Econ Week 9: Monopoly, Oligopoly, and Monopolistic Competition

How much should Carla charge for editing if she uses a perfect hurdle? Assume: - Carla must charge the same price to everyone - Carla offers a mail in rebate coupon - Carla knows that students with at least a $36 reservation price never use the coupon - Carla knows that students with a reservation price below $36 always use the coupon - Opportunity cost = $29

List price submarket - Carla will service all three students as the MR is greater than the MC of $29. Equilibrium price =$36 (lowest AR of group) Discount price submarket - Carla will only serve students D and E. For everyone else MC is greater than MR. - Equilibrium price is $32 - So, charge $36 and allow a rebate coupon for $4 With Hurdle Price Discrimination: - TR = (3)(36) + (2)(32) = $172 - TC = ($5)($29) = $145 - Economic Profit = $27/wk; This is $6 more than Without Price Discrimination (single price monopoly) - Serve students A, B and C only. - TR = (3)(36) = $108 - TC = ($3)($29) = $87 - Economic Profit = $21/wk

Example 2: - Nintendo and Playstation each have fixed costs of $10,000,000 and constant MC= $0.20 per game. - Playstation produces 20% more copies of the video game compared to Nintendo - $1.67 difference in ATC because TFC/TC is high.

Nintendo: annual production: 1,000,000 fixed cost: 10,000,000 variable cost: 200,000 total cost: 10,200,000 ATC per game: 10.20 playstation: annual production: 1,200,000 fixed cost: 10,000,000 variable cost: 240,000 total cost: 10,240,000 ATC per game: 8.53 •Fixed costs are a relatively large share of total cost •Playstation has a $1.67 average cost advantage •Playstation can lower prices, cover cost, and attract customers

Example 1: - Nintendo and Playstation each have fixed costs of $200,000 and constant MC= $0.80 per game. - Playstation produces 20% more copies of the video game compared to Nintendo - 3 cent difference in ATC because TFC/TC is small. what is the annual production/fixed cost/variable cost/total cost/average total cost per game of the two?

Nintendo: annual production: 1,000,000 fixed cost: 200,000 variable cost: 800,000 total cost: 1,000,000 ATC per game: 1.00 playstation: annual production: 1,200,000 fixed cost: 200,000 variable cost: 960,000 total cost: 1,160,000 ATC per game: 0.97 Observations: •Fixed costs are a relatively small share of total cost •Cost/game is nearly the same

Example 2: - Nintendo and Playstation each have fixed costs of $10,000,000 and constant MC= $0.20 per game. - Playstation produces 20% more copies of the video game compared to Nintendo - $1.67 difference in ATC because TFC/TC is high. Example 3: - With a $1.67 advantage in ATC, Playstation is able to get a larger market share. - Cost advantage to Playstation becomes larger. Explains why you would expect to see just a few firms survive in markets characterized by large fixed start up costs and low variable costs.

Nintendo: annual production: 500,000 fixed cost: 10,000,000 variable cost: 100,000 total cost: 10,100,000 ATC per game: 20.20 playstation: annual production: 1,700,000 fixed cost: 10,000,000 variable cost: 340,000 total cost: 10,340,000 ATC per game: 6.08 - 500,000 games move from Nintendo to Playstation - Nintendo's average cost increases to $20.20/unit - Playstation average cost falls to $6.08 - A large number of firms cannot survive when the cost differential is high

what do you notice about P and AR?

P=AR=Demand curve -true for all 4 market structures

A Perfect Hurdle

Separates buyers precisely according to their reservation prices - These don't exist in reality. But imperfect hurdles are common.

In exchange for a share in the revenues earned on campus, State U has granted CheapFizz the exclusive right to sell soft drinks in the student union and in vending machines on campus. Prior to the deal, three soft drink companies sold beverages on campus; now no other soft drink company is allowed to sell its products on campus or at university events. The beneficiaries of this deal are _____________.

