Topics to be Discussed Monopolistic Competition Oligopoly Price Competition Competition Versus Collusion: The Prisoners Dilemma Chapter 12 Slide 2

Chapter 12 Monopolistic Competition and Oligopoly

Topics to be Discussed Monopolistic Competition Oligopoly Price Competition Competition Versus Collusion: The Prisoners Dilemma Chapter 12 Slide 2

Topics to be Discussed Implications of the Prisoners Dilemma for Oligopolistic Pricing Cartels Chapter 12 Slide 3

Monopolistic Competition Characteristics 1) Many firms 2) Free entry and exit 3) Differentiated product Chapter 12 Slide 4

Monopolistic Competition The amount of monopoly power depends on the degree of differentiation. Examples of this very common market structure include: Toothpaste Soap Cold remedies Chapter 12 Slide 5

Monopolistic Competition Toothpaste Crest and monopoly power uprocter & Gamble is the sole producer of Crest uconsumers can have a preference for Crest---taste, reputation, decay preventing efficacy uthe greater the preference (differentiation) the higher the price. Chapter 12 Slide 6

Monopolistic Competition Question Does Procter & Gamble have much monopoly power in the market for Crest? Chapter 12 Slide 7

Monopolistic Competition The Makings of Monopolistic Competition Two important characteristics udifferentiated but highly substitutable products ufree entry and exit Chapter 12 Slide 8

A Monopolistically Competitive Firm in the Short and Long Run 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net $/Q Short Run MC $/Q Long Run MC AC AC P SR P LR D SR D LR MR SR MR LR Q SR Quantity Q LR Quantity

A Monopolistically Competitive Firm in the Short and Long Run 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Observations (short-run) Downward sloping demand--differentiated product Demand is relatively elastic--good substitutes MR < P Profits are maximized when MR = MC This firm is making economic profits Chapter 12 Slide 10

A Monopolistically Competitive Firm in the Short and Long Run 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Observations (long-run) Profits will attract new firms to the industry (no barriers to entry) The old firm s demand will decrease to D LR Firm s output and price will fall Industry output will rise No economic profit (P = AC) P > MC -- some monopoly power Chapter 12 Slide 11

Comparison of Monopolistically Competitive Equilibrium and Perfectly Competitive Equilibrium 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Perfect Competition Monopolistic Competition $/Q $/Q MC AC Deadweight loss MC AC P P C D = MR D LR MR LR Q C Quantity Q MC Quantity

Monopolistic Competition Monopolistic Competition and Economic Efficiency The monopoly power (differentiation) yields a higher price than perfect competition. If price was lowered to the point where MC = D, consumer surplus would increase by the yellow triangle. Chapter 12 Slide 13

Monopolistic Competition Monopolistic Competition and Economic Efficiency With no economic profits in the long run, the firm is still not producing at minimum AC and excess capacity exists. Chapter 12 Slide 14

Monopolistic Competition Questions 1) If the market became competitive, what would happen to output and price? 2) Should monopolistic competition be regulated? Chapter 12 Slide 15

Monopolistic Competition Questions 3) What is the degree of monopoly power? 4) What is the benefit of product diversity? Chapter 12 Slide 16

Monopolistic Competition in the Market for Colas and Coffee 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net The markets for soft drinks and coffee illustrate the characteristics of monopolistic competition. Chapter 12 Slide 17

Elasticities of Demand for Brands of Colas and Coffee 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Brand Elasticity of Demand Colas: Royal Crown -2.4 Coke -5.2 to -5.7 Ground Coffee: Hills Brothers -7.1 Maxwell House -8.9 Chase and Sanborn -5.6 Chapter 12 Slide 18

Elasticities of Demand for Brands of Colas and Coffee 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Questions 1) Why is the demand for Royal Crown more price inelastic than for Coke? 2) Is there much monopoly power in these two markets? 3) Define the relationship between elasticity and monopoly power. Chapter 12 Slide 19

Oligopoly Characteristics Small number of firms Product differentiation may or may not exist Barriers to entry Chapter 12 Slide 20

