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Lecture 18

Lecture 18-Oligopoly and Monopolistic Competition

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Department
Economics
Course
ECO101H1
Professor
Jack Carr
Semester
Fall

Description
th Thursday, November 19 , 2009. Oligopoly and Monopolistic Competition Market Structure Perfect Monopolistic Oligopoly Monopoly Competition Competition No. of firms Many Many Few One in industry Product Identical Differentiated Identical or No close Differentiated substitutes Example Wheat Family Auto TTC Farmer Restaurants Manufacturers ______________________________________________________________________________ Oligopoly: Key Features N No Single Theory N Economic profits can range from nil (same as in perfect competition) to monopoly level N Mutual interdependence among firms is central to analysis Two Sellers: Will They Earn Monopoly Profits? Assume (for simplicity): MC = 0 = ATC (Example: town wells) 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 www.notesolution.com Monopolist Maximizes Profits P 60 MC = 0 30 DD MR Q Observations 1) To maximize profit, produces output where MR = MC 2) Since MC = 0, MR = 0 at profit-maximizing output Ù monopolist maximizes total revenue (numerical example) 1. How do oligopolists collude 2. By fixing prices (at monopoly level, if joint profits are maximized) 3. Price fixing is illegal (so agreements cannot be enforced by the courts) 4. Result: agreements (cartels) may break down Duopolist: Possible Outcomes 1. Collude (Form Cartel) (1) Replicate monopoly output Q = 30 P = 60 www.notesolution.com Profit = 1800 (2) Must allocate market share 50 : 50 (for example) => q = 15 (each firm) Profit = 900 (each firm) 2. Incentive to Cheat: Cartel May Break Down: Detail 1) Firm: TO cheat or not to cheat (a) If does not cheat, q = 15 and profit = 900 (b) If cheats and increases q to 20 (say) Market output increases from 30 to 25 (Q = 35) Market price declines form 60 to 50 (since Q = 35) Profit increasesto 1,000 (20*50 = 1,000) Result: Firms cheat and cartel breaks down 2) Equilibrium (a) Each firm: q = 20 => Q = 40 (20 + 20) Ö P = 40 Ö Profit = 800 (each) Note: lower profit than if did not cheat c
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