EXAM #2 (10/25/23)
REGULATING A MONOPOLY (SEE PROBLEM SET)
(1) They can use antitrust laws to split up the company and encourage more competition; or (2) they can regulate the prices that the monopolist can charge via price ceilings or government control. Encouraging competition is the better choice if the industry is not a natural monopoly. Utilizing price ceilings is the better choice if the industry is a natural monopoly Regulating a non natural monopoly: Regulating a natural monopoly: 15.4.1 : Average Total Cost pricing (sometimes called average cost pricing) 15.4.2 : Marginal Cost pricing 15.4.3 Profits tax
Average total cost (this is the one with...)
-first, total cost = total of all costs of production, including opp. costs TC = TFC + TVC THUS, ATC = the average of all costs per unit of output ATC = TC / Q ATC = AVC + AFC (this is the one with economies and diseconomies of scale!!!)
CH. 12 READING QUIZ REVEIW the QUESTIONS key topics: 4 characerstis of perf. comptetitoin 4 characterstics of monopolistic competiotn 4 characerstics of oligopoly 4 characteristic of monopoly
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Ch. 12 - Different Types of Market Structures
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Ch. 15 Monopoly and Monopoly Power
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Chapter 13 Short-run and long-run cost of production
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Chapter 16 --- Monopolistic Competition
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see study guide (printed out)
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Main issue concerned w/ long run is the entry and exit of firms in the market
Eas of entry = firms are earning an economic profit in short run... Thus, in the long run in perfectly competitive markets, firms always end up producing at their minimum long-run average total cost and earning a normal profit (point A in Figure 14.7). As we will discuss later, this is one of the most appealing attributes of perfectly competitive markets.
Relationship between marginal cost and average variable cost is very important
Ex: student's GPA Ex: the marginal grade points are the number of grade points you get from each additional course grade you receive. The grade point AVERAGE is the average of all of the individual (marginal) grade points (see rest of 293 chapter 13)
In the long run in the Mainstream model
Firms choose optimal size of operations based on economies of scale The long-run av. total cost curve is used to display economies and diseconomies of scale...
Strategic competition:
Firms use advertising and marketing, branding, pricing, mergers and acquisitions, research and development, lobbying, and other strategies to gain an advantage over competitors. This is the most common type of behavior in oligopolistic industries.
reading quiz topics
For today's reading (quiz), please focus on the results generated by the cost curves analysis for perfect competition, monopoly, and monopolistic competition. What drives firm decision making in the short run? What happens in the long run and how does this affect profits? For example, does the model predict positive economic profits in the long-run for monopolistic competition? Why or why not? NB You do not need to master the long-run entry and edit graphs (Figures 16.3(b) and 16.4(b), we will do this in class.)
RQ topics
For today's reading (quiz), please investigate the kinked demand curve (why does it occur? how does this affect supply and demand analysis?), and the following concepts from game theory (have the working definition): game theory, dominant strategy, consistent strategy, Nash equilibrium.
(17.4) Game Theory and Prisoner's Dilemma -- GAME THEORY
Game Theory: a method for modeling how economic agents such as firms, individuals, or groups interact. Each different model or game involves particular actors, who are able to choose from among two or more strategies. The strategies taken by the actors determine the outcomes of the game. The outcomes of the game, therefore, are determined by the interdependent decisions of the actors
goal of monopolistic competition
Goal: Keep costs low and have a differentiating factor that allows a firm to raise prices Example of monopolistically competitive businesses... fast -casual restaurants Ex: they offer higher quality / fresher food
If firms exit a monopolistically competitive market,...
If firms exit a monopolistically competitive market, remaining firms will see the demand for their product increase and become more inelastic due to the decrease in the number of substitutes. This type of long-run behavior is unique to monopolistic competition
if new firms enter a monopolistically competitive market ...
If new firms enter a monopolistically competitive market, existing firms will see the demand for their product decrease and become more elastic due to the existence of additional substitutes.
