Imperfect

1
Imperfect Competition
2
Imperfect Competition

• Monopolistic Competition

3
MONOPOLISTIC COMPETITION

• Assumptions of monopolistic competition
• Equilibrium of the firm
• short run
• MR MC

4
Short-run equilibrium of the firmunder
monopolistic competition

Ps
ACs
O
Q
Qs
5
MONOPOLISTIC COMPETITION

• Assumptions of monopolistic competition
• Equilibrium of the firm
• short run
• MR MC
• long run
• MR MC AR AC

6
Long-run equilibrium of the firmunder
monopolistic competition

PL
O
Q
QL
7
MONOPOLISTIC COMPETITION

• Assumptions of monopolistic competition
• Equilibrium of the firm
• short run
• MR MC
• long run
• MR MC AR AC
• under-utilisation of capacity in long run

8
Under-utilisation of capacity in the long run

LRAC
DL under monopolistic competition
O
Q1
Q2
Q
9
MONOPOLISTIC COMPETITION

• Limitations of the model
• imperfect information
• difficulty in identifying industry demand curve
• entry may not be totally free
• indivisibilities
• importance of non-price competition
• The public interest
• comparison with perfect competition

10
Long run equilibrium of the firm under perfect
andmonopolistic competition

LRAC
P1
DL under monopolistic competition
O
Q1
Q2
Q
11
MONOPOLISTIC COMPETITION

• Limitations of the model
• imperfect information
• difficulty in identifying industry demand curve
• entry may not be totally free
• indivisibilities
• importance of non-price competition
• The public interest
• comparison with perfect competition
• comparison with monopoly

12
Imperfect Competition

• Oligopoly

13
OLIGOPOLY

• Key features of oligopoly
• barriers to entry
• interdependence of firms
• incentives to compete versus incentives to
  collude
• Factors favouring collusion
• Collusive oligopoly cartels
• equilibrium of the industry

14
Profit-maximising cartel

O
Q
15
Profit-maximising cartel

P1
Industry D AR
Industry MR
Q1
O
Q
16
OLIGOPOLY

• Key features of oligopoly
• barriers to entry
• interdependence of firms
• incentives to compete versus incentives to
  collude
• Factors favouring collusion
• Collusive oligopoly cartels
• equilibrium of the industry
• allocating and enforcing quotas

17
Oil Prices
18
Oil Prices
OPECs first quotas
Iraq invades Iran
World-wide slowdown
Revolution in Iran
World-wide recovery
First oil from North Sea
New OPEC quotas
Cease-fire in Iran-Iraq war
Recession in Far East
Yom Kippur War Arab oil embargo
19
OLIGOPOLY

• Tacit collusion
• price leadership
• dominant firm

20
Dominant firm price leadership

P1
P2
O
Q
Division of the market between leader and
followers
21
Dominant firm price leadership

Sall other firms
PL
Dmarket
Dleader
O
QT
QL
QF
Q
Determination of price and output
22
Price leader aiming to maximise profits for a
given market share

O
Q
23
Price leader aiming to maximise profits for a
given market share

MC
AR D market
AR D leader
MR leader
O
Q
24
OLIGOPOLY

• Tacit collusion
• price leadership
• dominant firm
• barometric

25
OLIGOPOLY

• Tacit collusion
• price leadership
• dominant firm
• barometric
• rules of thumb

26
OLIGOPOLY

• Tacit collusion
• price leadership
• dominant firm
• barometric
• rules of thumb
• Collusion and the law

27
OLIGOPOLY

• Tacit collusion
• price leadership
• dominant firm
• barometric
• rules of thumb
• Collusion and the law
• The breakdown of collusion

28
The incentive for a firm to produce more than its
quota, or undercut the cartels price

12
10
8
6
4
2
2000
3000
1000
Q
The Industry
29
The incentive for a firm to produce more than its
quota, or undercut the cartels price

MC
12
10
8
6
AR
4
2
MR
400
200
600
800
Q
Firm A
30
OLIGOPOLY

• Non-collusive oligopoly game theory
• alternative strategies maximax and maximin

31
Profits for firms A and B at different prices
Xs price
2.00
1.80
A
B
5m for Y 12m for X
2.00
10m each
Ys price
D
C
12m for Y 5m for X
1.80
8m each
32
OLIGOPOLY

• Non-collusive oligopoly game theory
• alternative strategies maximax and maximin
• simple dominant strategy games

33
Profits for firms A and B at different prices
Xs price
2.00
1.80
A
B
5m for Y 12m for X
2.00
10m each
Ys price
D
C
12m for Y 5m for X
1.80
8m each
34
OLIGOPOLY

• Non-collusive oligopoly game theory
• alternative strategies maximax and maximin
• simple dominant strategy games
• the prisoners dilemma

35
The prisoners' dilemma
Amanda's alternatives
Not confess
Confess
A
B
Nigel gets 10 years Amanda gets 3 months
Not confess
Each gets 1 year
Nigel's alternatives
D
C
Nigel gets 3 months Amanda gets 10 years
Each gets 3 years
Confess
36
OLIGOPOLY

• Non-collusive oligopoly game theory
• alternative strategies maximax and maximin
• simple dominant strategy games
• the prisoners dilemma
• more complex non-dominant strategy games

37
Profit possibilities for firm X
38
Profit possibilities for firm X
39
Profit possibilities for firm X
40
Profit possibilities for firm X
41
OLIGOPOLY

