ECO101H1 Lecture Notes - Lecture 9: Potashcorp, Monopolistic Competition, The Globe And Mail
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ECO101H1 Full Course Notes
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Monopolistic competition: oligopoly: key features, numerical example. Oligopoly: cartel earns monopoly profits, cartel breaks down, prisoners" dilemma: application to oligopoly, monopolistic competition: key features. Oligopoly: few firms, each faces downward sloping demand curve, award of mutual interdependence. If compete, industry profits will be less than monopoly profits [and could fall to perfectly competitive level - zero economic profits] If form a successful cartel, industry profits could equal monopoly profits. Observations: to maximize profit, produces output where mr=mc, since mc=0, mr=0 at profit-maximizing output monopolist maximizes total revenue. Duopolist: possible outcomes: collude (form cartel, replicate monopoly outcome. The incentive to cheat the cartel: detail: firm: to cheat or not cheat. If cheats and increases q to 20 (say) Market output increases from 30 to 35 (q=35) Market price declines from 60 to 50 (since q=35) If firm increase q from 15 to 20: Mr>mc (for the individual firm, not the industry) firm has incentive to cheat : equilibrium, each firm: q=20.
