CHAPTER 11: IMPERFECT COMPETITION Flashcards
monopolist
sole supplier and has all market power
perfect competition
a lot of suppliers but no one has real market power
accepts the price for his product that is determined in the market by the forces of supply and demand
perfect competitor faces a perfectly elastic demand at the existing market price (only market structure to have this characteristic)
‘matching’ markets
markets where transactions take place without money
involves matching heterogeneous suppliers with heterogenous buyers
imperfect competition
there where the real world lies, in between if the extremes
there could be many large firms and many small organizations offering same products and services
there could be some different companies offering a solution to same problem or need, but by giving different products and services
we can differentiate imperfect competition from perfect competition by the characteristics of the demand curves they all face
Imperfectly competitive firms
face a downward-sloping demand curve, and their output price reflects the quantity sold
they have some influence on the price of the good
also that if they change the price they charge, they can expect demand to reflect this in a predictable manner
demand curve for the firm and industry coincide for the monopolist, but not for other imperfectly competitive firms
oligopolistic competition
market with a small number of suppliers
The home appliance industry is an oligopoly.
The prices of KitchenAid appliances depend not only on its own output and sales, but also on the prices of Whirlpool, Maytag and Bosch
Monopolistic competition
market with many sellers of products that have similar characteristics who may differentiated products
Monopolistically competitive firms can exert only a small influence on the whole market
the local Italian restaurant is a monopolistic competitor. Its output is a package of distinctive menu choices, personal service, and convenience for local customers. It can charge a different price than the out-of-neighbourhood restaurant
also face downward sloping demand
free entry and exit. There are no barriers to entry
normal profits are with long run equilibrium
Economic profits will be competed away by entry, just as losses will erode due to exit
duopoly
Duopoly defines a market or sector with just two firms
can a sole domestic producer act the same way as defined earlier as a monopoly if he has international competition
nah boy
could be described as being part of an international oligopoly if there are small amount of international suppliers, such as bombardier and others
what is a critical determination in market structure
Size of the market (amount of demand) relative to cost structure of the industry)
what happens if q1 is small compared to long run Demand
basically, what happens when the minimum average cost output on LATC1 is there where q1 (smallest output per firm) is situated
it means that N1 (amount of suppliers) is large
firms only need to produce a bit of output (q1) to satisfy whole market Q (whole output)
outcome might be perfect competition
(N virtually infinite)
monopolistic competition
(N large with slightly differentiated products produced by each firm)
what happens when the minimum average cost output corresponds the the biggest LATC curve (LATC 2)
basically the curve that corresponds to the biggest output (q2)
(scale economies are needed cause this curve huge and it means expensive costs)
could be a monopoly with only one supplier
since economies of scale are needed, not enough resources can be exploited by all
its output (q2) is literally the whole market’s output (Q)
what happens when the minimum average cost output is there with LATC3
basically, what happens if the output (q3) needed is large, almost half of the whole market output (Q)
an give rise to oligopoly
with each firm producing more than q1 but less than a monopolies
what is market power
the influence that a firm or organization has on its market
the most important element in defining market structure
percentage of sales in the market thatis attributable to a small number of firms
Such a statistic is called a concentration ratio
in the Real world, can we define an industry as specific type of market structure such as perfect competition, duology or monopoly
nah boi
Canada’s brewing sector has two large brewers in Molson-Coors and Labatt, a couple of intermediate sized firms such as Sleeman, and an uncountable number of small boutique brew pubs
a large number of brewers satisfy one requirement for perfect competition, it would not be true to say that the biggest brewers wield no market power; and this is the most critical element in defining market structure
we could not define this market as a duopoly since there are countless others who, together, are important
N-firm concentration ratio
N = the amount of firms
sales share of the largest N firms in that sector of the economy
differentiated product
one that differs slightly from other products
all in the same market
why are demand curves not horizontal in a monopolist competition
different firms’ products are only limited substitutes
most will still stay with original firm they were with
why are there limits to economies of scale in a monopolistic competition
Firms are small and, with many competitors
individual firms do not compete strategically with particular rivals
what does the market share of each firm depend on in a monopolistic competition
on the price that it charges and on the number of competing firms
what happens to a shift in industry demand of monopolistic competition
also shifts the demand facing each firm
what attracts new firm to enter a monopolistic completion
free entry and the profits made by already established firms
what are the two conditions that must hold at the long term equilibrium of a long term competition
monopolistically competitive equilibrium in the long run
- the optimal pricing rule must be satisfied—that is MC=MR
- only normal profits are made at the final equilibrium. These are competed away as a result of free entry
these two conditions must exist at the optimal output
requires the firm’s demand curve to be tangent to the ATC curve at the output where MR=MC
ATC must equal price at the output where MC=MR
implies that the ATC is tangent to the demand curve where P = ATC
what much each firm consider in an oligopolistic competition
how its actions affect the decisions of its relatively few competitors
Each firm must guess how its rivals will react
are they gonna collude or compete?
