Econ 2306 Test 3
Benefits of Oligopoly
-Increases international competitiveness -Lead to large technological advances -Limit Pricing
Focus on Labor- The importance of resource pricing
-determines your income -determines allocation, if something is expensive, you use it more wisely. -In order for a firm to be profit maximizing, they must cost minimize. -Ethical questions, (income inequality, income distribution)
Oligopoly Model- Cartel and Collusion
A cartel is a formal agreement among producers to set the price and the individual firm's output levels of a product. Collusion is a situation in which firms act together and in agreement to fix prices, divide markets, or otherwise restrict competition.
Oligopoly Characteristics
A few large Producers- a few large producers control the market, whether it be a few large firms controlling an industry or the only company in a small town. Either Homogenous or Differentiated products- homogenous products are standardized products like metal or cement. Differentiated product are those whose products are different from firm to firm. Price Makers, but mutual interdependence- Mutual interdependence is a situation which the change in price by one firm affects the sales of another firm Barriers to entry
Monopolistic Competition
A market structure in which many firms sell a differentiated product and entry into and exit from the market are relatively easy.
Oligopoly and Advertising Positive Effects
Advertising will reduce costs and time spent by customers to find out details about your product (driving to the store, comparing products etc.) Advertising also disrupts monopolies, by making the customers aware of an alternate choice. (i.e. UPS and U.S. Postal service)
Changes in labor demand- Changes in Product Demand
An increase in demand for a product will increase the demand for a resource used in its production, and vice versa.
Changes in Labor Demand- Changes in Productivity
An increase in the productivity of a resource will increase the demand for the resource. and a decrease in productivity will reduce demand for the resource.
Concentration Ratio
An oligopoly is determined if the top 4 firms in an industry control over 40% of sales in that industry. 50% of firms in the US are oligopolies.
Hiring Rule
As long as your MRC (marginal resource cost) is equal to or lower than your MRP (marginal revenue product), you should hire the extra labor.
Trade Deficit
Buying more foreign goods than selling to foreigners.
Oligopoly and Advertising Negative Effects
Can be based on misleading or extravagant claims. Firms will often advertise that a particular personality uses their product. They will often alter preferences to persuade customers. Firms will often justify selling products at a higher price because of misleading information (ex. motor oil additives.) Advertising will often establish a name-brand loyalty, you usually do not make a large purchase on a product from a company you've never heard of. Advertising can be self-canceling as well, if one fast food company advertising near the same time as another fast food company, they effectively cancel each others efforts. There will be no increase in demand for their products and they will have wasted money.
What causes changes in Labor Demand
Changes in product demand, changes in productivity, changes in prices of other resources.
Obstacles to Collusion
Demand and cost differences- Firms have different demand and costs curves, meaning their profit maximization is at a different price. Even in industries with standardized (homogonous) products, they will often have different prices. Number of firms- The more firms in an industry, the harder it is to set prices or create a mutual agreement. Cheating- attempting to secretly price cut or change pricing. As stated in the game theory above, if a firm engages in a high price while a rival has a low price, The low price strategy will gain much more profits. Recession- recessions will increase average total costs, and demand is down. Firms will cut prices and attempt to increase demand. Potential Entry- The profits of a collusion may attract new firms into an industry, meaning that there would be a decrease in profits and prices.
Oligopoly- Barriers of Entry Characteristics
Economies of scale- reductions in the average total cost of producing a product as a firm expands the size of its operation (output) in the long run. Patents and licenses- a patent is the exclusive right of an inventor to use, or to allow another to use, their invention. Licenses are used by governments to limit entry into an industry or occupation through licensing (radio, tv, liqour licenses etc.) -Control of Essential Resources- control of an essential resource can limit a new firm from entering an industry. -Pricing and other strategic barriers- firms can create an entry barrier by slashing prices, steeping up advertising, or taking other actions to make it difficult for firms to enter its industry.
Monopolistic Competition-Easy Exit and entry(characteristics)
Entry into monopolistic industries is relatively easy compared to oligopoly and pure monopoly. Firms will see no economic profits over the long run
Monopolistic Competition Long Run
Firms will enter a profitable monopolistic competitive industry and leave an unprofitable one. The monopolistic firm will ultimately earn a normal profit(break even) in the long-run.
Marginal Resource Price as Labor Demand Schedule
In a competitive labor market, market supply and demand establish the wage rate. Firms are wage takers, not wage makers. As wages increase, the quantity of labor decreases because of the MRC=MRP rule.
Oligopoly Model- Price Leadership
Infrequent Price changes- as states before, raising the price will reduce demand and profits, lowering the price will increase costs and reduce demand. Firms do not change prices often Communication- Firms will communicate their intention for price changes, so that rivals will predict price changes in the market. Making sure everyone will gain profits. Avoidance of price wars- Firms will not lower their price, because that would lead to price wars. Costs will increase, Marginal revenue plumets, and demand decreases.
Problems with Concentration Ratio
National vs Local- Concentration ratio does not account for local businesses. There might be one firm operating in a small town (i.e. monopoly) While the national concentration is very low. Inter-Industry Comp.- Competition between industries not accounted for International Comp.- Does not include international firms in the ratio. Ex. Percentage of sales of automobiles in US might not include auto makers from other countries, therefore are not included in the ratio.
Monopolistic Competition Efficiency
Not allocative, productively efficient. Somewhat self-adjusting, and does not maximize consumer surplus.
Oligopoly Inefficiency
Oligopolies are neither productively efficient (P= min. ATC) or allocatively efficient (P=MC). Will not maximize consumer surplus and is not dynamically self adjusting. NO SUPPLY CURVE
Oligopoly Behavior and Game Theory
Prisoners Dilemma- the idea that acting in one's own self interest will lead to a decrease in overall profit. Firms or people working together will often lead to more profits and better outcome. Mutual Interdependence- Each firm's profit depends on its own pricing strategy and that of its rivals. The pricing strategy of other firms affect the strategy of another company
Monopolistic Competition-Differentiated Products(characteristics)
Product Attributes- Physical or qualitative differences in the products between firms. Service- service and conditions surrounding the sale of a product. (service difference between lexus and kia dealership) Brand Name and Packaging- product differentiation through use of brand names and trademarks, packaging, and celebrity connections. Some control over price- they have control over price, but it is limited because of the substitutes to their product.
Positives of Monopolistic Competition
Product variety- differentiated products make companies attempt to better their products and advertising. Improvement- The competition of other companies pressured firms to make improvements to their products.
Monopolistic competition Short Run
Profit maximization occurs where MC=MR
Characteristics of Monopolistic Competition
Relatively large number of sellers, Differentiated products, easy exit and entry.
Monopolistic Competition-Relatively large number of sellers (characteristics)
Small market shares- each firm is a small percentage on the market, therefore a small control over market price. No collusion- Large number of sellers ensure that collusion is unlikely Independent Action- no interdependence between firms, each can determine its own pricing policy without considering reactions from rival firms.
Marginal Revenue Product
The change in a firm's total revenue when it employs 1 more unit of labor. It is the change in total revenue over the unit change in labor.
Derived Demand
The demand for a resource that results from the demand for the products it helps produce. Labor resources usually do not satisfy customer wants but do so indirectly through their use in producing goods and providing services.
Oligopoly Model- Kinked-Demand-Curve
a demand curve based on the assumption that rivals will ignore a price increase and follow a price decrease.
Trade Surplus
exports exceed imports
Herfendel Index
take each percentage of the firms in an industry and square it. If the total is 10,000 (100 squared) it's a monopoly.
Marginal Resource Price
the change in the firms total cost when it employs 1 more unit of labor.
