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Lecture 9

ECO101H1 Lecture Notes - Lecture 9: Potashcorp, Monopolistic Competition, The Globe And Mail


Department
Economics
Course Code
ECO101H1
Professor
James Pesando
Lecture
9

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[ECO100 ECONOMICS]2014 Fall Notes
OLIGOPOLY AND MONOPOLISTIC COMPETITION
1. Market Structure
Perfect Compeon
Monopoly
Imperfect Compeon
Oligopoly
Monopolisc Compeon
2. Oligopoly: Key Features
3. Numerical Example
Monopoly Pro&ts
Oligopoly
1) Cartel earns monopoly pro&ts
2) Cartel breaks down
4. Prisoners’ Dilemma: Applicaon to Oligopoly
5. Monopolisc Compeon: Key Features
Oligopoly
1. Few &rms
2. Each faces downward sloping demand curve
3. Award of mutual interdependence
Examples
North America: auto manufacturers [Ford, Chrysler, GM]
Canada: 5 major banks
Oligopolists
1. If compete, industry pro&ts will be less than monopoly pro&ts [and could fall to perfectly
compeve level - zero economic pro&ts]
2. If form a successful cartel, industry pro&ts could equal monopoly pro&ts
Numerical Example: Purpose
1) What output would a pro&t-maximizing monopolist produce in special case where MC=0=ATC?
2) Why might oligopolists, if agree to form an illegal cartel, NOT succeed in earing monopoly
pro&ts?
Two Sellers: Will They Earn Monopoly Pro(ts?
Assume (for simplicity): MC=0=ATC (Example: town wells)
Market Demand Curve Total Revenue (=Pro&ts)
P Q
80 20 1600
70 25 1750
60 30 1800
50 35 1750
40 40 1600
30 45 1350

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[ECO100 ECONOMICS]2014 Fall Notes
Graph 1: Monopolist Maximizes Pro&t
Observaons
1) To maximize pro&t, produces output where MR=MC
2) Since MC=0, MR=0 at pro&t-maximizing output
monopolist maximizes total revenue
Duopolist: Possible Outcomes
1. Collude (Form Cartel)
1) Replicate monopoly outcome
Q=30
P=60
Pro&t=1800
2) Must allocate market share
50:50 (for example)
q=15 (each &rm)
Pro&t=900 (each &rm)
2. Incenve to Cheat: Cartel May Break Down (Cartel is illegal)
1. How do oligopolists collude?
2. By &xing prices (at monopoly level, if joint pro&ts are maximized)
3. Price &xing is illegal (so agreements cannot be enforced by the courts)
4. Result: agreements (cartels) may break down
The Incenve to Cheat the Cartel: Detail
1. Firm: To cheat or not cheat
1) If does not cheat, q=15 and pro&t=900
2) 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)
Pro&t increases to 1,000 (20*50=1,000)
Result: Firms cheat and cartel breaks down
Observaon
If &rm increase q from 15 to 20:
MR=1000-900=100
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