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ECO100 Nov.18 2013.docx

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James Pesando

TUT: 5(Nov4) 6(Nov18) 7(Nov25) OLIGOPOLY AND COMPETITION 1.Market structuresMONOPOLISTIC Perfect competition No firm effect the price Monopoly: a single seller of the product Imperfect competition:(almost all firms in daily days) Oligopoly Monopolistic competition 2.Oligopoly: key features ONE MARKET STRUCTURE Few firms Face downward-sloping demand curves Aware of mutual interdependence Auto Manufacturers (North America) 1. few firms( GM,Chrysler,Ford) 2. Face downward-sloping demand curves Should GM raise price of tits compact cars? 3. Mutual interdependence If GM raises price, what will competitors do? Oligopolists(few sellers, aware of interdependence) 1. If compete with one another, industry profits may fall to competitive level ( 0 economic profits) 2. If form a SUCCESSFUL cartel (may earn economic profits), industry profits may= monopoly profits Insights 1. most oligopolists compete with one another 2.Cartels are illegal cartel--an association to gain interest of Cartel members 3. Cartel, if formed, may break down for incentive reasons (get: the conflict between cooperation and self-interest)** Oligopolists may try to collude (form a a cartel) rather than to compete with one another 1. Forming a cartel (price-fixing) is illegal 2. Economic analysis draws attention to incentives high probability of breaking down Numerical example; purpose 1. what output would a profit-maximizing monopolist produce in special case where MC=0=ATC what would monopolist do? (MC=0, ATC=0, fixed cost=0) 2.Why might oligopolists, if agree to form an oligopolists, if agree to form an illegal cartel, NOT succeed in earning monopoly profits? TWO SELLERS: WILL THEY EARN MONOPOLY PROFITS? Assume (for simplicity): MC=0=ATC (example: town wells—fill up consumers’ own bottle with water) Market Demand curve Total revenue (profit) P Q 80 20 1600 70 25 1750 60 30 1800 50 35 1750 40 40 1600 30 45 1350 mono: MR=MC=0==>P=60 Q=30 Profit=1800 in particular, mono set the price=50, TR=1750. MR<0 in equilibrium: mono will produce when MR=MC OBSERVATIONS 1. maximizing: 30 units of output, price=60 2. Since MC=0, MR=0 at profit-max output<=>mono maximizes TR Duopolist: possible outcomes (only two oligopolist) 1. collude (form cartel) == ilegal —>don’t compete any more the best we can do is to act as we are a monopoly 1) Repicate monopolh outcome Q=30 P=60 Profit=1800 2) must allocate market share How? 50:50 (e.g.) ==>
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