微观经济学Monopolistic-Competition-and-Oligopoly课件.ppt

1、Chapter 12Monopolistic Competition and Oligopoly2005 Pearson Education,Inc.Chapter 122Topics to be DiscussedlMonopolistic CompetitionlOligopolylPrice CompetitionlCompetition Versus Collusion:The Prisoners DilemmalImplications of the Prisoners Dilemma for Oligopolistic PricinglCartels2005 Pearson Edu

2、cation,Inc.Chapter 123Monopolistic Competitionl Characteristics1.Many firms2.Free entry and exit3.Differentiated product2005 Pearson Education,Inc.Chapter 124Monopolistic CompetitionlThe amount of monopoly power depends on the degree of differentiationlExamples of this very common market structure i

3、nclude:mToothpastemSoapmCold remedies2005 Pearson Education,Inc.Chapter 125Monopolistic CompetitionlToothpastem Crest and monopoly powerlProcter&Gamble is the sole producer of CrestlConsumers can have a preference for Crest taste,reputation,decay-preventing efficacylThe greater the preference(differ

4、entiation)the higher the price2005 Pearson Education,Inc.Chapter 126Monopolistic CompetitionlTwo important characteristicsmDifferentiated but highly substitutable productsmFree entry and exitA Monopolistically CompetitiveFirm in the Short and Long RunQuantity$/QQuantity$/QMCACMCACDSRMRSRDLRMRLRQSRPS

5、RQLRPLRShort RunLong Run2005 Pearson Education,Inc.Chapter 128A Monopolistically CompetitiveFirm in the Short and Long RunlShort runmDownward sloping demand differentiated productmDemand is relatively elastic good substitutesmMR MC some monopoly powerDeadweight lossMCACMonopolistically and Perfectly

6、 Competitive Equilibrium(LR)$/QQuantity$/QD=MRQCPCMCACDLRMRLRQMCPQuantityPerfect CompetitionMonopolistic Competition2005 Pearson Education,Inc.Chapter 1211Monopolistic Competition and Economic EfficiencylThe monopoly power yields a higher price than perfect competition.If price was lowered to the po

7、int where MC=D,consumer surplus would increase by the yellow triangle deadweight loss.lWith no economic profits in the long run,the firm is still not producing at minimum AC and excess capacity exists.2005 Pearson Education,Inc.Chapter 1212Monopolistic Competition and Economic EfficiencylFirm faces

8、downward sloping demand so zero profit point is to the left of minimum average costlExcess capacity is inefficient because average cost would be lower with fewer firmsmInefficiencies would make consumers worse off2005 Pearson Education,Inc.Chapter 1213Monopolistic Competitionl If inefficiency is bad

9、 for consumers,should monopolistic competition be regulated?m Market power is relatively small.Usually there are enough firms to compete with enough substitutability between firms deadweight loss small.m Inefficiency is balanced by benefit of increased product diversity may easily outweigh deadweigh

10、t loss.2005 Pearson Education,Inc.Chapter 1214The Market for Colas and CoffeelEach market has much differentiation in products and tries to gain consumers through that differentiation mCoke vs.PepsimMaxwell House vs.FolgerslHow much monopoly power do each of these producers have?mHow elastic is dema

11、nd for each brand?2005 Pearson Education,Inc.Chapter 1215Elasticities of Demand forBrands of Colas and Coffee2005 Pearson Education,Inc.Chapter 1216The Market for Colas and CoffeelThe demand for Royal Crown is more price inelastic than for CokelThere is significant monopoly power in these two market

12、slThe greater the elasticity,the less monopoly power and vice versa2005 Pearson Education,Inc.Chapter 1217Oligopoly CharacteristicslSmall number of firmslProduct differentiation may or may not existlBarriers to entrymScale economiesmPatentsmTechnologymName recognitionmStrategic action2005 Pearson Ed

13、ucation,Inc.Chapter 1218OligopolylExamplesmAutomobilesmSteelmAluminummPetrochemicalsmElectrical equipment2005 Pearson Education,Inc.Chapter 1219OligopolylManagement ChallengesmStrategic actions to deter entrylThreaten to decrease price against new competitors by keeping excess capacitymRival behavio