Oligopoly Examples Automobiles Steel Aluminum Petrochemicals Electrical equipment Computers Chapter 12 Slide 21

Oligopoly The barriers to entry are: Natural uscale economies upatents u Technology uname recognition Chapter 12 Slide 22

Oligopoly The barriers to entry are: Strategic action uflooding the market ucontrolling an essential input Chapter 12 Slide 23

Oligopoly Management Challenges Strategic actions Rival behavior Question What are the possible rival responses to a 10% price cut by Ford? Chapter 12 Slide 24

Oligopoly Equilibrium in an Oligopolistic Market In perfect competition, monopoly, and monopolistic competition the producers did not have to consider a rival s response when choosing output and price. In oligopoly the producers must consider the response of competitors when choosing output and price. Chapter 12 Slide 25

Oligopoly Equilibrium in an Oligopolistic Market Defining Equilibrium ufirms doing the best they can and have no incentive to change their output or price uall firms assume competitors are taking rival decisions into account. Chapter 12 Slide 26

Oligopoly Nash Equilibrium Each firm is doing the best it can given what its competitors are doing. Chapter 12 Slide 27

Oligopoly The Cournot Model Duopoly utwo firms competing with each other uhomogenous good uthe output of the other firm is assumed to be fixed Chapter 12 Slide 28

Firm 1 s Output Decision P 1 D 1 (0) If Firm 1 thinks Firm 2 will produce nothing, its demand curve, D 1 (0), is the market demand curve. If Firm 1 thinks Firm 2 will produce 50 units, its demand curve is shifted to the left by this amount. D 1 (75) MR 1 (0) If Firm 1 thinks Firm 2 will produce 75 units, its demand curve is shifted to the left by this amount. MR 1 (75) MC 1 MR 1 (50) D 1 (50) What is the output of Firm 1 if Firm 2 produces 100 units? 12.5 25 50 Q 1 Chapter 12 Slide 29

Oligopoly The Reaction Curve A firm s profit-maximizing output is a decreasing schedule of the expected output of Firm 2. Chapter 12 Slide 30

Reaction Curves and Cournot Equilibrium 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Q 1 100 75 Firm 1 s reaction curve shows how much it will produce as a function of how much it thinks Firm 2 will produce. The x s correspond to the previous model. Firm 2 s Reaction Curve Q*2(Q 2 ) Firm 2 s reaction curve shows how much it will produce as a function of how much it thinks Firm 1 will produce. 50 x 25 Firm 1 s Reaction Curve Q* 1 (Q 2 ) x Cournot Equilibrium x In Cournot equilibrium, each firm correctly assumes how much its competitors will produce and thereby maximize its own profits. 25 50 75 100 x Q 2 Chapter 12 Slide 31

Oligopoly Questions 1) If the firms are not producing at the Cournot equilibrium, will they adjust until the Cournot equilibrium is reached? 2) When is it rational to assume that its competitor s output is fixed? Chapter 12 Slide 32

Oligopoly The Linear Demand Curve An Example of the Cournot Equilibrium Duopoly umarket demand is P = 30 - Q where Q = Q 1 + Q 2 umc 1 = MC 2 = 0 Chapter 12 Slide 33

Oligopoly The Linear Demand Curve An Example of the Cournot Equilibrium Firm 1 s Reaction Curve Total Revenue, R 1 PQ1 (30 Q) 30Q 30Q 1 1 Q Q 1 ( Q 1 2 1 Q 2 2 Q Q ) Q 1 1 Chapter 12 Slide 34

Oligopoly The Linear Demand Curve An Example of the Cournot Equilibrium MR MR Q Q 1 2 1 1 R 1 0 15 1 15 1 Q MC 2Q 1 2 2Q 1 1 30 2Q Firm 1' s Reaction Curve Firm 2' s Reaction Curve 1 Q 2 Chapter 12 Slide 35

