Imperfect Competition

Question 1

What does imperfect competition mean?

Answer 1

Basically anything that isn’t perfect competition, meaning that the firms have some market power, meaning that they will charge a price that is higher than the MC -> a mark-up.

Note: there is a negative relationship between firms increasing their prices and demand decreasing, therefore firms have to act strategically given the rest of the market

Question 2

Explain how a monopolist acts:
(In words and mathematically)
How does this affect consumers?

Answer 2

The monopolist has a full market power, which means that they set the market price. Since negative relationship between demand and price, they will set their quantity at MR=MC and then set the price at Q=D for that given quantity.
The price will be higher than MR, meaning that the firm charges a mark-up.
The mark-up depends on the price elasticity of demand.
They will therefore be able ti make a profit and because they charge a higher price than i PC, the market will not be fully efficient in terms of utility

Question 3

What does the mark-up depend on?

Give the formula for these

Answer 3

It depends on the price-elasticity of demand
Price elasticity of demand: ε(q)=(dq/dp)*(p/q)

Mark-up: p(1-(1/ε(q))=c(q) 
where c(q)= marginal cost

Duopoly: also depends on market share

Question 4

How does the monopoly in general equlibrium in autarky look?

What are the main assumptions (Markusen)

Answer 4

Assumtions:

• Monopoly in Manufactures
• Perfect comp. in Food
• The market for factors of production are also PC
• All firms maximize profits
• All consumers maximize utility

Question 5

What properties must hold in general equilibrium in autarky where Manufactures is monopoly and Food is PC?

Answer 5

1. Marginal rate of transformation (MRT) must be equal to the ratio of marginal costs.
2. Price charged by monopolist is a mark-up over the MC
3. The marginal rate of substitution must be equal to the ratio of final goods prices (P)

MRT=MC(m)/MC(f)=[p(m)*1-(1/ε(q))]/p(f) < p(m)/p(f)=MRS

Question 6

Explain the outcome in a general equilibrium in autarky where Manufactures is monopoly and Food is PC:

Answer 6

Since the monopolist charges a higher price than the MC, the MRT will deviate from the final price goods ratio (which is equal to MRS)
With a monopoly, the market will not produce socially optimal quantity which will lead to U(mon) being stsrictly below U(opt)
That being the diffrent utility curves.

Question 7

What is the setup in te Cournot model?
What are the mathimatical functions?
(q, p and π)

Answer 7

Doupoly who produces identical goods towards one shred demand curve.
The firms maximize profits given demand curve and output level of component.
Firm A and Firm B
p: market price
q= q(A) + q(B): tot output on market
p=a-bq : linear demand function
π(a) = (p-c)q(A)= [(a-c) - b(q(A) + q(B))]*q(A)
c= marginal cost o production

Question 8

What is the conclusion of the Cournot model?
How are the reaction functions derived?
What will the Equilibrium be?

Answer 8

Given the output level of firm B, firm A will maximize profits through a suitable choice of its output level
-> Each diffrent output level of firm B leads to a diffrens opt output level for firm A.

The duopoly price will be lower than monopoly price since there is some competition. -> we can measure number of firms as competition, leading to a lower price level.

Reaction functions are derived through the max. points of diffrent isoprofit curves.

Cournot equilibrium will be where the twi reaction functions intersect. This is the only point where each firs maximizes its profit given the other firms’ output level.

Question 9

What are the pro-competetive gains of (international) trade?

Markusens framework: what are the assumptions?
- Conclusions?

Answer 9

Since we argue that more firms in market leads to more competition, less market power and less mark-up, competition is positive for increasing efficiency and presenting lower prices for conusmers.

Markusens assumptions for framework:
- Factor markets are PC in both countries
- Firms maximize profits
- Consumers maximize utility
- M sector has monopoly producer
- F sector has PC
- Two identical countries (technology, preferences, stock of capital and labour)
(This neutralises any other reasons for international tade flows)

In autarky both countries will produce inefficielty since M firm has monopoly -> utility will be lower
When we open up for trade the monopoists will become duopolists because not they have a component.
This will lead to some improvement in efficiency since they cant have as high of a mark-up -> utility will rise (will still be under optimal level)
= the procompetitive effect