• Non-collusive oligopoly game theory
• alternative strategies maximax and maximin
• simple dominant strategy games
• the prisoners dilemma
• more complex non-dominant strategy games
• Importance of threats and promises

42
OLIGOPOLY

• Non-collusive oligopoly game theory
• alternative strategies maximax and maximin
• simple dominant strategy games
• the prisoners dilemma
• more complex non-dominant strategy games
• Importance of threats and promises
• Importance of timing

43
OLIGOPOLY

• Non-collusive oligopoly game theory
• alternative strategies maximax and maximin
• simple dominant strategy games
• the prisoners dilemma
• more complex non-dominant strategy games
• Importance of threats and promises
• Importance of timing
• decision trees

44
A decision tree
Boeing decides
A
45
OLIGOPOLY

• Non-collusive oligopoly the kinked demand curve
  theory
• assumptions of the model
• the shape of the demand and MR curves

46
Kinked demand for a firm under oligopoly

Current price and quantity give one point on
demand curve
Q
O
47
Kinked demand for a firm under oligopoly

D
P1
D
Q
O
Q1
48
Kinked demand for a firm under oligopoly

P1
D AR
Q
O
Q1
49
OLIGOPOLY

• Non-collusive oligopoly the kinked demand curve
  theory
• assumptions of the model
• the shape of the demand and MR curves
• stable prices

50
Stable price under conditions of a kinked demand
curve

P1
D AR
Q
O
Q1
51
OLIGOPOLY

• Non-collusive oligopoly the kinked demand curve
  theory
• assumptions of the model
• the shape of the demand and MR curves
• stable prices
• limitations of the model

52
OLIGOPOLY

• Oligopoly and the public interest
• advantages
• disadvantages
• difficulties in drawing general conclusions
• Advertising and the public interest
• Oligopoly and contestable markets

53
Imperfect Competition

• Price Discrimination

54
PRICE DISCRIMINATION

• Meaning of price discrimination
• Types of price discrimination
• first degree

55
First-degree price discrimination
P
P1
D
Q
O
200
56
First-degree price discrimination
P
P1
D
Q
O
200
57
PRICE DISCRIMINATION

• Meaning of price discrimination
• Types of price discrimination
• first degree
• second degree

58
PRICE DISCRIMINATION

• Meaning of price discrimination
• Types of price discrimination
• first degree
• second degree
• third degree

59
Third-degree price discrimination
P
P1
D
Q
O
200
60
Third-degree price discrimination
P
P2
P1
D
Q
O
150
200
61
PRICE DISCRIMINATION

• Meaning of price discrimination
• Types of price discrimination
• first degree
• second degree
• third degree
• Conditions necessary for price discrimination to
  operate

62
PRICE DISCRIMINATION

• Profit-maximising prices and output under price
  discrimination
• first degree

63
Profit maximising under first-degree price
discrimination

Q1
O
Q
64
PRICE DISCRIMINATION

• Profit-maximising prices and output under price
  discrimination
• first degree
• third degree

65
Profit-maximising output underthird degree price
discrimination
DX
O
O
O
MRX
(a) Market X
66
Profit-maximising output underthird degree price
discrimination
DY
DX
MRY
O
O
O
MRX
(b) Market Y
(a) Market X
67
Profit-maximising output underthird degree price
discrimination
DY
DX
MRY
MRT
O
O
O
MRX
(c) Total (markets X Y)
(b) Market Y
(a) Market X
68
Profit-maximising output underthird degree price
discrimination
MC
DY
DX
MRY
MRT
O
O
O
MRX
(c) Total (markets X Y)
(b) Market Y
(a) Market X
69
Profit-maximising output underthird degree price
discrimination
MC
DY
DX
MRY
MRT
O
O
O
3000
MRX
(c) Total (markets X Y)
(b) Market Y
(a) Market X
70
Profit-maximising output underthird degree price
discrimination
MC
5
DY
DX
MRY
MRT
O
O
O
3000
MRX
(c) Total (markets X Y)
(b) Market Y
(a) Market X
71
Profit-maximising output underthird degree price
discrimination
MC
5
DY
DX
MRY
MRT
O
O
O
1000
3000
MRX
(c) Total (markets X Y)
(b) Market Y
(a) Market X
72
Profit-maximising output underthird degree price
discrimination
MC
5
DY
DX
MRY
MRT
O
O
O
1000
2000
3000
MRX
(c) Total (markets X Y)
(b) Market Y
(a) Market X
73
Profit-maximising output underthird degree price
discrimination
MC
9
5
DY
DX
MRY
MRT
O
O
O
1000
2000
3000
MRX
(c) Total (markets X Y)
(b) Market Y
(a) Market X
74
Profit-maximising output underthird degree price
discrimination
MC
9
7
5
DY
DX
MRY
MRT
O
O
O
1000
2000
3000
MRX
(c) Total (markets X Y)
(b) Market Y
(a) Market X
75
PRICE DISCRIMINATION

• Profit-maximising prices and output under price
  discrimination
• first degree
• third degree
• Advantages to the firm

76
PRICE DISCRIMINATION

• Profit-maximising prices and output under price
  discrimination
• first degree
• third degree
• Advantages to the firm
• Price discrimination and the public interest
• advantages

77
PRICE DISCRIMINATION

• Profit-maximising prices and output under price
  discrimination
• first degree
• third degree
• Advantages to the firm
• Price discrimination and the public interest
• advantages
• disadvantages