(14.2) The Model of the Perfectly Competitive Firm in the Short Run
In PCM, market supply curve and market demand curve determine market price ... Individual consumers or firms have NO influence on market price - they are price takers rather than price makers The revenue the firm gets for each additional unit they sell is exactly equal to the market price Firm's profit-maximizing level of output is determined where marginal revenue (MR) is equal to marginal cost (MC)
(13.4) The Mainstream Model of a Firm's Long-RUn Costs of Production
In SR, firm's size of operations is fixed In the LR, the firm's size of operations is variable Firm can vary its capital stock
(16.2) Short-Run Profit Maximization in Monopolistic Competition
In SR, monopolistic compeitiotn maximize profits by producing every unit for which marginal rev is >= MC the firm's profit-maximizing level of output occurs at a quantity of 7, where MR = MC = $38. At that quantity, TR = TC = $308, and P = ATC = $44, so the firm is earning a normal profit.
(15.4) Regulating Natural Monopolies in the LR
In the long run, a monopolist can continue to earn economic profits indefinitely due to barriers to entry. New firms cannot enter the market. This means that monopolists will tend to charge high prices and that they have little incentive to innovate To force the firm to be more efficient and less exploitative, regulators have two choices: (1) They can use antitrust laws to split up the company and encourage more competition; or (2) they can regulate the prices that the monopolist can charge via price ceilings or government control. Encouraging competition is the better choice if the industry is not a natural monopoly. Utilizing price ceilings is the better choice if the industry is a natural monopoly
(16.3) Monopolistic Competition in the LR
In the long run, because there is easy entry into this monopolistically competitive market, more firms will enter. This means there are more close substitutes competing with existing firms. As more restaurants open up nearby, the existing restaurant will see its sales decline, and it will be < able to charge high prices bc consumers can go to a competitor
review: 2 different types of monopolies
Natural It is actually more efficient to have one firm controlling the market, bc costs per unit fall is the firm gets larger Regular natural monopolies w/ one of four policies: Average cost pricing Fair price Marginal cost pricing to subsidize products that genreate eternal benefits Profits tax to raise rev. And discourage consumption of a product State owned enterprise to provide the product / service directly to consumers Nonatural Use antitrust laws to preserve and foster competition Gov. regulators can take dramatic steps such as splitting a company up into smaller firms ... like w/ Standard oil
natural monopoly
Natural monopoly: a market where multiple firms producing a product would be less efficient than production by one firm only
(17.2) The Kinked Demand Curve Model of An Oligopolistic Industry
Oligopolies that feature three or more large firms and little product differentiation, like the airline industry, display some interesting patterns: • Prices are "sticky" and do not change as frequently as prices do in more competitive industries. • Firms usually match each other's prices. • Instead of competing with prices, firms use non-price competition such as advertising. • Every so often, firms engage in a price war in which firms slash prices to gain market share. • After price wars, these markets usually return to stability and sticky prices
(12.4) Oligopoly
Oligopoly = market that is dominated by a few huge firms whose behavior affects each other significantly Markets become oligopolistic when there are significant benefits to being huge Ex: manufacturing or cars, cell phones, steel, other products Producing on a massive scale = lower costs of production
Nonetheless, we do see some patterns. In oligopolistic industries we often see the following major variations in competitive behavior -- price competition
Price Competition: firms largely ignore the interdependence that exists and maximize profits independently of the behavior of competing firms This type of behavior occurs in the most competitive of oligopolies Ex: wireless service provider industry Price: firms started engaging in price cutting to lure customers from competitors — T-Mobile, Sprint, etc. cut their prices below Verizon to try and gain market share Quaity - companies invest a lot of improve their quality Advertising - spending a lot of money on advertising
price war / kinked demand curve
Price war : airlines do not want to lower prices because that will start a price war If United lowered their price to $99, the rest would match that... THEREFORE, this makes firms in airline industry reluctant to lower prices Lowering prices will start price war and sales will barely increase Firms dont want to raise prices for fear they will lose most of their customers by being most expensive option Firms do not want to lower prices of fear of starting price war THUS, rational strategy for firm = to be to charge same price as ALL other firms and then compete in DIFFERNT WAYS Ex: reducing costs (eliminating free meals) Brand recognition Increasing customer loyalty (flier programs)