State U and CheapFizz

Hurdle Method of Price Discrimination

The hurdle method of price discrimination is the practice of offering a discount to all buyers who overcome some obstacle. - Rebate coupons - Temporary Sales - Commercial airline tickets - Hard cover and paperback books - Cars with optional add-ons - Scratch and Dent appliance sales - Movies with phased releases

Price Discrimination

The practice of charging different buyers different prices for essentially the same good or service

Imagine that you are an entrepreneur, making designer T-shirts in your garage. Your accountant has estimated that your firm's total costs are TC = 300 + 10 * Q.As you increase production of T-shirts your average fixed costs _____________ and your marginal costs _____________.

decrease; stay the same

Perfect price discrimination occurs when

each buyer pays exactly his or her reservation price.

According to the textbook, the most important and enduring source of market power is

economies of scale.

Comparing the non-price discriminating monopoly outcome to the perfectly price discriminating monopoly outcome, profits are

greater when price discriminating.

A firm is most likely to experience economies of scale if it has _____________ start up costs and _____________ marginal costs.

high; low

The hurdle method of price discrimination usually _____________ consumer surplus and _____________ producer surplus compared to the standard monopoly profit maximizing equilibrium.

increases; increases

monopolies are inefficient

monopolies are inefficient because they: 1. charge a higher price 2. don't produce enough (not allocatively efficient) 3. produce at higher costs (not productively efficient) 4. have little incentive to innovate (there is no external pressure to be efficient)

In exchange for a share in the revenues earned on campus, State U has granted CheapFizz the exclusive right to sell soft drinks in the student union and in vending machines on campus. Prior to the deal, three soft drink companies sold beverages on campus; now no other soft drink company is allowed to sell its products on campus or at university events. Prior to the deal, a 12-ounce can of CheapFizz sold for 75 cents. After the deal you would expect a 12-ounce can of CheapFizz to sell for

more than 75 cents because other firms must exit the market.

A firm that emerges as the only seller in an industry with economies of scale is called a(n)

natural monopoly.

Suppose a firm is collecting $100 in total revenues when it sells 10 units and it receives $110 in total revenues when it sells 11 units. The firm is a(n)

perfect competitor.

Because the monopolist charges a price in excess of marginal costs, it must be the case that the monopolist

produces less than the socially efficient level of output.

A monopolist calculates its marginal revenues to be $15 and marginal costs to be $16. One can infer that it

should decrease output.

Imperfect price discrimination occurs when

some buyers pay less than their reservation price.

In exchange for a share in the revenues earned on campus, State U has granted CheapFizz the exclusive right to sell soft drinks in the student union and in vending machines on campus. Prior to the deal, three soft drink companies sold beverages on campus; now no other soft drink company is allowed to sell its products on campus or at university events. CheapFizz now has market power due to

the grant of an exclusive license to sell.

A monopolist sets its price at $100 and offers a 10% rebate. For this to be a perfect hurdle, it must be the case that

those with a reservation price of $100 or more purchase and ignore the rebate while those with a reservation price between $99 and $90 purchase and use the rebate.

what effects cause marginal revenue to be less than price?

when any imperfectly competitive firm lowers its price to increase the amount it sells, there are two effects on total revenue 1. Quantity Effect- TR is increased due to an increase in ouput (lower price, sell more units, so TR increases) 2. Price Effect- TR decreases due to a fall in price (losing money because selling at a lower price) The extra revenue received from selling an additional unit of output is offset by the selling of other units at a lower price -overall TR may increase or decrease depending on which effect is stronger

Economies of Scale and the Importance of Start-Up Costs

- Any production process that entails large pre-investments in research and development are characterized by: + Large start up costs + Low constant marginal costs + Average total cost declines sharply as output increases - These are Firms with large fixed costs and low variable costs and are characterized by - Economies of scale - Increasing returns to scale.

