LAC3
D
Output
©McGraw-Hill Education, 2014
Monopolistic competition
• Characteristics:
– many firms
– no barriers to entry
– product differentiation
• so the firm faces a downward-sloping
demand curve
– The absence of entry barriers means that
profits are competed away...
• COLLUSION
– an explicit or implicit agreement between
existing firms to avoid or limit competition with
one another.
• CARTEL
– is a situation in which formal agreements
between firms are legally permitted.
• e.g. OPEC
Q0 Quantity
… so demand in response
to a price reduction is likely
to be relatively inelastic.
• Game
– a situation in which intelligent decisions are
necessarily interdependent
• Strategy
– a game plan describing how the player will
act or move in every conceivable situation
• Dominant strategy
– where a player’s best strategy is
independent of those chosen by others
Firm B Output
HIGH LOW
Firm A HIGH 1 1 3 0
Output
LOW 0 3 2 2
£
Assuming firm B produces zero output,
p0 A faces the market demand curve D0
p1
and it maximizes profits by setting MR0
p2 = MC and producing QA0.
MC When B produces some positive
output, A faces the residual demand
curve D1,sets MR1 = MC and produces
MR2 D2 D 1 D0
MR1 MR0 QA1.
QB QA When firm B increases its output, A
sets MR2 = MC and produces QA2.