Economic loss
A below-normal profit Firms will eventually exit an industry that is incurring economic losses so they can invest their money in more profitable endeavors
consistent strategy
A player behaves in a consistent fashion, either always matching what the other player does or always doing the opposite Consistent strategy: a player in a game always behaves in a consistent fashion, either matching what the other player does or doing the opposite of what the other player does Ex: industry w/ dominant player like American airlines.. And other player, United Airlines always matches what dominant players does
note: law of diminishing returns does ______ in the long run
APPLY Think intuitively Bc in the long run, ALL inputs can be varied If a firm wants to expand in the LR, it can hire more laborers AND purchase more machinery and expand operations
Key elements of AVC Curve:
AVC = MC when Q =1 When MC < AVC, AVC falls as quantity increases (when each additional unit costs lest than the averag) MC = AVC when AVC is at its minimum level When MC < AVC, AVC increases as quantity increases (when each additional unit costs more than the average)
Oligopoly = common market structure
Any industry in which firms benefit from being large due to significant economies of scale usually becomes an oligopoly Common in large scale manufacturing of all types steel , aluminum, plastics, cars, cell phones, cereal, soft drinks, tablets, etc. Must dominate national retail and service markets Social media and other software markets = also oligopoly Significant financial advantages Pay lowest interest rates and get acces to most favorable financing from banks
The questions to ask when attempting to classify a particular industry are the following:
Are there barriers to entry (is it difficult to start a business in this industry? if the answer is yes, then the market must be either oligopolistic or monopolistic with a few firms or one firm. If the answer is no, then the market must be perfectly competitive or monopolistically competitive with many firms. Is there product differentiation (do the products vary or are they identical?) if the answer is yes, then the market must be either monopolistically competitive or oligopolistic. If the answer is no, then the market must be perfectly competitive or oligopolistic.
13.1.1 Marginal Cost
As workers' marginal productivity increases, marginal cost decreases The increase in marginal productivity of labor results in a decrease in the marginal cost of production due to specialization "The key insight from Figure 13.1 is related to the shape of the marginal cost (MC) curve and how it determines the shape of all other firm cost curves. The rounded check mark shape of the MC curve is due to the law of specialization, which causes the marginal cost of each additional unit to fall up to point A, and the law of diminishing returns, which causes the marginal cost of each additional unit to increase after point A."
13.1.2. Average Variable Cost
Average Variable Cost: the variable cost per unit of output The total variable cost is the total cost of hiring all of the variable inputs, like labor AVC = (TVC/Q) Shape of AVC curve is driven directly by the shape of the marginal cost curve The change in total variable cost dived by the CHANGE in Q → the variable cost of producing each additional unit Compared to AVC which is the AVERAGE VARIABLE COST OF ALL UNITS BEING PRODUCED
average fixed cost
Average fixed cost = the fixed cost per unit of output AFC = (TVC / change in Q) Note: bc total fixed cost is a CONSTANT amount, AFC falls as Q increases ... The more the firm produces, the smaller its average fixed cost becomes because the firm is able to spread its fixed costs over more and more units
Behavior of Monopolistically competitive firms is interesting in the LONG RUN
To beat out the competition and gain market share, firms focus on keeping costs down, branding and marketing, improving quality, innovating, improving service, securing a perfect location, and making other efforts to differentiate their product from those of competitors. Despite such efforts, if most firms in a monopolistically competitive market are extremely successful and earn economic profits in the short run, then new firms will enter in the long run (this market is easy to enter), the addition of new substitutes will compete away the economic profits of many existing firms, and the typical monopolistically competitive firm will earn a normal profit in the long run.
total fixed cost
Total Fixed Cost = the total cost of hiring all fixed inputs, such as capital In short run all firms must pay rent and make payments toward the cost of machinery each month...
13.1.4 Average total cost
Total cost = total of all costs of production, including opportunity costs (normal profit) : TC= TFC + TVC Average Total Cost : the average of all costs per unit of output ATC = (TC / Q) = AVC + AFC
Examples of perfect competition in real world:
Unprocessed agricultural products Market for common stocks Homogeneous local services (babysitting, mowing lawn, etc.) Used goods in plentiful supply (used books, etc.) homogeneous , easily produced local products (baked goods, wood products, etc).