Monopolies

- Historic monopolies included John D. Rockefeller's Standard Oil and J.B. Duke's American Tobacco Co. They were broken up after the passage of the Sherman Anti-Trust Act of 1890. - AT&T was a monopoly for landline telephones until it was broken up in 1982. - Local utilities (electricity, gas, water) today work as govt. licensed monopolies. These monopolies were created by the govt. and their pricing policies are be subject to regulation by local and state governments. - De Beers was close to a true monopoly for almost a century, but due to a variety of market and regulatory factors, its market share went down from over 80% in the late 1980s to around 36% as of 2019.

homogeneous vs. differentiated goods

- Homogeneous - Identical - Differentiated - the goods are similar but are not perfect substitutes in the consumer's mind (differentiated by quality, packaging, advertising, etc) - Whether a market sells differentiated goods or homogeneous goods depends on the nature of the good and consumer's preferences ex: Breakfast cereals versus hammers!

Limitations to Price Discrimination

- In reality, perfect price discrimination can not likely to occur because + Seller will not know each buyer's reservation price. + Even if buyers RP is public knowledge, low price buyers could always resell to other buyers at a higher price and capture a part of the producers' surplus. - Imperfect price discrimination is widespread. - The hurdle method of PD is aimed at solving these problems

Different Forms of Imperfect Competition: oligopoly

- Industry structure in which a small number of large firms produce products that are either close or perfect substitutes - Homogeneous (steel, cement) and differentiated (automobile, cigarettes, detergents) products.

Why Diseconomies of Scale?

- Is there anything called "too large" in terms of factory size or size of operations? - Yes. Beyond a certain point bureaucratic and managerial inefficiencies creep in. Cook book procedures replace managerial brilliance. Coordinating a large labor force becomes prohibitively expensive.

Economies of Scale and Start-Up Costs

- New products can have a large fixed development costs - If marginal cost is constant, Marginal cost (M) = Average variable cost - Total cost is fixed cost (F) plus variable cost TC = F + (M) (Q) (Total cost increases as output increases) - Average total cost is ATC = F / Q + M (Average total cost decreases as output increases) -Cost advantages from economies of scale depends on how large the fixed cost is in relation to marginal cost.

Returns to Scale

- Returns to scale is a long run phenomenon. All inputs are changed in the same proportion. - If output more (less) than doubles when all inputs are doubled, the production function is said to exhibit Increasing (Decreasing) returns to scale. - If output doubles when all inputs are doubled, the production function is said to exhibit Constant returns to scale.

Summary of Using Discounts to Expand the Market

- Single price monopolies are inefficient because P > MC (=MR). - The hurdle method of price discrimination reduces the inefficiency. - The more finely the seller can discriminate, the smaller the efficiency loss. - Hurdles are not perfect, therefore, there will be some efficiency loss.

Why Economies of Scale?

- Specialization and Division of labor yields efficiency. - Mass production reduces average costs since the large set up costs are spread over a large amount of output. Once production is established, MC is very low. - Experience leads to "learning by doing" and leads to improvements in efficiency.

Why does Intel sell the overwhelming majority of all microprocessors used in personal computers?

- The fixed investment needed to produce a new leading edge micro-processor is upwards of $2 billion while the marginal cost is just pennies. - Huge start up costs and initial advantage translating to insurmountable cost advantages for Intel

Why do many movie theaters offer discount tickets to students?

- The goal is to get buyers who would not buy without the discount. Students have a lower RP compared to older working adults. Theater owners expand their clientele by offering tickets to students at a discount. - There is also no risk (because of verifiable IDs) that a student would buy the ticket for a low price and re-sell it to a non-student for a higher price and pocket the difference.

Is Price Discrimination Bad?

- The hurdle method raised economic surplus (consumers' and producers' surplus). - CS and PS are both greater under the hurdle method of price discrimination than when there is no price discrimination.

