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Lecture 6

MGEC40H3 Lecture Notes - Lecture 6: Monopolistic Competition, Bertrand Competition, Substitute Good

Economics for Management Studies
Course Code
Jack Parkinson

of 6
MGEC40 Lecture 6
Todays Outline (continuation of Market Structure/Competition)
1. PC – Social Welfare
2. Monopoly
3. Oligopoly – Courtnot Model – Bertrand Model
4. Monopolistic Competition – Hotelling Model
Single supplier with no close substitute
oSo Pepsi and Coke are not monopolies
Barriers to entry must exist (can be government-imposed barriers like license, patent,
controlling of scarce input)
Oligopoly (non-cooperative)
Few firms (2+… assume just 2)
Barriers to entry exist
Often assume…
operfect substitutes
oidentical technology and costs
osimultaneously picking (moving at the same moment) vs. sequentially picking
(playing rock/paper/scissors if one person always goes first)
oone-shot (play once) vs. repeated
The aim is not to destroy your competition
Picking price (Bertrand model) or quantity (Cournot model)
oFor a monopoly, picking price or quantity results in the same outcome. For
oligopoly, the results are very different. So oligopolies partake in strategic
oLike a soccer goalie, you have to anticipate which direction to block. You don’t
have time to wait until the kick is made to dive in one direction
Complete and symmetric information
oKnow all of your own costs and competitors know your cost/you know their cost
oYou also know how many competitors there are
Monopolistic Competition
Lots of firms – more competitive
Output is differentiated – means you have market/pricing power because output is not
perfectly substitutable
Free entry/exit in the long-run – means more competition in the LR as well
Examples: restaurants side by side in the same plaza… two places that both sell chicken
but the dishes are still not duplicates of each other. Clothing lines are also an example 
opens up a role for advertising
Perfect competition results in max social welfare (when there are no externalities and
not a public good)
CS – highest price consumers are willing to buy for
PS – lowest price producers are willing to sell for
These diagrams show imperfect competition
Assume that PMAX is about rent control…
oThere will be excess demand for rent
oCS is above the price but below demand
oPS is below the price but above supply
oThere is excess supply
So basically… if you throw the price and quantity off its equilibrium, there will always be
DWL because P does not = MC anymore
Perfect competition always has P=MC which is why it is always efficient
Monopolies have to perfectly price discriminate to reach the same social welfare as the
perfect competition… they have to know your maximum willingness to pay and stop you
from purchasing elsewhere. This way, the price that goes out the door ends up being MC
Assume the market demand curve is P = 100-Q
And MR = 100 – 2Q (double the slope, same intercept)
And MC = 10
And FC = 0 … then MC = 10 = AC