Oligopoly The Linear Demand Curve An Example of the Cournot Equilibrium Cournot Equilibrium: 15 1 2(15 1 Q Q 1 Q 20 P 30 Q 10 2 2Q 1 ) 10 Q Q 1 2 Chapter 12 Slide 36

Duopoly Example Q 1 30 Firm 2 s Reaction Curve The demand curve is P = 30 - Q and both firms have 0 marginal cost. 15 Cournot Equilibrium 10 Firm 1 s Reaction Curve 10 15 30 Q 2 Chapter 12 Slide 37

Oligopoly Profit Maximization with Collusion R PQ (30 Q) Q 30Q Q 2 MR R Q 30 2Q MR 0 when Q 15 and MR MC Chapter 12 Slide 38

Oligopoly Profit Maximization with Collusion Contract Curve Q 1 + Q 2 = 15 ushows all pairs of output Q 1 and Q 2 that maximizes total profits Q 1 = Q 2 = 7.5 uless output and higher profits than the Cournot equilibrium Chapter 12 Slide 39

Duopoly Example Q 1 30 Firm 2 s Reaction Curve For the firm, collusion is the best outcome followed by the Cournot Equilibrium and then the competitive equilibrium 15 Competitive Equilibrium (P = MC; Profit = 0) Cournot Equilibrium 10 Collusive Equilibrium 7.5 Collusion Curve 7.5 10 15 30 Firm 1 s Reaction Curve Q 2 Chapter 12 Slide 40

First Mover Advantage-- The Stackelberg Model 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Assumptions One firm can set output first MC = 0 Market demand is P = 30 - Q where Q = total output Firm 1 sets output first and Firm 2 then makes an output decision Chapter 12 Slide 41

First Mover Advantage-- The Stackelberg Model 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Firm 1 Must consider the reaction of Firm 2 Firm 2 Takes Firm 1 s output as fixed and therefore determines output with the Cournot reaction curve: Q 2 = 15-1/2Q 1 Chapter 12 Slide 42

First Mover Advantage-- The Stackelberg Model 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Firm 1 Choose Q 1 so that: MR MC, MC 0 therefore MR 0 R 1 PQ1 30 Q 1 - Q 2 1 - Q Q 2 1 Chapter 12 Slide 43

First Mover Advantage-- The Stackelberg Model 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Substituting Firm 2 s Reaction Curve for Q 2 : R 1 30Q 1 15Q 1 Q 1 2 1 Q 2Q 2 1 1 (15 1 2Q 1 ) MR MR 1 R 1 0 : Q 1 Q 1 15 Q 15 and Q 2 1 7.5 Chapter 12 Slide 44

First Mover Advantage-- The Stackelberg Model 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Conclusion Firm 1 s output is twice as large as firm 2 s Firm 1 s profit is twice as large as firm 2 s Questions Why is it more profitable to be the first mover? Which model (Cournot or Shackelberg) is more appropriate? Chapter 12 Slide 45

Price Competition Competition in an oligopolistic industry may occur with price instead of output. The Bertrand Model is used to illustrate price competition in an oligopolistic industry with homogenous goods. Chapter 12 Slide 46

Price Competition Bertrand Model Assumptions Homogenous good Market demand is P = 30 - Q where Q = Q 1 + Q 2 MC = $3 for both firms and MC 1 = MC 2 = $3 Chapter 12 Slide 47

Price Competition Bertrand Model Assumptions The Cournot equilibrium: u P for $12 both firms $81 Assume the firms compete with price, not quantity. Chapter 12 Slide 48

Price Competition Bertrand Model How will consumers respond to a price differential? (Hint: Consider homogeneity) The Nash equilibrium: up = MC; P 1 = P 2 = $3 uq = 27; Q 1 & Q 2 = 13.5 u 0 Chapter 12 Slide 49

Price Competition Bertrand Model Why not charge a higher price to raise profits? How does the Bertrand outcome compare to the Cournot outcome? The Bertrand model demonstrates the importance of the strategic variable (price versus output). Chapter 12 Slide 50