The Marginal Revenue Curve for a Monopolist with a Straight-Line Demand Curve

- The vertical intercept, a, is the same for MR and AR - The horizontal intercept for MR, b/2, is one half the demand intercept, b

Total and Average Total Costs for a Production Process with Economies of Scale

- Total cost rises at a constant rate, M, as output rises M is Marginal Cost, assumed constant Average costs decline and at very high levels of output ATC is infinitely close to MC. (curve downward) ATC= F/Q + M

Market structures

- We know that in reality, perfect competition, in its ideal text-book form, is rare. - What is far more common are firms with some degree of market power (power to set prices). Market Power is a measure of a firm's ability to raise the price of a good without losing all its sales. - In economics we define market structures based mainly on the following two dimensions: 1) Number of producers in the market (one, few, or, many) 2) Whether goods produced are homogeneous or differentiated - we have one perfectly competitive and three Imperfectly competitive market forms: 1) Perfect Competition (homogeneous, many) 2) Imperfect Competition - Monopolistic Competition (differentiated, many) - Oligopoly (differentiated/homogeneous, few) - Pure Monopoly (one firm)

We have price discrimination when a monopolist:

- charges a different price to different consumers even when the cost of supplying each consumer is the same. Example - discount airfares, discounts on movie tickets for students and seniors, rebate coupons. - Charges the same price when the cost of supplying different consumers is different. Example - mailing letters to Boston vs. Chicago say from St Louis. - We will focus mainly on PD of the first kind.

Different Forms of Imperfect Competition: monopolistic competition

- closest to perfect competition - A large number of firms that produce slightly differentiated products that are reasonably close substitutes for one another - Long-run adjustment to zero economic profits because of free entry and exit - Importance of product differentiation

Different Forms of Imperfect Competition: pure monopoly

- most inefficient The only supplier of a unique product with no close substitutes

The Demand Curves Facing Perfectly and Imperfectly Competitive Firms

- perfectly competitive firm: perfectly elastic demand curve - imperfectly competitive firm: downward sloping straight line curve

monopolies- consumer/producer surplus & DWL

-PC market- CS is triangle from competitive price to where y-intercept of D curve is and PS is below the price and above the supply curve (MC) -monopolies underproduce and overcharge, decreasing CS (triangle from where monopolist price to y-intercept for D curve) and increasing PS (below monopolist price and above the MC curve but to the left of the Q). Since TS falls, there is DWL -consumers are hurt and producers are receiving more and the expense of consumers in a monopoly -DWL (loss CS and PS): triangle (to the right of Q) from monopolist price to point where Q (MR=MC) intersects the MC curve -can show how inefficient monopolies are by looking at CS, PS, and DWL

What do you notice about TR and MR?

-TR rises as MR is positive but falls (earning additional revenue which increases TR) -TR falls when MR is negative -TR peaks when MR is 0

natural monopoly

-a market that run most efficiently when one large firm provides all of the output -a single firm can produce at lower ATC (economies of scale due to large FC) -ATC is always decreasing -ex: utility company bc have a very high fixed cost, have to set up electric towers, etc. so you are producing the highest volume in the market because you are the single seller

monopoly demand curves

-a monopolist is the only seller, so it uses the market demand curve (downward sloping) -monopoly sets a high price, Q demanded is low -since it is subject to the law of demand so to sell a larger Q, the firm must reduce P -price maker so MR does not equal P

in order to price discriminate, a firm must

-a price maker (bc setting the price for each group of people) -be able to divide the market in groups based on their WTP (group students and seniors and group business travelers and leisure travelers) -make sure that buyers cannot resell the good/services (arbitrage) b/c then you can't price discriminate

characteristics of a pure monopoly

-a single seller in the market: the firm is the industry -unique product: no close substitutes for the firm's product -the firm is the price maker: the firm has considerable control over the price because it can control the quantity supply -entry is blocked -in SR and LR unless the problem says otherwise