collusion
explicit or implicit agreement to avoid competition with a view to increasing profit
a cartel is a form a collusion
without it, each firm’s demand curve depends on how competitors react (conjecture)
what makes collusion more difficult
if there are many firms in the industry
if the product is not standardized
if demand and cost conditions are changing rapidly
conjecture
belief that one firm forms about the strategies of another competing firm
what is a game in oligopoly
situation in which contestants plan strategically to maximize their profits, taking account of rivals’ behavior
this makes oligopolists act like poker players trying to anticipate what competitors are going to do
In most games, each player’s best strategy depends on the strategies chosen by their opponents
what is a strategy
game plan describing how a player acts, or moves, in each possible situation
what is the Nash equilibrium
commonly used concept of equilibrium
one in which each player chooses the best strategy, given the strategies chosen by the other player
there is no incentive for any player to move
no player wants to change strategy
there where each reaction function intersects
each firm is making an optimal decision, conditional upon the choice of its opponent
dominant strategy
player’s best strategy, independent of the strategies adopted by rivals
payoff matrix
defines the rewards to each player resulting from particular choices
when game is competitive, each player will tend to their preferences, sometimes not being choice overall in the payoff matrix
prisoners dilemma game
can be constructed to reflect a scenario in which two prisoners, under isolated questioning, each confess to a crime
it can define wether companies choose to cooperate with other companies or simply not compete, or completely compete with them
demonstrates tension between competition and collusion
Cournot duopoly model
duopoly model that we frequently use in economics to analyze competition between a small number of competitors
each firm reacting optimally in their choice of output to their competitors’ output decisions
reaction functions in cornet duopoly model
define the optimal choice of output conditional upon a rival’s output choice
what is the residual demand of a firm
residual demand is basically the difference between original demand and second demand
first, we must see what is that firms demand without competitors and see what is their output
to do this, we must do initial MC = MR
when competitors reach, we must consider their outputs
original output minus that of the competitors’ output gives second output
residual demand is each original quantity demanded minus quantity of output of competitors
this corresponds to original’s firms second output
what is the reaction function of a firm
it is their optimal output in response to any output choice of another competitive firm
reaction function of this competitive firm is similar
what leads to markets with only a few players
nature of modern product development
Product development (fixed) costs
relatively small marginal cost of production,
unintended barrier to entries in a market
mostly common with oligopolists
they tend to have substantial fixed costs
they also tend to have declining average costs up to very high output levels
gives rise to a supply side with a small number of suppliers
an additional competitor in a market with gyu profits could result in a all of them getting losses
intended entry barriers
patent law
advertising cause attempt to market their product as being distinctive and even enviable
predatory pricing illegal form of entry deterrence. lowering prices to impossible lows to deter new arrivants
Network externalities
Transition costs
over investment strategy
netwrok externalities
arise when the existing number of buyers itself influences the total demand for a product
An individual contemplating joining a social network has an incentive to join one where she has many existing ‘friends’
ex: face has many more members than MySpace or Google+, hence its easier to attract other users
transition costs
can be erected by firms who do not wish to lose their customer base
ex: cellphone and Contract-termination costs are one obstacle to moving to a new supplier
over-investment strategy
existing supplier generates additional production capacity through investment in new plant or capital
its like a warning to potential new entrants
such a strategy may not always be feasible: It might be just too costly
a credible treaty
one that is effective in deterring specific behaviours
a competitor must believe that the threat will be implemented if the competitor behaves in a certain way
if many firms can produce at a cost efficient scale, is the market competitive or non competitive
competitive boyyy
If one or only a few firms can produce at a cost-efficient scale, s the market competitive or non competitive
non competitive
if you have a larger share in the market, do you have a bigger market power?
ye boyyyy
which is the only market structure to face a perfectly elastic demand at the market price
perfect competition
what happens to the demand of an industry when new firms join it
the presence of more firms in the industry reduces the demand facing each one
when more firms enter, it shifts the demand of each firm inwards
process will continue as long as there is stilll economic profit to be made
For entry to cease, average cost must equal price (AC = P)
in the prisoners’ dilemma game, do they end up worse confessing or remaining silent
both end up worse confessing
more beneficial if they remain silent
when does the equilibrium occur in the reaction function
equilibrium occurs when each reaction function intersects each other (RA = RB)
any other output from one firm will make the other firm change its output, so can’t be output
both functions are downward sloping: The more B produces, the smaller is the residual market for A, and therefore the less A will produce and vice versa
who usually have UNINTENDED barriers to entry
Oligopolists
so the small amount of suppliers in a oligopolist market
why is an over investment strategy as an intended barrier not always feasible
cause sometimes, it be too costly
how does a size of market evolve in the long run
also evolves over the long run: Time is required for entry and exit
demand in the long run is downward sloping
initially, all suppliers produce output of q1 and total market output is Q1
The number of firms in the industry is N1 (=Q1/q1)
what is the appropriate description of the mutual interdependence that characterizes oligopolistic industries?
The firms C and D are interdependent because their profits depend not just on their own price, but also on the other firm’s price