Price Competition Bertrand Model Criticisms When firms produce a homogenous good, it is more natural to compete by setting quantities rather than prices. Even if the firms do set prices and choose the same price, what share of total sales will go to each one? uit may not be equally divided. Chapter 12 Slide 51

Price Competition Price Competition with Differentiated Products Market shares are now determined not just by prices, but by differences in the design, performance, and durability of each firm s product. Chapter 12 Slide 52

Price Competition Differentiated Products Assumptions Duopoly FC = $20 VC = 0 Chapter 12 Slide 53

Price Competition Differentiated Products Assumptions Firm 1 s demand is Q 1 = 12-2P 1 + P 2 Firm 2 s demand is Q 2 = 12-2P 1 + P 1 up 1 and P 2 are prices firms 1 and 2 charge respectively uq 1 and Q 2 are the resulting quantities they sell Chapter 12 Slide 54

Price Competition Differentiated Products Determining Prices and Output Set prices at the same time Firm1: 1 PQ 1 P 1 1 (12 12P 1 $20 2P 2 1-2P 1 P 1 2 PP ) 2 20 20 Chapter 12 Slide 55

Price Competition Differentiated Products Determining Prices and Output Firm 1: If P 2 is fixed: Firm 1' s profit maximizing P 1 P 2 1 P 1 12 3 1 4P 2 3 1 4 P 1 4P Firm 1' s reaction curve Firm 2' s reaction curve 1 P 2 price 0 Chapter 12 Slide 56

Nash Equilibrium in Prices P 1 Firm 2 s Reaction Curve Collusive Equilibrium $6 $4 Firm 1 s Reaction Curve Nash Equilibrium $4 $6 P 2 Chapter 12 Slide 57

Nash Equilibrium in Prices Does the Stackelberg model prediction for first mover hold when price is the variable instead of quantity? Hint: Would you want to set price first? Chapter 12 Slide 58

A Pricing Problem for Procter & Gamble 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Differentiated Products Scenario 1) Procter & Gamble, Kao Soap, Ltd., and Unilever, Ltd were entering the market for Gypsy Moth Tape. 2) All three would be choosing their prices at the same time. Chapter 12 Slide 59

A Pricing Problem for Procter & Gamble 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Differentiated Products Scenario 3) Procter & Gamble had to consider competitors prices when setting their price. 4) FC = $480,000/month and VC = $1/unit for all firms Chapter 12 Slide 60

A Pricing Problem for Procter & Gamble 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Differentiated Products Scenario 5) P&G s demand curve was: Q = 3,375P -3.5 (P U ).25 (P K ).25 uwhere P, P U, P K are P&G s, Unilever s, and Kao s prices respectively Chapter 12 Slide 61

A Pricing Problem for Procter & Gamble 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Differentiated Products Problem What price should P&G choose and what is the expected profit? Chapter 12 Slide 62

P&G s Profit (in thousands of $ per month) P&G s Competitor s (Equal) Prices ($) Price ($)1.10 1.20 1.30 1.40 1.50 1.60 1.70 1.80 1.10-226 -215-204 -194-183 -174-165 -155 1.20-106 -89-73 -58-43 -28-15 -2 1.30-56 -37-19 2 15 31 47 62 1.40-44 -25-6 12 29 46 62 78 1.50-52 -32-15 3 20 36 52 68 1.60-70 -51-34 -18-1 14 30 44 1.70-93 -76-59 -44-28 -13 1 15 1.80-118 -102-87 -72-57 -44-30 -17

A Pricing Problem for Procter & Gamble 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net What Do You Think? 1) Why would each firm choose a price of $1.40? Hint: Think Nash Equilibrium 2) What is the profit maximizing price with collusion? Chapter 12 Slide 64

Competition Versus Collusion: The Prisoners Dilemma 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Why wouldn t each firm set the collusion price independently and earn the higher profits that occur with explicit collusion? Chapter 12 Slide 65

Competition Versus Collusion: The Prisoners Dilemma 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Assume: FC $20 andvc $0 Firm1's demand : Q 12 Firm 2's demand : Q 12 Nash Equilibrium : P Collusion : P 2P 1 2P 2 $4 $6 P 2 P 1 $12 $16 Chapter 12 Slide 66