a monopolist with a loss

-as with a competitive firm, the monopolist's loss equals (P at ATC (Cm) - Pm) x Qm -ATC curve is drawn above Pm -AVC curve is below Pm to show they are producing -so rectangle including the loss rectangle is total cost (P at ATC (Cm) x Q) -total revenue is rectangle below the loss rectangle which is Pm x Qm -losses can occur in a monopoly, but the monopolist will not persistently operate at loss in the long run (so no loss in LR because the people will just leave)

a monopolist making a profit

-as with a competitive firm, the monopolist's profit equals (Pm-ATC) x Qm -ATC curve is drawn below Pm -so rectangle below profit rectangle is total cost (P at ATC (Cm) x Q) -total revenue is Pm x Qm -a monopolist can earn positive economic profits in the SR and the LR (can earn profit in LR because there is no competition in a monopoly) Profit= total revenue - total cost total cost= ATC x Q Profit= PxQ - ATCxQ Profit (P-ATC) x Q If P> ATC then the firm earns a profit If P<ATC then the firm suffers a loss

comparing monopoly and perfect competition in the LR

-at its MR=MC, a monopolist will produce less and charge a higher price than a PC firm -this is because the competitive price is where MC= D (bc MC is supply curve and competitive price is where S=D in the market graph) which is at a lower price than where the monopolist price is which is the point on the D curve where Q is at MC=MR -monopolist produces less than what the market wants it to and charge more than the market wants it to

elastic and inelastic range

-draw vertical dotted line from where MR=0 -the point on D curve where the vertical dotted line hits is the unit elastic point (maximized TR when MR is 0, can't get any better) -anything to the left is where demand is elastic (elastic range, where TR rises when MR is positive) -anything to the right is where demand is inelastic (inelastic range when TR falls when MR is negative)

profit maximization

-like a competitive firm, a monopolist maximizes profit by producing the quantity where MR=MC -MC is increasing line -but since price maker, once the monopolist identifies this profit maximizing quantity and it sets the highest price consumers are willing to pay (demand curve) for that quantity , this is known as the monopolist price

perfect competition vs. monopoly

-look at market structure, look at competition bc competition is good for consumers bc goods are better and cheaper -compare monopoly to perfect competition bc perfect competition is the best scenario for consumers -compare efficiencies and which one is better for consumer

the monopolist's marginal revenue and demand curve

-monopolies (and all imperfectly competitive firms) have a downward sloping demand curve -to sell more units, a firm must lower its price (law of demand) and this cut in price reduces the revenue on the units it was already selling -the two curves start at the same point but after the first unit, the MR curve lies below the demand curve -MR extends to negative

are monopolies allocatively efficient?

-no, price (what product is worth to consumers) is well above the marginal cost (opportunity cost of product), monopoly is producing less than what society wants it to produce -P>MC

are monopolies productively efficient?

-no, price>min ATC which means that the monopoly is not producing at the lowest possible cost because there is no pressure/competition from other firms that causes it to become more efficient -firms will produce at an output which is less than the ouput of min ATC

perfect price discrimination (aka First-degree PD)

-perfect price discrimination is when a firm charges the highest price that consumer are willing to pay for each unit -> capture entire consumer surplus (bc every customer is paying the highest price they are willing to pay) -as a result, the demand curve= MR curve and there is no DWL -in the real world, perfect price discrimination is not possible since no firm knows every buyer's WTP (but airlines and car dealerships come as close as possible) -D curve represents all the different prices that the firm charges -a monopolist who can engage in perfect price discrimination can achieve allocative efficiency (P=MC), this is the lowest price the firm will charge so if producing at this Q and charging at this price then it is producing the same Q as a perfectively competitive market which is why there is no DWL (socially optimal point)

perfect competition demand curve

-perfectly elastic at market price -in a competitive market, the market demand curve slopes downward but the demand curve for any individual firm's product is horizontal at the market price -the firm is a price taker so P=MR=D=AR

