Why are we Speed Reviewing? 1.Having you review on your own wouldnt be effective 2.Lecturing about every concept would be too boring. Speed Reviewing

Why are we “Speed Reviewing”?1. Having you review on your own wouldn’t be effective2. Lecturing about every concept would be too boring.

“Speed Reviewing” will help you identify what you need to study.

So you must come see me about specific things you don’t understand.

Unit IV: Unit IV: Imperfect Imperfect

CompetitionCompetition

Half Way

Imperfect Competition1. The cost curves are the same2. The MR= MC rule still applies3. Shut down rule still applies4. All have a downward sloping

demand curve. To sell more a firm must lower its

price.5. All are inefficient.6. MR < Demand

Characteristics Characteristics of Monopoliesof Monopolies

5 Characteristics of a Monopoly5 Characteristics of a Monopoly

3. “Price Maker”2. Unique good with no close substitutes

• The firm can change the price by changing the quantity it produces

• The Firm IS the Industry1. Single Seller

4. High Barriers to Entry•New firms CANNOT enter market•No immediate competitors

5. Some “Nonprice” Competition

Drawing Drawing MonopoliesMonopolies

1 2 3 4 5 6

P

Q

$100

80

60

40D

MR

MR is below Demand

P Qd TR MR

$11 0 0 -

Why is MR less than Demand?

$10

P Qd TR MR

$11 0 - -

$10 1 10 10


$10

P Qd TR MR

$11 0 - -

$10 1 10 10

$9 2 18 8


$9 $9

$10

P Qd TR MR

$11 0 - -

$10 1 10 10

$9 2 18 8

$8 3 24 6


$9 $9

$8 $8 $8

$10

P Qd TR MR

$11 0 - -

$10 1 10 10

$9 2 18 8

$8 3 24 6

$7 4 28 4


$9 $9

$8 $8 $8

$7 $7 $7 $7

$10

P Qd TR MR

$11 0 - -

$10 1 10 10

$9 2 18 8

$8 3 24 6

$7 4 28 4

$6 5 30 2


$9 $9

$8 $8 $8

$7 $7 $7

$6 $6 $6 $6

$7

$6

$10

P Qd TR MR

$11 0 - -

$10 1 10 10

$9 2 18 8

$8 3 24 6

$7 4 28 4

$6 5 30 2

$5 6 30 0


$9 $9

$8 $8 $8

$7 $7 $7

$6 $6 $6 $6

$7

$6

$5$5 $5 $5 $5 $5

$10

P Qd TR MR

$11 0 - -

$10 1 10 10

$9 2 18 8

$8 3 24 6

$7 4 28 4

$6 5 30 2

$5 6 30 0

$4 7 28 -2


$9 $9

$8 $8 $8

$7 $7 $7

$6 $6 $6 $6

$7

$6

$5$5 $5 $5 $5 $5

$4 $4 $4 $4 $4 $4 $4

$10

P Qd TR MR

$11 0 - -

$10 1 10 10

$9 2 18 8

$8 3 24 6

$7 4 28 4

$6 5 30 2

$5 6 30 0

$4 7 28 -2


$9 $9

$8 $8 $8

$7 $7 $7

$6 $6 $6 $6

$7

$6

$5$5 $5 $5 $5 $5

$4 $4 $4 $4 $4 $4 $4

$10

P Qd TR MR

$11 0 - -

$10 1 10 10

$9 2 18 8

$8 3 24 6

$7 4 28 4

$6 5 30 2

$5 6 30 0

$4 7 28 -2


$9 $9

$8 $8 $8

$7 $7 $7

$6 $6 $6 $6

$7

$6

$5$5 $5 $5 $5 $5

$4 $4 $4 $4 $4 $4 $4

MR IS LESS THAN PRICE

Elastic vs. Inelastic Elastic vs. Inelastic Range of Demand Range of Demand

CurveCurve

1 2 3 4 5 6

P

Q

$100

80

60

40D

MR

Elastic and Inelastic Range

Do

llar

sD

oll

ars

$200

150

100

50

$750

500

250

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Q0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Q



Do

llar

sD

oll

ars

$200

150

100

50

$750

500

250

MR

Elastic

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

DQ

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

TR

Q

Total Revenue TestIf price falls and

TR increases then demand is

elastic.