14、rlBecause only a few firms,each must consider how its actions will affect its rivals and in turn how their rivals will react2005 Pearson Education,Inc.Chapter 1220Oligopoly EquilibriumlIf one firm decides to cut their price,they must consider what the other firms in the industry will domCould cut pr

15、ice some,the same amount,or more than firmmCould lead to price war and drastic fall in profits for alllActions and reactions are dynamic,evolving over time2005 Pearson Education,Inc.Chapter 1221Oligopoly Equilibriuml Defining EquilibriummFirms are doing the best they can and have no incentive to cha

16、nge their output or pricemAll firms assume competitors are taking rival decisions into accountl Nash EquilibriummEach firm is doing the best it can given what its competitors are doingl We will focus on duopolymMarkets in which two firms compete2005 Pearson Education,Inc.Chapter 1222OligopolylThe Co

17、urnot ModelmOligopoly model in which firms produce a homogeneous good,each firm treats the output of its competitors as fixed,and all firms decide simultaneously how much to producemFirm will adjust its output based on what it thinks the other firm will produce2005 Pearson Education,Inc.Chapter 1223

18、MC150MR1(75)D1(75)12.5If Firm 1 thinks Firm 2 will produce 75 units,its demand curve is shifted to the left by this amount.Firm 1s Output DecisionQ1P1D1(0)MR1(0)Firm 1 and market demand curve,D1(0),if Firm 2 produces nothing.D1(50)MR1(50)25If Firm 1 thinks Firm 2 will produce 50 units,its demand cur

19、ve is shifted to the left by this amount.2005 Pearson Education,Inc.Chapter 1224OligopolylThe Reaction CurvemThe relationship between a firms profit-maximizing output and the amount it thinks its competitor will producemA firms profit-maximizing output is a decreasing schedule of the expected output

20、 of Firm 22005 Pearson Education,Inc.Chapter 1225Firm 2s ReactionCurve Q*2(Q1)Firm 2s reaction curve shows how much itwill produce as a function of how much it thinks Firm 1 will produce.Reaction Curves and Cournot EquilibriumQ2Q1255075100255075100Firm 1s ReactionCurve Q*1(Q2)xxxxFirm 1s reaction cu

21、rve shows how much itwill produce as a function of how much it thinks Firm 2 will produce.The xs correspond to the previous model.2005 Pearson Education,Inc.Chapter 1226Firm 2s ReactionCurve Q*2(Q1)Reaction Curves and Cournot EquilibriumQ2Q1255075100255075100Firm 1s ReactionCurve Q*1(Q2)xxxxIn Courn

22、ot equilibrium,eachfirm correctly assumes howmuch its competitors willproduce and therebymaximizes its own profits.CournotEquilibrium2005 Pearson Education,Inc.Chapter 1227Cournot EquilibriumlEach firms reaction curve tells it how much to produce given the output of its competitorlEquilibrium in the

23、 Cournot model,in which each firm correctly assumes how much its competitor will produce and sets its own production level accordingly2005 Pearson Education,Inc.Chapter 1228Oligopolyl Cournot equilibrium is an example of a Nash equilibrium(Cournot-Nash Equilibrium)l The Cournot equilibrium says noth

24、ing about the dynamics of the adjustment processm Since both firms adjust their output,neither output would be fixed2005 Pearson Education,Inc.Chapter 1229The Linear Demand CurvelAn Example of the Cournot EquilibriummTwo firms face linear market demand curvemWe can compare competitive equilibrium an

25、d the equilibrium resulting from collusionmMarket demand is P=30-Q mQ is total production of both firms:Q=Q1+Q2mBoth firms have MC1=MC2=02005 Pearson Education,Inc.Chapter 1230Oligopoly ExamplelFirm 1s Reaction Curve MR=MC111)30(QQPQR:Revenue Total12211121130)(30QQQQQQQQ2005 Pearson Education,Inc.Ch