Competition Versus Collusion: The Prisoners Dilemma 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Possible Pricing Outcomes: Firm1: P $6 Firm 2 : P $6 $16 P $6 P $4 2 P2 Q2 20 (4) 12 (2)(4) 6 20 $20 1 PQ 1 1 20 (6) 12 (2)(6) 4 20 $ 4 Chapter 12 Slide 67

Payoff Matrix for Pricing Game Firm 2 Charge $4 Charge $6 Charge $4 $12, $12 $20, $4 Firm 1 Charge $6 $4, $20 $16, $16 Chapter 12 Slide 68

Competition Versus Collusion: The Prisoners Dilemma 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net These two firms are playing a noncooperative game. Each firm independently does the best it can taking its competitor into account. Question Why will both firms both choose $4 when $6 will yield higher profits? Chapter 12 Slide 69

Competition Versus Collusion: The Prisoners Dilemma 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net An example in game theory, called the Prisoners Dilemma, illustrates the problem oligopolistic firms face. Chapter 12 Slide 70

Competition Versus Collusion: The Prisoners Dilemma 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Scenario Two prisoners have been accused of collaborating in a crime. They are in separate jail cells and cannot communicate. Each has been asked to confess to the crime. Chapter 12 Slide 71

Payoff Matrix for Prisoners Dilemma Prisoner B Confess Don t confess Confess Prisoner A -5, -5-1, -10 Would you choose to confess? Don t confess -10, -1-2, -2 Chapter 12 Slide 72

Payoff Matrix for the P & G Prisoners Dilemma 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Conclusions: Oligipolistic Markets 1) Collusion will lead to greater profits 2) Explicit and implicit collusion is possible 3) Once collusion exists, the profit motive to break and lower price is significant Chapter 12 Slide 73

Payoff Matrix for the P&G Pricing Problem 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Unilever and Kao Charge $1.40 Charge $1.50 Charge $1.40 $12, $12 $29, $11 P&G What price should P & G choose? Charge $1.50 $3, $21 $20, $20 Chapter 12 Slide 74

Implications of the Prisoners Dilemma for Oligipolistic Pricing 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Observations of Oligopoly Behavior 1) In some oligopoly markets, pricing behavior in time can create a predictable pricing environment and implied collusion may occur. Chapter 12 Slide 75

Implications of the Prisoners Dilemma for Oligipolistic Pricing 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Observations of Oligopoly Behavior 2) In other oligopoly markets, the firms are very aggressive and collusion is not possible. ufirms are reluctant to change price because of the likely response of their competitors. uin this case prices tend to be relatively rigid. Chapter 12 Slide 76

The Kinked Demand Curve $/Q If the producer raises price the competitors will not and the demand will be elastic. If the producer lowers price the competitors will follow and the demand will be inelastic. D MR Quantity Chapter 12 Slide 77

The Kinked Demand Curve $/Q So long as marginal cost is in the vertical region of the marginal revenue curve, price and output will remain constant. MC P* MC D Q* Quantity Chapter 12 Slide 78 MR

Implications of the Prisoners Dilemma for Oligopolistic Pricing 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Price Signaling & Price Leadership Price Signaling Implicit collusion in which a firm announces a price increase in the hope that other firms will follow suit Chapter 12 Slide 79

Implications of the Prisoners Dilemma for Oligopolistic Pricing 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Price Signaling & Price Leadership Price Leadership Pattern of pricing in which one firm regularly announces price changes that other firms then match Chapter 12 Slide 80

Implications of the Prisoners Dilemma for Oligopolistic Pricing 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net The Dominant Firm Model In some oligopolistic markets, one large firm has a major share of total sales, and a group of smaller firms supplies the remainder of the market. The large firm might then act as the dominant firm, setting a price that maximized its own profits. Chapter 12 Slide 81