Cartel :
a group of sellers who work together to coordinate prices, quantities, and sales practices to reduce competition and increase profits Collusion is "irresistible" to oligopolies in the unique nature of interdependence when a market is dominated by few huge firms Kinked demand curve model helps understand incentives faced by oligopolies, especially why they tend to adopt similar prices and practices and why they have an incentive to collude...
Nash equilibrium:
a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen
Dominant strategy:
a strategy that is best for a player in a game regardless of the strategies chosen by the other players
Price leadership:
a type of tacit collusion that occurs when 1 firm, the industry leader, sets the prices for the industry, and the other firms follow suit by adopting the same pricing structure We see price leadership in the airline industry repeatedly. For example, in 2008, American Airlines, the largest U.S. carrier, announced that they would start charging $15 for passengers' checked bags. Almost immediately, Delta and AirTran announced that they, too, would charge exactly the same amount for checked bags. By 2017 all of largest U.S. airlines settled on $25 as the charge for the first checked bag Price leadership does not always work...
forumula for marginal cost
change TC / change Q
In order to differentiate themselves from the other competitors, and in hopes of being one of the more successful firms in the industry, monopolistic competitors tend to focus on five strategic factors
costs, quality, location, service, and branding. We can see all of these behaviors in the clothing manufacturing industry
the key in monopolistic competition (Graph) is _______ and how the number of ________ affects the demand curve
substitutes -if there are more substitutes, the demadn curve decreases and becomes flatter if there are fewer substitutes, the demand curve increaeses and becomes steeper this give the market a unique character compared w/ pure monopolies or perfectly competitive markets
Diseconomies of Scale
the increase in average total cost a firm experiences as it produces a larger quantity due to management challenges Larger firms have more difficulty with coordination of efforts, communications, bureaucratic waste, and unproductive layers of management Long run ATC...
average variable cost
the variable cost per unit of output ; the avg. variable cost of ALL units being produced AVC = TVC / Q
Total variable cost
total cost of hiring all of the variable inputs, such as labor
14.2.1 The Short-Run shutdown condition
want to shut down in SR if ______< ______ keep producing if ________ > _________ in the LONG run leave if _______ < _________ stay in industry if ________ > _________ (TC, VC) (TC, VC) (TR, TC) (TR, TC)
(16.1) The Characteristics of a Monopolistically Competitive Market (list the 4)
1. Slightly differentiated products: Goods or services in this market are close but not perfect substitutes for each other. Differences exist based on quality, cost, branding, service, and location. 2. Large number of sellers and buyers: No seller or buyer has a large influence over the market. 3. Easy entry and exit: These markets are fairly easy to enter. Economic profits will lure new firms into the market in the long run, whereas losses will cause firms to exit. On average, suppliers earn normal profits in the long run. 4. Some control over prices: The unique elements of each business allow some firms to raise prices and be more successful than others. Nonetheless, the large number of substitutes makes the demand curve for every firm fairly elastic and limits how much any one firm can charge.
Numerous examples of monopolistically competitive business operating in every community
16.1.1 : Local Professional Services Doctors, lawyers, dentists, physical therapists... They all operate in monopolistically competitive industries There are some barriers, entry is still easy enough that every community has numerous professionals in each one 16.1.2 : Local Retailers restaurants , bars, cafes, convenience stores... gas stations... etc. Monopolistically competitive retail industries Numerous local competitors and easy to enter these markets 16.1.3 Small-scale manufacturing Usually monopolistically competitive
(14.1) The Characteristics of a Perfectly Competitive Market (list 4)
Homogeneous Product: Firms sell product that is identical to all other competing products - goods are perfect substitutes for each other - consumers will buy what is cheapest - advertising cannot be used Large number of small sellers and buyers : all sellers / buyers are small relative to size of market - no individual seller / buyer can influence market price Easy entry and exit: There are no barriers to entry or exit, so firms can enter or exit the market easily. The ease of entry means that if existing firms are making above-normal profits, new firms will enter the market and drive prices down to where firms make a normal profit in the long run. If existing firms are experiencing losses, some firms will exit the market, which drives prices up until firms earn a normal profit in the long run Firms are price takers: All firms charge the same price. The market price is determined by the market supply and demand curves. Individual suppliers cannot raise their prices at all because if they do, consumers will switch and buy cheaper, identical substitutes. Individual suppliers have no reason to lower their prices because they can sell all of their goods at the going market price
list 4 major traits of perf. competition
Homogenous product: all firms sell a product that is identical to the products being sold by other suppliers. Goods are perfect substitutes for each other, so consumers will buy whatever good is cheapest. In such markets, advertising is not helpful because it raises costs but does not increase demand, because all products are identical and branding is not possible. Large # of small sellers and buyers This market consists of a large number of sellers and buyers in the market, all of whom are small in size. No individual seller or buyer can influence the market price of the product. Easy entry and exit The reason that these markets are so competitive is because anyone can enter this market. It is easy to start a firm in a perfectly competitive industry because there are no barriers to entry. It is easy to exit the market (close up operations) because the initial investment is small. The ease of entry means that if firms in this market are making above-normal profits, new firms will enter the market and drive prices down to where firms make a normal profit Firms are price takers: Suppliers cannot raise their prices at all because if they do, consumers will switch and buy cheaper, identical substitutes. Suppliers have no reason to lower their prices because they can sell all they want at the going market price. Thus, all firms charge the same price, and the market price is determined by the market supply and demand curves.
