AP Micro - Unit 4

imperfect competition generalizations

• price > MC

• firms must lower P to sell additional units

• there will be profit

• Output lower than ATC minimum (excess capacity, choosing to produce at the efficient point would hurt profits)

• To sell more, price must be lowered

Barriers to entry

• economics of scale (Coke, McDonalds, etc.)

  • difficult to compete

• legal protection

  • patents (drugs are initially only sold by one firm)

  • licenses (stadiums only allow one beer vendor)

• ownership or control of essential resources

  • One company acquires all the coal mines, diamond mines, etc.

• pricing and other strategies

  • Microsoft secured early market dominance by giving away browser for free (killed netscape) and gave OS away to PC manufacturers and then offering Office subscriptions to new users

monopoly

• most inefficient, on the way-side of the four market model

• types

  • pure monopoly (has 100% of market share, produces all of one product)

  • near monopoly (has around 80% of market share)

  • natural monopoly (where it makes sense for one firm to dominate, like electricity wherein infrastructure needed is so expansive and expensive only one firm can really do it) (however, these tend to be..see below)

  • regulated monopoly

natural monopoly (graph and facts)

pure monopoly (assumptions, on a table, on a graph)

pure monopoly (explain MR and DARP slope relationship, where is profit max, why single graph, misconceptions)

profit maximization / loss minimization in a pure monopoly

economic effects of monopoly

price discrimination (conditions and effects)

• conditions

  • monopoly

  • market segregation (how are prices being differently assigned, by race? region? age? etc.)

  • No resale

• Consequences

  • more profit

  • more output

price discrimination effects on a graph

monopolistic competition generalizations

• large number of sellers

• small market shares

• no collusion

• independent action

• easy entry and exit

• advertising

• differentiated products (product A no longer the same across all firms, can differ in…)

  • service - how is good served

  • location - where is it served (think good gas station locations)

  • brand names, packaging

  • some control over price

• demand is highly elastic (many sellers)

monopolistic competition on a graph

• new competition creates other goods, demand for your good falls »

• with econ. losses, firms will exit market, less goods, so demand for your good increases »

• normal profit only, econ. profit = 0

  • long-run equilibrium for monopolistic competition

long-run equilibrium for monopolistic competition

efficiency in monopolistic competition

• not productively efficient, economic profit does = 0 but P is not at minimum ATC

• not allocatively efficient, P does not equal MC (excess capacity, producing less than we should)

oligopoly

• control over price

  • mutual interdependence

  • strategic behavior

  • price wars (slashing prices at a loss to force competitors out)

• entry barriers

  • economies of scale

  • control of resources

• not productively or allocatively efficient

collusive oligopoly

• if a few firms face similar demand and costs they will act like a monopoly

• they will split monopoly profits

types of collusion in oligopolies

• overt collusion (public)

  • cartels, OPEC

• covert collusion

  • illegal in USA

  • tacit understandings (“gentlemen’s agreements”)

obstacles to collusion in oligopolies

• demand or cost differences

  • firms can only act together if they have similar DARP and MC lines (monopoly profits shared equally in this case, see graph)

• large number of firms (harder to get everyone on the same page)

• cheating (double-crossing deals)

• potential entry

• anti-trust laws

game theory

• (refer to Payoff Matrix)

  • (A) = greatest combined profit

  • Independent actions stimulate response, if either cheats (B) and (C) are possible

  • if both cheat, gravitate to (D), Worst Case

game theory: dominant strategy

• when picking one option always yields high profits

  • Ex) United going low is always higher regardless of Southwest’s decision (12 v 15, 6 v 8)

  • However, notice that Southwest’s dom. strat. is low too!

• thus, if both sides pick dom. strat., they will reach Nash Equilibrium (D), only way to reach (A) is to successfully collude (but incentive to cheat is very real..)

nash equilibrium

point on the payoff matrix wherein no player would gain by changing their strategy (keeping other players’ strategies constant)