies can be characterised by: o Profit maximisation.
More informationEconS Monopoly - Part 1
EconS 305 - Monopoly - Part 1 Eric Dunaway Washington State University eric.dunaway@wsu.edu October 23, 2015 Eric Dunaway (WSU) EconS 305 - Lecture 23 October 23, 2015 1 / 50 Introduction For the rest
More informationcompetition policy r Palgrave Publishers Ltd 1
Definition Competition policy, also known as antitrust policy in the United States, is a body of legislated law designed to promote and maintain competition in markets. Abstract This article discusses
More informationOligopoly and Monopolistic Competition
Oligopoly and Monopolistic Competition Introduction Managerial Problem Airbus and Boeing are the only two manufacturers of large commercial aircrafts. If only one receives a government subsidy, how can
More informationIncentives for Market Research: Preemption and Learning Effects
Incentives for Market Research: Preemption and Learning Effects Peter M. Kort, Pauli Murto, and Grzegorz Pawlina April 25, 2005 Preliminary and incomplete. Please do not quote. Abstract This paper is about
More informationCIE Economics A-level
CIE Economics A-level Topic 2: Price System and the Microeconomy f) Differing objectives of a firm Notes Traditional profit maximising objective of a firm Profit is an important objective of most firms.
More informationEconS Competitive Markets Part 1
EconS 305 - Competitive Markets Part 1 Eric Dunaway Washington State University eric.dunaway@wsu.edu October 11, 2015 Eric Dunaway (WSU) EconS 305 - Lecture 19 October 11, 2015 1 / 48 Introduction Today,
More informationOligopoly C H A P T E R C H E C K L I S T. When you have completed your study of this chapter, you will be able to
Oligopoly CHAPTER17 C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to 1 Describe and identify oligopoly and explain how it arises. 2 Explain the dilemma
More informationECO 610: Lecture 9. Oligopoly, Rivalry, and Strategic Behavior
ECO 610: Lecture 9 Oligopoly, Rivalry, and Strategic Behavior Oligopoly, Rivalry, and Strategic Behavior: Outline Porter s Five Forces Model: when does internal rivalry get interesting? Oligopoly: definition
More informationIntroduction. Learning Objectives. Learning Objectives. Economics Today Twelfth Edition. Chapter 24 Monopoly
Roger LeRoy Miller Economics Today Twelfth Edition Chapter 24 Monopoly Introduction The cement market in Mexico is dominated by a single company that accounts for more than 70 percent of all sales. Why
More informationLecture 12. Monopoly
Lecture 12 Monopoly By the end of this lecture, you should understand: why some markets have only one seller how a monopoly determines the quantity to produce and the price to charge how the monopoly s
More informationLecture 11 Imperfect Competition
Lecture 11 Imperfect Competition Business 5017 Managerial Economics Kam Yu Fall 2013 Outline 1 Introduction 2 Monopolistic Competition 3 Oligopoly Modelling Reality The Stackelberg Leadership Model Collusion
More informationBest-response functions, best-response curves. Strategic substitutes, strategic complements. Quantity competition, price competition
Strategic Competition: An overview The economics of industry studying activities within an industry. Basic concepts from game theory Competition in the short run Best-response functions, best-response
More informationECON 115. Industrial Organization
ECON 115 Industrial Organization 1. Linear (3rd Degree) Price Discrimination First Hour QUIZ Second Hour Introduction to Price Discrimination Third-degree price discrimination Two Rules Examples of price
More informationIntroduction. Learning Objectives. Chapter 25. Monopoly
Chapter 25 Monopoly Introduction Economists have found that when nations governments proclaim that a single church denomination represents the official state religion, the church loses attendance equal
More informationDynamic Games and First and Second Movers
9781405176323_4_011.qxd 10/19/07 8:11 PM Page 245 11 Dynamic Games and First and Second Movers Since its introduction in the 1970s, Boeing s 416-seat 747 jet aircraft has dominated the jumbo jet market.