(14.3) THe Mainstream Model of the Perfectly Competitive Firm in the Long Run
LR Marginal Cost Curve is also shaped by economies and diseconomies of scale Long-run marginal cost (LRMC): is the lowest possible increase in total cost from offering one additional unit of output for sale given that all inputs are variable LRMC is the least cost way a firm can use any combination of its inputs to produce an additional unit of output Law of Diminishing returns does NOT apply in the long run Think intuitively Bc in the long run, ALL inputs can be varied If a firm wants to expand in the LR, it can hire more laborers AND purchase more machinery and expand operations Law of specialization can still impact LR marginal cost Firms can develop specialized jobs, inputs, and machines to produce more effectively in the long run Greater specialization is one of the main sources in economies of scale
(13.1) The Mainstream Model of Short Run Costs of Production SR production function (TP1) reflects 2 key economic laws
Law of specialization Law of diminishing returns
Monopoly
Least competitive market structure with only ONE firm present and NO close substitutes Natural monopoly: a market where multiple firms producing a product would be less efficient than production by one firm only
profit maximization -- you do NOT want to produce where ____> _____
MC > PRICE Profit Maximization: in the mainstream economics model of firm behavior is achieved when firms produce every unit for which marginal revenue is greater than or equal to marginal cost
monopolistic competition
MC is a market that is similar to perfect competition, but ONE major difference Firms in monopolistically competitive market have a monopoly on ONE unique aspect of the market Product differentiation Quality Brand Location Gives firms some control over their prices
monopolistic compt. review
Monopolistically competitive market structures are some of the MOST COMMON and important markets in modern capitalist economic systems Firms in these markets sell differentiated products that are close substitutes for competing products Easy entry and exit ensure typical firm will earn normal profits in the LR Once profit maximizing livel of output is determined, the amt of economic profit / loss is determined by comparing price and atc or total rev and total cost
list the 4 characteristic of monopoly
One Seller: There can be no competition for a firm to be considered a monopoly Unique Product There are no close substitutes for a monopoly good. The product produced by a monopolist is unique. Prohibitive barriers to entry There is little or no chance of another firm supplying the same product as a monopolist due to economies of scale, legal prohibitions, or other barriers to entry Complete control over prices With no substitutes and no threat of new firms entering the market, a monopolist can set prices wherever they wish to make the most amount of profit possible. With no substitutes, they tend to face an extremely inelastic demand curve that allows them to raise prices without losing much in the way of sales The KEY to long term monopoly success is for a monopolist to MAINTAIN their monopoly Can use financial and legal resources to stymie potential competitors Example: Microsoft Windows monopoly (276)
(15.1) Monopoly Characteristics
One seller: There is only one firm with no competitors in a monopolistic market. 2. Unique product: There are no close substitutes for a monopoly good. A monopolist produces a product that is unlike other products. 3. Prohibitive barriers to entry: In natural monopolies no other firms can enter the market due to economies of scale. In non natural monopolies, the barriers to entry include ownership of a unique resource, first mover advantages, or legal prohibitions such as patents, copyrights, or legally granted franchises. With prohibitive barriers to entry, monopolies can earn an economic profit in the long run. 4. Complete control over prices: With no threat of competition, a monopolist can set prices wherever they wish to maximize profits. With no substitutes, their demand curve is downward sloping and tends to be extremely inelastic
perfect competition
Perfect competition is the MOST competitive market structure Large numbers of small firms produce identical products Market is easy for new firms to enter and firms have NO control over the price they charge Prices are determined by market supply / demand Example: markets for : Wheat Corn Soybean Babysitting lawn mowing
review: Four market structures that we tend to find in industries in capitalist economics (list and describe each breifly)