Q

Do

llar

sD

oll

ars

$200

150

100

50

$750

500

250

TR

MR D

Inelastic Range

Elastic Range

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18Q

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18



TR falls then demand is inelastic.

When MR goes negative, TR will fall


TR increases then demand is

elastic.

Putting Putting Demand, MR, Demand, MR,

and Cost and Cost TogetherTogether

D

MC

ATC

MR

Profit =$5

MR = MC Rule Still Applies

Q

200

175

150

125

100

75

50

25

0 1 2 3 4 5 6 7 8 9 10

Pri

ce,

cost

s, a

nd

rev

enu

e

$9

8

7

6

5

4

3

2

How much is the TR, TC and Profit or Loss?

D

MCATC

MR

140 Loss

Q

200

175

150

125

100

75

50

25

0 1 2 3 4 5 6 7 8 9 10

Pri

ce,

cost

s, a

nd

rev

enu

e

AVC

Q

How much is the TR, TC, and Profit or Loss?

Monopolies and Monopolies and EfficiencyEfficiency

Monopolies are inefficient because they…1. Charge a higher price2. Under produce• Not allocativly efficiency

3. Produce at higher costs • No productive efficiency

4. Have little incentive to innovate

Q

EFFICIENCY OF PERFECT COMPETITION

P

D

S = MC

Pc

Qc

An industry in pure competition

MB=MC

CS

PS

Q

INEFFICIENCY OF PURE MONOPOLYP

DMR

S = MC

Pc

Pm

QcQm

At MR=MCA monopolist will sell less units at a

higher price than in competition

Q

CS and PS of a MonopolyP

DMR

S = MC

Pc

Pm

QcQm

Result is DEADWEIGHT LOSS

to society

CS

PS

D

MC

MR

Q

200

175

150

125

100

75

50

25

0 1 2 3 4 5 6 7 8 9 10

Pri

ce,

cost

s, a

nd

rev

enu

eAre Monopolies Productively Efficient?

Does Price = Min ATC?

ATC

No. They are not producing at the lowest

cost (min ATC)

D

MC

MR

Q

200

175

150

125

100

75

50

25

0 1 2 3 4 5 6 7 8 9 10

Pri

ce,

cost

s, a

nd

rev

enu

eDo Monopolies Have Allocative Efficiency?

Does Price = MC?

ATC

No. Price is greater. The monopoly is under

producing.

Regulating Regulating MonopoliesMonopolies

How do they regulate?•Price controls: Price Ceilings

Why Regulate?Why would the government regulate

an monopoly? 1. To keep prices low 2. To make monopolies efficient

1.Socially Optimal PriceP = MC (Allocative Efficiency)

Where should the government place the price ceiling?

2. Fair-Return Price (Break–Even)

P = ATC (Normal Profit)NOT THE SAME AS PRODUCTIVE EFFICIENCY

OR

Q

D

MR

MCATC

P

Pri

ce a

nd

Co

sts

Monopoly PriceMR = MC

Qm

Pm

REGULATED NATURAL MONOPOLY

Q

D

MR

MCATC

P

Pri

ce a

nd

Co

sts

Fair-Return PriceNormal Profit Only

Qf

Pf

TR = TC


Q

D

MR

MCATC

P

Pri

ce a

nd

Co

sts

Socially-OptimumPrice

P = MC

Qr

Pr


Price Price DiscriminationDiscrimination

Requires the following conditions:•Firm must have monopoly power•Firm must be able to segregate the market •Consumers must not be able to resell product

PRICE DISCRIMINATION

Definition:Practice of selling the same products to different buyers at different prices

Q

D

MC

ATC

P

Q1

Pri

ce a

nd

Co

sts

Q2

A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand

MR=D

Q

D

MC

ATC

P

Pri

ce a

nd

Co

sts

What output do they make? Where is Consumer Surplus?

Q2

MR=D

Q

D

MC

ATC

P

Pri

ce a

nd

Co

sts

Profit withprice discrimination

Where is the Profit?

Q2

MR=D

Why does MR equal Demand?