More informationDepartment of Economics Spring Economics 121: MIDTERM EXAM ANSWERS
Department of Economics Spring 004 University of California Woroch/Lopez/Tovar Economics 11: MIDTERM EXAM ANSWERS GENERAL INSTRUCTIONS: Write your name on the front cover of your blue book. The exam has
More informationManagerial Economics Prof. Trupti Mishra S. J. M School of Management Indian Institute of Technology, Bombay. Lecture - 27 Monopoly
Managerial Economics Prof. Trupti Mishra S. J. M School of Management Indian Institute of Technology, Bombay Lecture - 27 Monopoly So, we will continue our discussion on theory of perfect competition.
More information14.1 Comparison of Market Structures
14.1 Comparison of Structures Chapter 14 Oligopoly 14-2 14.2 Cartels Cartel in Korea Oligopolistic firms have an incentive to collude, coordinate setting their prices or quantities, so as to increase their
More informationEconS Oligopoly - Part 1
EconS 305 - Oligopoly - Part 1 Eric Dunaway Washington State University eric.dunaway@wsu.edu November 19, 2015 Eric Dunaway (WSU) EconS 305 - Lecture 31 November 19, 2015 1 / 32 Introduction We are now
More informationOverview 11/6/2014. Herfindahl Hirshman index of market concentration ...
Overview Market Structure and Competition Chapter 3 explores different types of market structures. Markets differ on two important dimensions: the number of firms, and the nature of product differentiation.
More informationCh. 9 LECTURE NOTES 9-1
Ch. 9 LECTURE NOTES I. Four market models will be addressed in Chapters 9-11; characteristics of the models are summarized in Table 9.1. A. Pure competition entails a large number of firms, standardized
More informationOligopoly. Economics. Measuring Market Concentration. Oligopoly. In this chapter, look for the answers to these questions CHAPTER 17
Seventh Edition rinciples of Economics N. Gregory Mankiw Wojciech Gerson (1831-1901) In this chapter, look for the answers to these questions What outcomes are possible under oligopoly? Why is it difficult
More informationPerfect Competition. Chapter 7 Section Main Menu
Perfect Competition What conditions must exist for perfect competition? What are barriers to entry and how do they affect the marketplace? What are prices and output like in a perfectly competitive market?
More informationFINAL EXAMINATION VERSION A
Drake University, Spring 2015 William M. Boal Signature: Printed name: FINAL EXAMINATION VERSION A INSTRUCTIONS: This exam is closed-book, closed-notes. Simple calculators are permitted, but graphing calculators
More informationBasic Microeconomics. Basic Microeconomics 1
Basic Microeconomics Basic Microeconomics 1 Efficiency and Market Performance Contrast two polar cases perfect competition monopoly What is efficiency? no reallocation of the available resources makes
More informationChapter 10 Lecture Notes
Chapter 10 Lecture Notes I. Pure Monopoly: An Introduction A. Definition: Pure monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes. B. There are
More informationReading Essentials and Study Guide
Lesson 1 Market Structures ESSENTIAL QUESTION How do varying market structures impact prices in a market economy? Reading HELPDESK Academic Vocabulary theoretical existing only in theory; not practical
More informationIndustrial Organisation ECON309
Industrial Organisation ECON309 Introduction Industrial Organisation is the study of how firms behave in markets. Industrial organisation takes a strategic view of how firms interact and it deals with
More information14.27 Economics and E-Commerce Fall 14. Lecture 2 - Review
14.27 Economics and E-Commerce Fall 14 Lecture 2 - Review Prof. Sara Ellison MIT OpenCourseWare 4 basic things I want to get across in this review: Monopoly pricing function of demand, elasticity, & marginal
More informationIndustrial Organization 07
Industrial Organization 07 Strategic Behaviors, Entry, Exit Marc Bourreau Telecom ParisTech Marc Bourreau (TPT) Lecture 07: Strategic behaviors, entry, exit 1 / 56 Outline 1 Notion of entry barrier Legal