Perfect competitive : sell homogenous products in markets that are so competitive firms have NO control over prices Monopolistic competitive : firms sell slightly differentiated products in competitive markets so they have some control over prices... however high degree of competition limits how much firms can charge Oligopolistic: markets dominated by a few large firms In oligopolies w/ only 2-3 dominant firms, tend to find collusive behavior Monopolies: controlled entirely by one firm- deeply problematic and requires gov. Regulation / use of antitrust laws to make the market operate more effectively
Major characteristics of an oligopoly:
Products may be differentiated or undifferentiated: Oligopolistic industries that manufacture goods for consumers (cars, cell phones, etc.) sell differentiated products. Oligopolistic industries that manufacture materials used in the production of other goods, such as inputs like steel or aluminum, tend to produce undifferentiated products. 2. Dominated by a few huge firms: A handful of giant firms control most of the industry. There may be some smaller firms but the major dynamics of the market revolve around the interplay between the dominant firms. 3. Significant barriers to entry: In manufacturing, economies of scale are so significant that only huge firms with access to the latest technology and a global supply chain can compete. In consumer goods, brand name recognition and first mover advantages (where consumers get comfortable with a particular product, such as Facebook or the iPhone) allow certain companies to dominate. It is extremely difficult for new firms to enter such markets. 4. Interdependence among firms: When a handful of firms dominate an industry, the actions of one of the big players have a large and direct impact on the other firms. Firms watch each other very closely and try to match price cuts and counter advertising campaigns. This also leads to incentives for firms to collude to act like a monopoly or to merge in order to lessen competition. Most instances of collusion occur in oligopolies
(13.3) The Mainstream Model of Profit Maximization - Profit Maximization
Profit Maximization: in the mainstream economics model of firm behavior is achieved when firms produce every unit for which marginal revenue is greater than or equal to marginal cost
(15.3) Profit Maximization in a Monopoly in the Short Run
Profit maximizing level of output is found by comparing MR and MC for each uni In general, you can tell how a monopolist is doing by looking at the demand curve relative to the ATC curve. If the demand curve goes above the ATC curve, the firm will earn an economic profit. If D is tangent to ATC, the firm will earn a normal profit at the tangency point. If D is always below the ATC curve, the firm will experience an economic loss. Nonetheless, the vast majority of monopolies earn economic profits, which is why we regulate them
short run costs are shaped fundamentally by___________________________________________________
Short run costs are shaped fundamentally by the laws of specialization and diminishing returns
(17.1) The Major Characteristics of an Oligopolistic Industry (list the 4)
Significant barriers to entry: Firms in oligopolistic industries need to be huge in order to compete due to large economies of scale. The factors that result in significant economies of scale include the need for large-scale capital and technology, a global supply chain to minimize costs by producing where each input is cheapest, brand name recognition achieved by extensive advertising and marketing, financial advantages, political advantages, and first mover advantages. The existence of barriers to entry means that oligopolies can earn an economic profit in the long run. 2. Domination of the industry by a few huge firms: Although there may be some small firms in the industry, oligopolies are dominated by a few huge firms, ranging from duopolies with two dominant firms (Coca-Cola and Pepsi) to competitive oligopolies with four or five dominant firms (the airline industry in the United States). 3. Finished products are differentiated; inputs may be undifferentiated: Oligopolies in finished consumer goods markets such as cars, smartphones, and computers produce differentiated products and focus significantly on branding. Oligopolies that produce inputs for other firms such as steel, aluminum, rubber, and plastics tend to produce mostly undifferentiated products. When products are undifferentiated, the key strategic consideration is minimizing costs for a given level of quality. 4. Interdependence among firms: When a few firms dominate an industry, the behavior of one of the dominant firms affects all other firms in the industry. As a result, firms are constantly analyzing and attempting to predict and counter the actions of their competitors. Or, to reduce destructive competition, firms behave cooperatively Oligopolies are extremely diverse Firms in each oligopolistic industry behave very differently from firms in other industries depending on the type of industry ...
