Monopolis,c compe,,on vs perfect. compe,,on. Two key differences: in monopolis,c compe,,on, there is. Excess capacity

Transcription

1 Grading informa,on Second midterm average: 73 % compared to low 60 s for first midterm Grade calcula,on for final grade Midterms the becer grade counts 25% and the worse 15% Homework drop the lowest 2 homework grades Final exam counts for 40% of final grade

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3 Monopolis,c compe,,on vs perfect Two key differences: in monopolis,c compe,,on, there is compe,,on Excess capacity A markup of price over marginal cost

4 Core concepts of monopolis,c compe,,on Excess capacity: when quan,ty produced is less that the quan,ty at which ACT is a minimum. Efficient scale: quan,ty of output at which ATC is a minimum. Markup: the amount by which price exceeds marginal cost.

5 Output and price decisions: long run

6 Output and price decisions: long run 1. The efficient scale is 100 pairs of Tommy jeans a day. 2. The firm produces less than the efficient scale and has excess capacity. 3. Price exceeds 4. marginal cost by the amount of 5. the markup. 6. Deadweight loss arise.

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8 Problems with monopolis,c compe,,on in the long run Deadweight Loss Because P > MC, monopolis,c compe,,on creates deadweight loss Higher than minimum ATC Lower output and higher price than compeffve But, economic profit = 0

9 Innova,on and product development Wherever economic profits are earned, imitators emerge. To maintain economic profit, a firm must seek out new products. Cost Versus Benefit of Product InnovaFon The firm must balance the cost and benefit at the margin.

10 Efficiency and product innova,on Value of innova,on to the consumer: MB MB = MR = MC in equilibrium Here, because P > MC, product improvement is not pushed to its efficient level.

11 Adver,sing costs and total costs Adver,sing expenditures increase the costs of a monopolis,cally compe,,ve firm above those of a perfectly compe,,ve firm or a monopoly. Adver,sing costs are fixed costs. Adver,sing costs per unit decrease as produc,on increases.

12 Effect of adver,sing cost on total cost 1. When adver,sing costs are added to 2. The average total cost of produc,on, 3. Average total cost increases by a greater amount at small outputs than at large outputs.

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14 Effect of adver,sing cost on total cost 4. If adver,sing enables sales to increase from 25 pairs of jeans a day to 100 pairs a day, the average total cost falls from $60 a pair to $40 a pair.

15 Adver,sing (selling) costs and demand Adver,sing and other selling efforts change the demand for a firm s product. The effects are complex: A firm s own adver,sing increases the demand for its product. Adver,sing by all firms might decrease the demand for any one firm s product and might make demand more elas,c. The price and markup might fall.

16 No adver,sing graphically

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18 Effects of adver,sing graphically

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20 Summary of effects of adver,sing 1. With adver,sing, average total cost increases. 2. If adver,sing enables more firms to survive, new firms might be encouraged to enter the market. 3. Then demand for any one firm s product decreases. 4. If all firms adver,se, the demand for any one firm s product becomes more elas,c.

21 Why adver,se? Signaling quality Some adver,sing is very costly and has almost no informa,on content about the item being adver,sed. Such adver,sing is used to signal high quality. Signaling works because it is profitable to signal high quality and deliver it but unprofitable to signal a high quality product and not deliver it.

22 Brand names Also used to provide informa,on about the quality of a product Costly to establish a widely recognized brand name Signal high quality Work because it is unprofitable to incur the cost of crea,ng a brand name and then deliver a low quality product

23 Efficiency of adver,sing and brand names Adver,sing and brand name can be efficient if the marginal cost of the informa,on equals its marginal benefit. The final verdict on the efficiency of monopolis,c compe,,on is ambiguous: there are benefits (consumer choice of differen,ated products) and costs (deadweight loss and higher than minimum ATC)

24 Introduc,on to oligopoly Core concept - interdependence of firm decisions Structure only a few firms Interdependence if one firm lowers its price, others must do the same to keep its customers Asymmetry but if one firm raises price, others won t and that firm loses customers