$10

P Qd TR MR

$11 0 - -

$10 1 10 10

$9 2 19 9

$8 3 27 8

$7 4 34 7

$6 5 36 6

$5 6 35 5

$4 7 39 4

Why does MR equal Demand?

$10 $9

$10 $9 $8

$10 $9 $8

$10 $9 $8 $7

$7

$6

$5$10 $9 $8 $7 $6

$10 $9 $8 $7 $6 $5 $4

What’s the Point?•Perfectly price discriminating firms:

•Make more profit•Produce more •Produce at allocative efficiency

Monopoly Practice FRQ

Monopolistic CompetitionMonopolistic Competition

Market Structure Continuum

PureCompetition

PureMonopoly

MonopolisticCompetition Oligopoly

FOUR MARKET MODELSMonopolistic Competition:

•Relatively Large Number of Sellers•Differentiated Products•Some control over price•Easy Entry and Exit•Non-price competition (Advertising)

Examples:1. Fast Food Restaurants2. Furniture companies3. Jewelry stores4. Hair Salons5. Clothing Manufacturers

Differentiated Products• Goods are NOT identical.• Firms seek to capture a piece of the

market by making unique goods.• Since these products have substitutes,

firms use NON-PRICE Competition

Monopolistic Qualities• Control over price of own good due

to differentiated product.• D > MR • Plenty of non-price competition• Not efficient

“Monopolistic” +”Competition”

Perfect Competition Qualities• Large number of smaller firms• Relatively easy entry and exit• Zero Economic Profit in Long-Run

since firms can enter.

Drawing Drawing Monopolistic Monopolistic CompetitionCompetition

D

MR

$4

ATCP

rice

an

d C

ost

s

Q1

Short-RunEconomic

Profits

What Happens?

PRICE AND OUTPUT INMONOPOLISTIC COMPETITION

$2

MC

Quantity

$4

$2

D

MR

ATCP

rice

an

d C

ost

s

Q1

New Firms Enter

Quantity

MC

Short-RunEconomic

Profits


D

MR

$4

ATCP

rice

an

d C

ost

s

Q1

Normal Profit

$2

MC

$1

LONG- RUN EQUILIBRIUM

Quantity

D

MR

$7

Pri

ce a

nd

Co

sts

Q1

Short-RunEconomic

Loss

What happens? MC

$1


ATC

Quantity

D

MR

MC

ATCP

rice

an

d C

ost

s

Q3

Quantity

Long-Run EquilibriumNormalProfitOnly


$7

MONOPOLISTIC MONOPOLISTIC COMPETITIONCOMPETITION

AND EFFICIENCYAND EFFICIENCY

MONOPOLISTIC COMPETITIONAND EFFICIENCY

• Not Productively Efficient Minimum ATC

• Not Allocatively EfficientPrice MC

• Firm has Excess Capacity

Graphically…

Excess Capacity• The gap between the minimum

ATC output and the profit maximizing output

• Given current resources, the firm can produce at minimum ATC, but they decide not to.


D

MR

MC

P3 = A3

ATCP

rice

an

d C

ost

s

Q3

Quantity

Long-Run Equilibrium

Excess Capacity


Oligopoly

Market Structure Continuum

PureCompetition

PureMonopoly

MonopolisticCompetition Oligopoly

FOUR MARKET MODELSOligopoly:•A Few Large Producers•Identical or Differentiated Products•Mutual Interdependence

•Firms use Strategic Pricing•High Entry Barriers•Examples: Cereal Companies, Car Producers

Oligopolies occur when only a few large firms start to control an industry.

High barriers to entry keep others from entering.

Types of Barriers to Entry• Economies of Scale• High Start-up Costs• Ownership of Raw Materials

HOW DO OLIGOPOLIES OCCUR?

Game Theory

What is game theory?

The study of how people behave in strategic situations

A thorough understanding of game theory helps firms in an oligopoly

maximize profit.

