and Part III: Structure 12. Monopoly 13. Game Theory and Strategic Play 14. and 1 / 38
and Chapter 14 and 2015.12.25. 2 / 38
and 1 2 3 4 5 3 / 38
and Q:How many firms are necessary to make a market competitive? 4 / 38
and Two market structures that lie between perfect competition and monopoly are oligopoly and monopolistic competition. In both of these markets the seller must recognize actions of competitors. In oligopolies, economic profits in the long run can be positive. 5 / 38
and In monopolistically competitive markets, entry and exit drive economic profits to zero in the long run. There are several important variables such as the number of firms in the industry, the degree of product differentiation, entry barrier, and the presence or absence of collusion that determine the competitiveness of a market. 6 / 38
and 14.1 Differentiated products are goods that are similar but not identical. Homogeneous products are goods that are identical, making them perfect substitutes. Two characteristics of the classification of market structures: 1. The number of firms 2. The degree of product differentiation 7 / 38
and Exhibit 14.1 Characteristics of : only a few suppliers, homogeneous or differentiated products competition: facing downward-sloping demand curve (monopolistic), free entry (competitive), many firms selling differentiated products. 8 / 38
and 14.2 Greek origins: oligoi meaning a few and polein meaning to sell. Oligopolies sell homogeneous goods (for example, hard drive or oil) or differentiated goods (for example, cigarettes or soda). 9 / 38
and The Oligopolist s Problem Due to cost advantage associated with the economies of scale of oligopoly or other barrier to entry, entry and exit will not necessarily push the market to zero economic profits in the long run. Because of relatively few competitors, there is an important interaction between the few sellers that do occupy the market. 10 / 38
and Model with Homogeneous Products One of the simplest cases of oligopoly is an industry with only two competing firms a duopoly. Suppose that these two firms compete against one another by setting prices Bertrand competition. Suppose that the industry of interest is landscaping and that there are two firms: your company, Dogwood and a competitor, Rose Petal. Both companies have the same marginal cost which is $30 per landscape job. Consumers view services from two companies as identical. They will hire services from the company that sells at a lower price. 11 / 38
and Exhibit 14.2 Demand Curve for an with Homogeneous Products If both companies charge the same price, each company will get half of the demand. The market has a total demand of 1,000 landscaping jobs per week, provided that the price is $50. At any price above $50, the market demand is zero. 12 / 38
and What is directly relevant for a firm s profit-maximizing decisions is its residual demand curve, which is the demand that is not met by other firms. Your residual demand curve is 1000, if P DW < P R P, 1000 2, if P DW = P R P, 0, if P DW > P R P 13 / 38
and Doing the Best You Can: How Should You Price to Maximize Profits? You should choose the price that maximizes your profits. Marginal cost is $30. How does your behavior affect Rose Petal s behavior? To start with some simple strategies, suppose you charge a price of $50 and Rose Petal charges $45. What happens? Is this a Nash Equilibrium? Can you do better? 14 / 38
and Exhibit 14.3 Dueling Duopolies and a Pricing Response A series of price-cutting between you and Rose Petal. When does all of this price-cutting end? Or, what is the Nash equilibrium? P DW = P R P = MC = $30 is the unique Nash Equilibrium. In this equilibrium, each company ends up supplying half of the market and earn zero economic profits. 15 / 38
and Model with Differentiated Products A more realistic description of an industry is a set of firms that make similar but not homogeneous products. Because products are differentiated, the demand function is not all-or-nothing. Firms can charge higher prices and not lose all sales because the differentiation creates preferences on the part of consumers. 16 / 38
and Example: Coke Cola and Pepsi If Coke raises its price, it will lose sales to Pepsi, but Coke s sales won t go to zero because of differentiation. Some consumers would still rather have Coke. How should Coke and Pepsi decide on their prices? Each firm must predict how its prices will affect the prices of its competitor. In Nash equilibrium, both firms set their prices as best responses to each other. In a oligopoly with differentiated products, firms typically make positive economic profits, and some oligopolists persist in the long run with positive profits because of barriers (such as established brands) to entry. 17 / 38
and What happens if there is a third firm supplying soda to the market? Price will typically be lower with three firms competing compared to two firms competing. As the number of firms in an oligopolistic market increases further, prices tend to decline toward marginal cost. If enough entry occurs, it could cause the market to turn into a monopolistically competitive structure. 18 / 38
and Collusion: One Way to Keep Prices High Collusion occurs when rival firms conspire among themselves to set prices or to control production quantities rather than let the free market determine them. Imagine that you and the CEO of Rose Petal decide to collude by setting your prices jointly rather than independently. Oligopolies might coordinate and collectively act as a monopolist and then split the monopoly profits among themselves. 19 / 38
and Your firm and Rose Petal can collude and set prices at $50. At this price, the market demand is 1,000 jobs. Half of the consumers will go to each firm. Two reasons that collusion among oligopolies might not always be formed: Even firms agree on collusion, they have an incentive to engage in secret price-cutting to capture more of the profits for themselves. (For example, you can charge $49.50 for landscaping jobs and get the whole demand.) Price-fixing is illegal. 20 / 38
