Imperfect Competition
The spectrum of competition: Perfect Comp. ------------- Monopoly Monop. Comp.-- Oligopoly Assumptions underlying oligopoly
Few Sellers
Interdependence each seller must be aware that their actions will provoke actions by rival firms
Cartels
Explicit agreements among firms to fix output and prices
Links
http://www.sunship.com/mideast/oil.html http://www.eia.doe.gov/emeu/cabs/chron.ht ml
http://www.naseo.org/energy_sectors/fossil/oil/Supply_Graphs.htm#Prices,%201973-97
Concentration Ratios
Primary Copper (1992,2002) Cigarettes Beer Breakfast Cereals Motor Vehicles Greeting Cards Small-arms munitions Household Refrigerators and Freezers 98,95 93,99 90,90 85,83 84,83 84 84,89 82,82
Game Theory
Game theory is an attempt to model and understand behavior given the presence of interdependence Games have the following characteristics:
Rules Strategies Payoffs Outcome
Payoffs: Two players with two outcomes four possible outcomes with the following payoffs
Both confess each get 5 year sentences Both deny each get 2 year sentence Bill confesses and Paul denies Bill gets off and Paul gets 10 years Paul confesses and Bill denies Paul gets off and Bill gets 10 years.
5 years
P Confess 5 years A U Paul L Deny
10 years
Off
Off 2 years
2 years
10 years
Paul if Bill confesses I should too (5 vs 10), if Bill denies, I should still confess (off vs 2) Bill if Paul confesses I should too (5 vs 10); if Paul doesnt. I should still confess (off vs 2)
Marginal revenue curve is discontinuous and allows for various marginal cost curves.
Dominant Firm
The large firm can set the price and receives a marginal revenue that is less than price along the curve MR. Dominant Firms Demand Curve
Residual Demand
Dominant Firm
As long as the dominant firm has lower costs, it can act like a monopolist over the residual demand.
In monopoly, the level of output produced is where P>MC or MB>MC. Hence, net benefits to society are NOT maximized. Market prices are higher and respond to changes in market forces. This allows prices to help direct resource allocation. In oligopoly, the level of output is somewhere between the competitive and the monopolistic outcome. As the oligopolist produces closer to the competitive solution, the net benefits to society move closer to being maximized. The opposite is true if the outcome moves closer to the monopoly outcomes, such as occurs with a perfect carte.
Non-price competition, such as advertising and product differentiation, can negatively affect resource allocation, but it can also contribute to efficiency. People have different preferences for products and advertising can help inform consumers about the price and nature of a product. If prices are sticky, they can also cause inefficiency by failing to act as signals for resource allocation. The extent of these inefficiencies are the subject of debate among economists and non-economists.
Imperfect Competition
The spectrum of competition: Perfect Comp. ------------- Monopoly Monop. Comp.-- Oligopoly Assumptions underlying Monopolistic Competition
Differentiated products
Differentiated products leads to some market power over price or a downward slping demand curve
Many buyers and sellers Free entry and exit Perfect knowledge
Advertising
Advertising is costly, the question is - does it add anything of value to the consumer?
informative advertising which contributes to competition Advertising aimed at creating perceived differences or brand loyalty Breakfast cereals and kids versus supermarket ads