26、apter 1231Oligopoly ExamplelAn Example of the Cournot Equilibrium12211121111211521150230QQQQMCMRQQQRMRCurve Reaction s2 FirmCurve Reaction s1 Firm2005 Pearson Education,Inc.Chapter 1232Oligopoly ExamplelAn Example of the Cournot Equilibrium10302010)2115(21152111QPQQQQQQ2:mEquilibriu Cournot2005 Pear

27、son Education,Inc.Chapter 1233Duopoly ExampleQ1Q2Firm 2sReaction Curve3015Firm 1sReaction Curve15301010Cournot EquilibriumThe demand curve is P=30-Q andboth firms have 0 marginal cost.2005 Pearson Education,Inc.Chapter 1234Oligopoly ExamplelProfit Maximization with CollusionMCMRMRQQRMRQQQQPQR and 15

28、 Q when 023030)30(22005 Pearson Education,Inc.Chapter 1235Profit Maximization w/CollusionlContract CurvemQ1+Q2=15lShows all pairs of output Q1 and Q2 that maximize total profitsmQ1=Q2=7.5lLess output and higher profits than the Cournot equilibrium2005 Pearson Education,Inc.Chapter 1236Firm 1sReactio

29、n CurveFirm 2sReaction CurveDuopoly ExampleQ1Q230301010Cournot EquilibriumCollusionCurve7.57.5Collusive EquilibriumFor the firm,collusion is the bestoutcome followed by the CournotEquilibrium and then the competitive equilibrium1515Competitive Equilibrium(P=MC;Profit=0)2005 Pearson Education,Inc.Cha

30、pter 1237First Mover Advantage The Stackelberg ModellOligopoly model in which one firm sets its output before other firms dolAssumptionsmOne firm can set output firstmMC=0mMarket demand is P=30-Q where Q is total outputmFirm 1 sets output first and Firm 2 then makes an output decision seeing Firm 1s

31、 output2005 Pearson Education,Inc.Chapter 1238First Mover Advantage The Stackelberg ModellFirm 1mMust consider the reaction of Firm 2lFirm 2mTakes Firm 1s output as fixed and therefore determines output with the Cournot reaction curve:Q2=15-(Q1)2005 Pearson Education,Inc.Chapter 1239First Mover Adva

32、ntage The Stackelberg ModellFirm 1mChoose Q1 so that:mFirm 1 knows Firm 2 will choose output based on its reaction curve.We can use Firm 2s reaction curve as Q2.1221111300Q -Q-QQ PQ R MCMR 2005 Pearson Education,Inc.Chapter 1240First Mover Advantage The Stackelberg ModellUsing Firm 2s Reaction Curve

33、 for Q2:5.7 and 15:015211111QQMRQQRMR2111121112115 )2115(30QQQQQQR2005 Pearson Education,Inc.Chapter 1241First Mover Advantage The Stackelberg ModellConclusionmGoing first gives Firm 1 the advantagemFirm 1s output is twice as large as Firm 2smFirm 1s profit is twice as large as Firm 2slGoing first a

34、llows Firm 1 to produce a large quantity.Firm 2 must take that into account and produce less unless it wants to reduce profits for everyone.2005 Pearson Education,Inc.Chapter 1242Price CompetitionlCompetition in an oligopolistic industry may occur with price instead of outputlThe Bertrand Model is u

35、sedmOligopoly model in which firms produce a homogeneous good,each firm treats the price of its competitors as fixed,and all firms decide simultaneously what price to charge2005 Pearson Education,Inc.Chapter 1243Price Competition Bertrand ModellAssumptionsmHomogenous goodmMarket demand is P=30-Q whe

36、re Q=Q1+Q2mMC1=MC2=$3lCan show the Cournot equilibrium if Q1=Q2=9 and market price is$12,giving each firm a profit of$81.2005 Pearson Education,Inc.Chapter 1244Price Competition Bertrand ModellAssume here that the firms compete with price,not quantitylSince good is homogeneous,consumers will buy fro

37、m lowest price sellermIf firms charge different prices,consumers buy from lowest priced firm onlymIf firms charge same price,consumers are indifferent who they buy from2005 Pearson Education,Inc.Chapter 1245Price Competition Bertrand ModellNash equilibrium is competitive output since have incentive

