Unit 4: AP Imperfect Competition Review

monopoly

one large firm with a unique product; firm is the industry; high barriers to entry; price makers (can set price because they have a unique product)

- ex. DeBeers family, the Electric Company

monopoly graph

- marginal revenue does not equal price

- downward sloping demand, so must continually lower price to sell more quantities

- total revenue is at its peak when MR equals 0

- elastic demand before MR becomes negative, inelastic from that point forward

efficiency of monopolites

inefficient because they:

1. charge a higher price

2. don't produce enough, price doesn't equal MC (allocative)

3. produce at higher costs, nor are they producing at lowest cost (productive)

natural monopoly

it is natural for only one firm to produce because they can produce at the lowest cost

- allocatively efficient

- not productively efficient

marginal revenue less than demand in monopolies

must continually lower the price on every unit in an attempt to sell more, what people are willing abnd able to sell

price discrimination

the practice of selling the same product to different buyers at different prices

- charges each consumer what they are willing and able to pay in order to increase profits

- those with inelastic demand will be charged more than those with elastic demand

- don't lower price for each unit

price discrimination conditions

1. must have monopoly power

2. must be able to segregate the market

3. consumers must NOT be able to resell the product

MR = Demand (one curve)

- no consumer surplus, it becomes profit

economies of scale (barrier to entry)

one company is able to produce because they are able to produce at the lowest cost; able to double and more than double output

superior technology (barrier to entry)

do not have the same resources and capabilities to produce; one firm has the best tech to produce

geography or ownership of raw materials (barrier to entry)

if a firm is far from a resource, they will not be able to produce; must produce according what that resources are available

government created barriers (barrier to entry)

the government can issue different things, like patents, to protect inventors and forbid them from using their invention

oligopoly

a few large producers (10 or fewer) selling identical or differentiated products

- high barriers to entry (economies of scale, high start-up costs, ownership of raw materials)

- control over price (price maker)

- use strategic pricing

- ex. cell phones, service provides, cars, OPEC

mutual interdependency

firms must worry about the decisions of their competitors and use strategies

game theory

understanding how people behave in strategic situations allows firms in oligopolies maximum profit

dominant strategy

best move to make regardless of what your opponent does

collusion

the act of cooperating with rivals in order to "rig" a situation

Nash Equilbrium

the outcome that will occur when both firms make decisions simultaneously and have all the information, but are not communicating

price leadership oligopoly

collusion is illegal, firms cannot set prices

- the strategy used by firms to coordinate prices without collusion

1. dominant firm initiates a price change

2. other firms follow the leader

- if breakdown occurs, temporary price wars may occur

colluding oligopoly

a group of producers that create an agreement to fix prices high, also known as cartels

1. cartels set price and output at an agreed upon level

2. firms require or identical or highly similar demand and costs

3. cartel must have a way to punish cheaters

- just a monopoly graph

non-colluding oligopoly

uses kinked demand curve model

- if firms are not colluding, other firms will match price (cut in price resulting in inelastic demand) or ignore change (price raise resulting in remain same, causing elastic demand)

kinked demand curve model

shows how non-collusive firms are interdependent

- marginal revenue has a vertical gap at the kink, the result is that MC can move and Qe won't change, causing price to be sticky

monopolistic competition

relatively large number of sellers, differentiated products, some control over price, low barriers to entry, lots of non-price competition, not efficient

- ex. fast food, furniture, shoe stores

- D > MR

- zero economic profit in the long-run (price = ATC)

monopolistic competition in long-run

profit: new firms will enter, driving down Demand for firms already in the market, until there is no economic profit (long-run equilibrium)

loss: firms will leave, driving up the demand for firms already in the market

non-price competition

brand names and packaging, product attributes, service, location, advertising (increased demand and make demand more inelastic)

excess capacity

the gap between the minimum ATC output and the profit maximizing output