OLIGOPOLY BEHAVIORA Game-Theory Overview

High

Low

High LowU

pto

wn

’s P

rice

Str

ateg

yRareAir’s Price Strategy

BA

DC

$12 $15

$12 $6

$6 $8

$8$15

High

Low

High LowU

pto

wn

’s P

rice

Str

ateg


BA

DC

$12 $15

$12 $6

$6 $8

$8$15

Greatest Combined Profit if both Sell High

OLIGOPOLY BEHAVIOR

High

Low

High LowU

pto

wn

’s P

rice

Str

ateg


BA

DC

$12 $15

$12 $6

$6 $8

$8$15

Each firm recognizes that more profit is made if they lower price

OLIGOPOLY BEHAVIOR

High

Low

High LowU

pto

wn

’s P

rice

Str

ateg


BA

DC

$12 $15

$12 $6

$6 $8

$8$15

BUT if both lower price they end up in the Worst Case

OLIGOPOLY BEHAVIOR

High

Low

High LowU

pto

wn

’s P

rice

Str

ateg


BA

DC

$12 $15

$12 $6

$6 $8

$8$15

To make more profit, firms may try to cooperate (collude)

OLIGOPOLY BEHAVIOR

High

Low

High LowU

pto

wn

’s P

rice

Str

ateg


BA

DC

$12 $15

$12 $6

$6 $8

$8$15

OLIGOPOLY BEHAVIORTo make more profit, firms may try to cooperate (collude)

High

Low

High LowU

pto

wn

’s P

rice

Str

ateg


BA

DC

$12 $15

$12 $6

$6 $8

$8$15

But now each firm has the incentive to cheat.

OLIGOPOLY BEHAVIOR

What did we learn?1. Oligopoly pricing must be

strategic2. Oligopolies have a tendency to

collude to gain profit.(Collusion is the act of cooperating

with rivals in order to “rig” a situation.)

3. Collusion results in the incentive to cheat.

Oligopoly Graph

Not one standard model because there are

colluding Oligopolies and noncolluding Oligopolies

Colluding Oligopoly

A cartel is a group of producers that create a formal agreement to fix prices high.

Cartel = Colluding Oligopoly

CARTELS AND COLLUSION

1. Cartels set price and output at an agreed upon price

2. Firms require identical or highly similar demand and costs

3. Cartel must have a way to punish cheaters

4. Together they act as a monopoly

Colluding Oligopolists WillSplit the Monopoly Profits.

D

MC

ATC

MR

EconomicProfit

MR = MC

Pri

ce a

nd

co

sts

Q0

P0

A0

CARTELS AND OTHER COLLUSION

Non Colluding Oligopoly

1. Match price-If one firm cuts it’s prices, then the other firms follow suit causing inelastic demand

Kinked Demand Curve Model

Noncollusive firms are likely to react to competitor’s pricing in two ways:

2. Ignore change-If one firm raises prices, others maintain same price causing elastic demand

D1

MR1Quantity

KINKED DEMAND THEORY:

Pri

ce

The demand and MR curves if other firms match lower pricing

If this firm lowers its price and

others follow, Qd will increase

mildly

MR2

D2

Quantity

KINKED DEMAND THEORY:

Pri

ce

The demand and MR curves if other firms ignore higher pricing

If this firm increases its price and others ignore it, Qd for this firm will decrease significantly

MR2D1

D2

MR1Quantity

Two sets of curves based on the pricing decisions of other firms

Pri

ce

The firm’s demand andmarginal revenue curves

MR2D1

D2

MR1Quantity

Pri

ce

Rivals tend tofollow a price cut


MR2D1

D2

MR1Quantity

Pri

ce

Rivals tend tofollow a price cut

or ignore aprice increase


MR2D1

D2

MR1Quantity

Effectively creatinga kinked demand curve

Pri

ce


D

Quantity

Effectively creatinga kinked demand curve

Pri

ce


MR2D1

D2

MR1Quantity

What about MR?

Pri

ce


D

MR1Quantity

Since we use sections of both MR curves, the MR has a

vertical gap. P

rice MR2


D

Quantity

Profit maximizationMR = MC occurs

at the kink.

KINKED DEMAND THEORY:NONCOLLUSIVE OLIGOPOLY

Pri

ce MR2

MR1

Documents

Why are we Speed Reviewing? 1.Having you review on your own wouldnt be effective 2.Lecturing about every concept would be too boring. Speed Reviewing