Major differences of monopolistically competitive market: (list the 4)
Slightly differentiated products Goods are close but not perfect substitutes for each other. If firms can successfully improve quality and establish brand name recognition, they can further differentiate their product from competing ones. Large number of sellers and buyers The large number of competitors and consumers means that no one actor has a large influence over the market. Some firms are larger than others but no firm is dominant. Easy entry and exit These markets are fairly easy to enter. It is relatively simple to open a restaurant or a hair salon, for example. There may be some small barriers to entry, such as startup costs or, in the case of professional services such as doctors, dentists, and lawyers, a graduate education. Nonetheless, entry into such markets is easy enough that if suppliers in a monopolistically competitive industry are earning above-normal profits, new firms will enter and compete those profits away, causing suppliers to earn normal profits in the long run Some control over prices Firms in this market have a monopoly over some unique aspects of the business, including quality, location, and branding. The more successfully a supplier can differentiate their product from their substitutes, the higher the price they can charge. But the large number of substitutes limits how much one supplier can raise prices, so demand curves tend to be elastic
No close substitutes = monopolist does NOT need to worry about competition
Stems barriers from entry due to power monopolies have Any form of monopoly faces a downward sloping demand curve Firm controls the entire market for the product it is producing so the firm's demand curve IS the market demand curve
economic loss conditions
TR < TC
17.3) Tacit, Illegal, and Formal Collusion Collusion btwn firms an take a variety of forms - bc formal collusion is ILLEGAL in most countries, most collusion is TACIT or ILLEGAL -- TACIT COLLUSION
Tacit Collusion: occurs when firms find a way of agreeing on prices or production quotas without actually discussing such things
profit maximization
achieved when firms produce every unit in which MR is >= marginal cost firms maximize profits by producing every unit for which MR >= MC
marginal cost
additional cost of producing another unit of output -increase of marginal productivity of labor = a decrease in marginal cost of production due to SPECIALIZATION
economic profit
an above-normal profit Firm earning an economic profit makes a higher profit than typical firms
Normal Profit =
defined as the level of profit needed for a company to remain competitive in a market Firm earns normal profit if it covers all of its explicit costs of production and pays a return to the firm's owners that is at least as good as they could get in other industries
Collusion:
firms engage in tacit (unspoken), illegal, or legal collusion to control an industry and to act like a monopolist. This behavior is also extremely common in oligopolies.
normal profit conditions
if TR = TC
economic profit conditions
if TR > TC
profit max. rule
in the short run, a firm should produce every unit for which MR > MC, as long as P > AVC keep producing more Q AS LONG AS MR >= MC
Marginal Revenue
is the addition to total revenue from selling an additional unit of output
as monopolist increases production of ________, price _______
output falls In monopoly, bc firm controls entire market, the more the firm floods the market with its products Ex: if apple wanted to sell twice as many iphones, it would have to lower the price significantly in order to sell that much more than it currently does Lowering price brings more money from selling additional units, but also reduces the amount of revenue the firm gets PER UNIT it sells Monopolies have financial incentive to keep production low and prices high In perfect competition, price ALWAYS EQUALS marginal revenue NOW, price, which comes from demand curve is ALWAYS GREATER THAN MARGINAL REV. AFTER THE 1ST UNIT
Economics / Economies of scale:
refers to the decrease in avg. total cost a firm experiences as it produces a larger quantity due to increases in productivity (increasing returns to scale)... or cost advantages from being larger
LRATC
shows the lowest cost of producing each Q in the LR when LRATC curve is declining, firm experiencing economies of SCALE when LRATC curve is increasing, firm is experiencing DISECONOMIES OF SCALE -see YT VIDEO ON THIS