and When Collusion Can Work Two important considerations that determine how successful a collusive arrangement is: Detection and punishment of cheaters. For example: Keep my price at $50 provided that you also keep your price at $50; if you ever cut your price, then I will cut my price to $30, forever. This type of punishment is called a grim strategy ( 冷酷策略 ). The long-term value of the market. A colluder who values future monopoly profits more than current cheating profits will abide by the collusion agreement. 21 / 38
and To Cheat or Not To Cheat: That Is the Question Another type of oligopoly model where sellers compete on quantities rather than prices is called Cournot competition. The most famous group that chooses to collude by choosing quantities is OPEC (Organization of the Petroleum Exporting Countries). OPEC is an oil cartel that coordinates the policies of several major oil-producing countries. 22 / 38
and OPEC has a problem of keeping the price of its good oil high. This problem arises from the natural inability of collusive arrangement: each country can increase its profits by pumping more oil, but if they all do so they will depress prices, reducing everybody s profits. In only 10 of the 83 months shown in Exhibit 14.4 is actual production at or below the agreed-upon quota. Exhibit 14.4 OPEC s Production Quota Agreements and Actual Production, 2001-2007 23 / 38
and 14.3 14.3 The Competitor s Problem Exhibit 14.5 Dairy Queen s (resdual) Demand Curve and Marginal Revenue Curve 24 / 38
and Doing the Best You Can: How a Competitor Maximizing Profits The decision rule is identical to that for the monopolist: Exhibit 14.6 Optimal Pricing Strategy for a Competitor 25 / 38
and How a Competitor Calculates Profits Exhibit 14.7 Economic Profits and Economics Losses Profits=Total revenue-total cost= (P Q) (AT C Q) = (P AT C) Q 26 / 38
and Long-Run Equilibrium in a ally Competitive Industry Exhibit 14.8 The Effect of Entry on an Existing Firm s Demand Curve With positive profits, sellers will be attracted to this market. When there are more substitutes for a good, a firm s residual demand curve shifts to the left and becomes more elastic (less steep). 27 / 38
and Exhibit 14.9 Zero Profits in Long-Run Equilibrium When does entry stop? Entry stops when there are no longer economic profits. ally competitive firms have an incentive to continually try to distinguish themselves from rivals. 28 / 38
and 14.4 One important factor that can break the powerful result of the invisible hand is market power. In both market structures of monopoly and oligopoly, firms have market power and are able to charge prices greater than marginal cost, reducing total surplus. 29 / 38
and Exhibit 14.10 Equilibria for a Perfectly Competitive and a ally Competitive Is total surplus maximized under monopolistically competition? The answer is no. competitors produce at a level below the efficient scale of production (the minimum of the AT C curve). They mark up price above its marginal cost. The monopolistic competitor produces too little compared to the socially efficient level. 30 / 38
and Regulating Power Should the government regulate oligopolistic and monopolistically competitive markets? It depends. A clear case in which government regulation is warranted is successful collusion. The Sherman Antitrust Act of 1890 and the Clayton Act of 1914 are concerned with the regulation of mergers ( 購併 ). One of the main approaches the Department of Justice (DOJ) adopts in its analysis of mergers is to calculate how concentrated an industry is. 31 / 38
and One of the tools that the DOJ uses to guide its enforcement of the Sherman Act is the Herfindahl-Hirschman Index (HHI). The HHI is a measure of market concentration, which is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, if there are two firms in an industry and one firm accounts for 75 percent of the sales and the other 25 percent, the HHI is equal to 75 2 + 25 2 =6,250. The higher the HHI, the more concentrated the industry. The HHI approaches zero when a market consists of a large number of firms of relatively equal size. 32 / 38
and There are limits to how effectively the government can use regulation to reduce market power, particularly in monopolistically competitive markets with many producers. Imagine if the government had to regulate prices for every product sold in monopolistically competitive industries. And Imagine further that it would set the number and type of entrants for each production line. This type of intervention would border on a command economy. 33 / 38
and 14. Four Exhibit 14.11 34 / 38
and Q:How many firms are necessary to make a market competitive? 35 / 38
and Two economists, Timothy Bresnahan and Peter Reiss reasoned that if a market is already effectively competitive, the addition of one more firm should not change prices. When firms have significant market power, further entry reduces prices, while in a competitive market, further entry should leave prices unchanged. Bresnahan and Reiss obtained information on prices and the number of tire dealers across different towns in the western United States. 36 / 38
and Exhibit 14.12 Tire Prices and Tire Quality in Selected U.S. Towns There is practically no difference in prices between markets with four and five dealers. Once the difference in tire quality (time mileage rating) is accounted for, there is no evidence that prices are different between markets with three or four dealers. In sum, the evidence suggests that three or four firms are sufficient for the tire market to be (effectively) competitive. 37 / 38
and Two economists, Martin Dufwenberg and Uri Gneezy designed an experiment in which a number of sellers each chose a bid (selling price) between 2 and 100. Whichever seller made the lowest bid kept the dollar amount equal to his or her bid. Dufwenberg and Gneezy found that in a duopoly, average bids were just below 50. When the number of sellers increased to four, the sellers acted much more competitively. In fact, with four sellers, the average winning bid at the end of ten rounds of play was close to 2! Thus, it the lab too, it appears that four competitors are sufficient to drive the equilibrium toward the competitive outcome. 38 / 38