price discrimination

-practice of selling the same good at different prices to different buyers -discriminate by charging customers based on their willingness to pay (WTP)/elasticity -increase profit by charging a higher price to buyers with higher WTP -charge consumer the highest price that the consumer is willing to pay, by doing this you increase your revenue because you're taking everything that they have (no more consumer surplus, made CS the PS) ex: movie tickets- discounts for seniors, students, and people who can attend during weekday afternoons. They are all more likely to have lower WTP than people who pay full price on Friday night airline prices- discounts for Saturday night stay overs help distinguish business travelers, who usually have higher WTP, from more price-sensitive leisure travelers (charge more on weekdays for business travelers than on weekends for leisure travelers) Discount coupons- people who have time to clip and organize coupons are more likely to have lower income and lower WTP than others Quantity discounts- a buyer's WTP often declines with additional units, so firms charge less per unit for large quantities than small ones ex: a movie theater charges $4 for a small popcorn and $5 for a large one that's twice as big

why monopolies exist

-the main cause of monopolies are barriers to entry- other firms cannot enter the market 1. a single firm owns a key resource (DeBeers owns most of the world's diamond mines) 2. the government gives a single firm the exclusive right (patents (protect innovations), copyright laws, licenses) to produce the good (ex: utility companies, gov gives them exclusive rights (sole status) bc they are natural monopolies)

Demand and Marginal Revenue Curves, what happens to TR when MR hits zero (right side of the vertical line that separates both sides where MR=0)

-this is the range where MR is negative and TR is falling -At high levels of output, the price effect is stronger than the quantity effect -as the monopolist sells more, it now has to lower the price on many units of ouput, so the price effect is very large (Q still on the high end, so lowering the P on a lot of units) -as price falls (this is along the demand curve), TR falls so the demand is inelastic (if price rises (along the demand curve), TR rises because the demand is inelastic)

Demand and Marginal Revenue Curves, what happens to TR when MR hits zero (left side of the vertical line that separates both sides where MR=0)

-this is the range where MR is positive and TR is rising -At low levels of output, the quantity effect is stronger than the price effect -as the monopolist sells more, it has to lower the price on only a few units, so the price effect is small (Q still on the low end, so only lowering the P on a few units) -As price falls (this is along the demand curve), TR rises, so the demand is elastic (if price rises (which is along the demand curve, TR falls because the demand is elastic)

Why is MR less than price?

-when firm lowers the price, it must lower the price for all consumers in the market so the firm loses out on $1 it could have earned at the higher price which is why MR is not equal to P -ex: 1 person would have bought it at $10 and 2 people would have bought it at $9, so lose one dollar because a person was willing to pay $10 ($18-$10= MR is $8, which is less than the price of $9) -MR= change in TR/change in Q -P and MR are only equal at one price but after that MR is always lower than P because you are losing out on people who would've paid money at a higher price

results of price discrimination

-when want to increase Q, you have to decrease price, BUT you don't have to decrease the price for all the consumers -ex: increase Q from 1 to 2 then price decreases from $10 to $9, but they still charge that first person willing to pay $10, $10, so the marginal revenue is $9 and so on. -therefore, the marginal revenue is equal to price when there is price discrimination -P is D curve so if price discriminate, then the MR will be equal to the D curve

Sources of Market Power

1. Exclusive control of a scarce resource or input - De Beers of South Africa- a near monopoly; Are diamonds rare? Gem quality diamonds are more common than other gem quality stones 2. Government Licenses or Franchises - lodging and concession operation at National Parks 3. Patents and Copyrights (Drug companies, Authors) - to provide incentives for inventions and innovations 4. Economies of Scale - Natural Monopolies - Production of electricity, natural gas, etc. When natural gas companies initially started there was competition. But large fixed costs gave the firm that sold the most the lowest ATC. (Local utilities) 5. Network Economies - a product's quality, popularity, usability, etc. increases as the number of users increase i.e., sales volume increase) - another form of economies of scale (Microsoft, Twitter, Facebook, etc.)

are monopolies efficient?