Price Setting by a Dominant Firm Price D S F The dominant firm s demand curve is the difference between market demand (D) and the supply of the fringe firms (S F ). P 1 MC D P* P 2 D D At this price, fringe firms sell Q F, so that total sales are Q T. Q F Q D Q T MR D Quantity Chapter 12 Slide 82

Cartels Characteristics 1) Explicit agreements to set output and price 2) May not include all firms Chapter 12 Slide 83

Cartels Characteristics 3) Most often international Examples of successful cartels u OPEC u International Bauxite Association u Mercurio Europeo Examples of unsuccessful cartels u Copper u Tin u Coffee u Tea u Cocoa Chapter 12 Slide 84

Cartels Characteristics 4) Conditions for success ucompetitive alternative sufficiently deters cheating upotential of monopoly power--inelastic demand Chapter 12 Slide 85

Cartels Comparing OPEC to CIPEC Most cartels involve a portion of the market which then behaves as the dominant firm Chapter 12 Slide 86

The OPEC Oil Cartel Price TD S C TD is the total world demand curve for oil, and S C is the competitive supply. OPEC s demand is the difference between the two. P* OPEC s profits maximizing quantity is found at the intersection of its MR and MC curves. At this quantity OPEC charges price P*. D OPEC MC OPEC MR OPEC Q OPEC Quantity Chapter 12 Slide 87

Cartels About OPEC Very low MC TD is inelastic Non-OPEC supply is inelastic D OPEC is relatively inelastic Chapter 12 Slide 88

The OPEC Oil Cartel Price TD S C The price without the cartel: Competitive price (P C ) where D OPEC = MC OPEC P* D OPEC P c MC OPEC MR OPEC Q C Q OPEC Q T Quantity Chapter 12 Slide 89

The CIPEC Copper Cartel Price TD TD and S C are relatively elastic D CIPEC is elastic CIPEC has little monopoly power P* is closer to P C S C MC CIPEC P* P C D CIPEC MR CIPEC Q CIPEC Q C Q T Quantity Chapter 12 Slide 90

Cartels Observations To be successful: utotal demand must not be very price elastic ueither the cartel must control nearly all of the world s supply or the supply of noncartel producers must not be price elastic Chapter 12 Slide 91

The Cartelization of Intercollegiate Athletics 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Observations 1) Large number of firms (colleges) 2) Large number of consumers (fans) 3) Very high profits Chapter 12 Slide 92

The Cartelization of Intercollegiate Athletics 高参考价值的真题 答案 学长笔记 辅导班课程, 访问 :www.kaoyancas.net Question How can we explain high profits in a competitive market? (Hint: Think cartel and the NCAA) Chapter 12 Slide 93

The Milk Cartel 1990s with less government support, the price of milk fluctuated more widely In response, the government permitted six New England states to form a milk cartel (Northeast Interstate Dairy Compact -- NIDC) Chapter 12 Slide 94

The Milk Cartel 1999 legislation allowed dairy farmers in Northeastern states surrounding NIDC to join NIDC, 7 in 16 Southern states to form a new regional cartel. Soy milk may become more popular. Chapter 12 Slide 95

Summary In a monopolistically competitive market, firms compete by selling differentiated products, which are highly substitutable. In an oligopolistic market, only a few firms account for most or all of production. Chapter 12 Slide 96

Summary In the Cournot model of oligopoly, firms make their output decisions at the same time, each taking the other s output as fixed. In the Stackelberg model, one firm sets its output first. Chapter 12 Slide 97

Summary The Nash equilibrium concept can also be applied to markets in which firms produce substitute goods and compete by setting price. Firms would earn higher profits by collusively agreeing to raise prices, but the antitrust laws usually prohibit this. Chapter 12 Slide 98

Summary The Prisoners Dilemma creates price rigidity in oligopolistic markets. Price leadership is a form of implicit collusion that sometimes gets around the Prisoners Dilemma. In a cartel, producers explicitly collude in setting prices and output levels. Chapter 12 Slide 99

End of Chapter 12 Monopolistic Competition and Oligopoly