More informationMonopolistic Competition
16 Monopolistic Competition PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 Monopolistic Competition Imperfect competition Between perfect competition and monopoly Oligopoly
More informationOn the Art 82 enforcement priorities Effects on consumer welfare
Competition Day Brno, May 13, 2009 On the Art 82 enforcement priorities Effects on consumer welfare Damien Neven, Chief Economist * DG COMP, European Commission *The views expressed are those of the authors
More informationMonopolistic Competition
CHAPTER 16 Monopolistic Competition Goals in this chapter you will Examine market structures that lie between monopoly and competition Analyze competition among firms that sell differentiated products
More informationEdexcel (A) Economics A-level
Edexcel (A) Economics A-level Theme 3: Business Behaviour & the Labour Market 3.4 Market Structures 3.4.4 Oligopoly Notes Characteristics of an oligopoly: High barriers to entry and exit There are high
More informationEconomics of Industrial Organization. Lecture 12: Mergers
Economics of Industrial Organization Lecture 12: Mergers Mergers Thus far we have talked about industry dynamics in terms of firms entering and exiting the industry, and have assumed that all these firms
More informationBS2243 Lecture 9 Advertisement. Spring 2012 (Dr. Sumon Bhaumik)
BS2243 Lecture 9 Advertisement Spring 2012 (Dr. Sumon Bhaumik) Why advertise? Building brands Creating markets for new products (scope economies) Price competition / Price protection Barrier to entry Product
More informationLesson 3-2 Profit Maximization
Lesson 3-2 Profit Maximization Standard 3b: Students will explain the 5 dimensions of market structure and identify how perfect competition, monopoly, monopolistic competition, and oligopoly are characterized
More informationI. Introduction to Monopolies
University of Pacific-Economics 53 Lecture Notes #13 I. Introduction to Monopolies As we saw in the last lecture, an industry in which individual firms have some control over setting the price of their
More informationECON 115. Industrial Organization
ECON 115 Industrial Organization 1. Review the Quiz 2. Reprise 3 rd Degree Price Discrimination 3. A problem and its implications 4. Introduction to non-linear (1 st & 2 nd Degree) Price Discrimination
More informationIgor Baranov Graduate School of Management St. Petersburg State University Fall 2008
Industrial Organization Igor Baranov Graduate School of Management St. Petersburg State University Fall 2008 1 Introduction WHAT is Industrial Organization Study of How firms behave in markets Whole range
More informationUnit 4: Imperfect Competition
Unit 4: Imperfect Competition 1 Monopoly 2 Characteristics of Monopolies 3 5 Characteristics of a Monopoly 1. Single Seller One Firm controls the vast majority of a market The Firm IS the Industry 2. Unique
More informationEcon 510. Monopolization I
con 510 Monopolization 1 xclusionary practices practices carried out by a dominant firm with the aim of deterring entry or inducing exit in the same market or in related markets. Common time pattern: nitial
More informationUC Berkeley Haas School of Business Economic Analysis for Business Decisions (EWMBA 201A)
UC Berkeley Haas School of Business Economic Analysis for Business Decisions (EWMBA 201A) Monopoly and oligopoly (PR 11.1-11.4 and 12.2-12.5) Advanced pricing with market power and equilibrium oligopolistic
More informationEdexcel (B) Economics A-level
Edexcel (B) Economics A-level Theme 4: Making Markets Work 4.2 Market Power and Market Failure 4.2.1 Market failure Notes Significance of market power: o Cartels, collusion, restrictive practices and tacit
More informationIn each case: fixed firms in the market, then entry/exit
Main structure Firms are price-takers (Perfect competition) Firms have market power (Imperfect competition) (Sessions 1 6) (Firms decisions &equilibrium) Firms decisions Equilibrium (Sessions 7 11) (Sessions
More information