38、to cut priceslBoth firms set price equal to MCmP=MC;P1=P2=$3mQ=27;Q1&Q2=13.5lBoth firms earn zero profit2005 Pearson Education,Inc.Chapter 1246Price Competition Bertrand ModellWhy not charge a different price?mIf charge more,sell nothingmIf charge less,lose money on each unit soldlThe Bertrand model

39、 demonstrates the importance of the strategic variable mPrice versus output2005 Pearson Education,Inc.Chapter 1247Bertrand Model CriticismslWhen firms produce a homogenous good,it is more natural to compete by setting quantities rather than priceslEven if the firms do set prices and choose the same

40、price,what share of total sales will go to each one?mIt may not be equally divided2005 Pearson Education,Inc.Chapter 1248Price Competition Differentiated Products lMarket shares are now determined not just by prices,but by differences in the design,performance,and durability of each firms productlIn

41、 these markets,more likely to compete using price instead of quantity2005 Pearson Education,Inc.Chapter 1249Price Competition Differentiated ProductslExamplemDuopoly with fixed costs of$20 but zero variable costsmFirms face the same demand curveslFirm 1s demand:Q1=12-2P1+P2lFirm 2s demand:Q2=12-2P1+

42、P2mQuantity that each firm can sell decreases when it raises its own price but increases when its competitor charges a higher price2005 Pearson Education,Inc.Chapter 1250Price Competition Differentiated ProductslFirms set prices at the same time202-12 20)212(20$:1 Firm21211211111PPPPPPPQP2005 Pearso

43、n Education,Inc.Chapter 1251Price Competition Differentiated ProductslIf P2 is fixed:122121114134130412PPPPPPP curve reaction s2 Firm curve reaction s1 Firm price maximizing profit s1 Firm 2005 Pearson Education,Inc.Chapter 1252Nash Equilibrium in PriceslWhat if both firms collude?mThey both decide

44、to charge the same price that maximizes both of their profitsmFirms will charge$6 and will be better off colluding since they will earn a profit of$162005 Pearson Education,Inc.Chapter 1253Firm 1s Reaction CurveNash Equilibrium in PricesP1P2Firm 2s Reaction Curve$4$4Nash Equilibrium$6$6Collusive Equ

45、ilibriumEquilibrium at price of$4 and profits of$122005 Pearson Education,Inc.Chapter 1254Nash Equilibrium in PriceslIf Firm 1 sets price first and then Firm 2 makes pricing decision:mFirm 1 would be at a distinct disadvantage by moving firstmThe firm that moves second has an opportunity to undercut

46、 slightly and capture a larger market share2005 Pearson Education,Inc.Chapter 1255A Pricing Problem:Procter&GamblelProcter&Gamble,Kao Soap,Ltd.,and Unilever,Ltd.were entering the market for Gypsy Moth TapelAll three would be choosing their prices at the same timelEach firm was using same technology

47、so had same production costsmFC=$480,000/month&VC=$1/unit2005 Pearson Education,Inc.Chapter 1256A Pricing Problem:Procter&GamblelProcter&Gamble had to consider competitors prices when setting their pricelP&Gs demand curve was:Q=3,375P-3.5(PU)0.25(PK)0.25Where P,PU,PK are P&Gs,Unilevers,and Kaos pric

48、es respectively2005 Pearson Education,Inc.Chapter 1257A Pricing Problem:Procter&GamblelWhat price should P&G choose and what is the expected profit?lCan calculate profits by taking different possibilities of prices you and the other companies could chargelNash equilibrium is at$1.40 the point where

49、competitors are doing the best they can as well2005 Pearson Education,Inc.Chapter 1258P&Gs Profit(in thousands of$per month)2005 Pearson Education,Inc.Chapter 1259A Pricing Problem for Procter&GamblelCollusion with competitors will give larger profitsmIf all agree to charge$1.50,each earn profit of$

50、20,000mCollusion agreements are hard to enforce2005 Pearson Education,Inc.Chapter 1260Competition Versus Collusion:The Prisoners DilemmalNash equilibrium is a noncooperative equilibrium:each firm makes decision that gives greatest profit,given actions of competitorslAlthough collusion is illegal,why