1. allocative efficiency: resources are used for producing the combo of goods and services most wanted by society (P=MC) 2. productive efficiency means that least costly production techniques are used to produce wanted goods and services (P=min ATC) -producer surplus is significant due to lack of competition, consumer surplus is minimized -it is possible that a monopoly is more efficient than many small firms. economies of scale (natural monopoly) may make a monopoly the most efficient market model in some industries

similarities with drawing monopolies to drawing perfect competition

1. only one graph because the firm IS the industry 2. the cost curves are the same (ATC, MC, AVC) 3. the profit-maximizing rule of MR=MC still applies 4. shut down role (P<min AVC) still applies

Which of the following is not an example of hurdle method of price discrimination? a A "Buy two, get the third free" special. b Mail-in rebate coupon on a HP printer c Tuesday Senior Citizens' discount d A going-out-of-business sale

A going-out-of-business sale

The Invisible Hand Fails

A monopolist maximizes profits by setting MR=MC The AR is falling; so MR<AR This implies P>MR=MC in equilibrium. Equilibrium is inefficient.

Perfect price discrimination

A monopolist that charges each buyer exactly his/her RP is called a Perfectly Discriminating Monopolist. - Under perfect price discrimination, the private profit maximizing equilibrium is exactly the socially efficient equilibrium. So, economic surplus is maximized. - All consumers that are willing to pay a price high enough to cover MC will be served. - Consumer surplus is zero; Economic surplus = producer surplus.

Elasticity of Demand and Monopoly A monopolist's MR is less than the price - this is the essential source of the monopolist's power. How much less?

Depends on the price elasticity of demand. - A monopolist that faces a highly elastic demand curve will behave a lot like a perfectly competitive industry. ex: Amtrak has a monopoly in intercity passenger service in the North-east corridor and yet is not able to raise prices by restricting service very effectively. Good substitutes - cars, planes

Monopolistic Competition

Examples of monopolistic competition: - Many firms producing a differentiated product with perfect freedom of entry and exit + Restaurants (McDonald's, Burger King, etc.) + Retail gas stations (Shell, BP, etc.) + Supermarkets (Kroger, Shnucks, Giant, etc.) + Running Shoes (Nike, Adidas, etc) + Clothing stores (Nordstrom, Macy's, J. Crew, Banana Republic, etc.)

Oligopoly

Examples of oligopoly: - A few Many firms producing a differentiated product with perfect freedom of entry and exit + Commercial aircraft (Boeing, Airbus) + Automobiles (Ford, GM, Chrysler, Toyota, etc.) + Tobacco (Philip Morris, British American Tobacco, etc.) + Soft drinks (Coca Cola, Pepsi) + Petroleum Cement (top 5 companies produce 54% of the total industry output)

Profit Maximization for the Monopolist

To sell another unit the monopolist must lower price - Total revenue from 2 units at price $6 = $12 - Total revenue from 3 units at price $5 = $15 + Marginal revenue = $3

Imperfect Competition Vs. Perfect Competition

With perfect competition: - If the firm raises its price, sales will be zero. - No incentive to charge a lower price because it can sell as many units as it wants at the current price. - The firm's demand curve is the horizontal line at the market price. It is a price taker. With imperfect competition: - The firm has some control over price or market power. - If it raises market price, it will not lose all its customers. - If it reduces price, it will add customers. - The firm faces a downward sloping demand curve. It is a price maker.

If a firm collects $90 in revenues when it sells 4 units, $100 in revenues when it sells 5 units, and $105 when it sells 6 units, one can infer the firm is likely to be

a monopolist.

A consumer goes to purchase a TV advertised for $300. As he is checking out, the clerk informs him of a $20 rebate offer for the TV, which he fills out and receives in 3 months. One can infer that the consumer had

a reservation price of at least $300 but jumped the hurdle anyway.