ECON 2306 1st EditionExam # 3 Study Guide Lectures: 9 - 13Lecture 9 (October 22)Chapter 9: OligopolyOligopoly Oligopoly: a market structure dominated by a few large producers of homogenous or differentiate products. Oligopolists have control over price, output, and advertising. A Few Large Producers: Like the aluminum industry, or a few small auto parts store in a medium-sized town. "Big (3,4, or 5)" is monopolistic industry. Also tires, beer, cigarettes, copper, greeting cards, lightbulbs, aircraft, cars, gypsum, and cereal. Either Homogenous of Differentiated Products: Homogenous oligopoly: an oligopoly in which the firms produce a standardized product. Differentiated oligopoly: an oligopoly in which the firms produce a differentiated product. Steel, zing, copper, cement, lead, and alcohol are examples of standardized products. Cars, appliances, electronics, cereals, cigarettes, and sporting goods are differentiated. Differentiated has more nonprice competition by advertising. Control over Price, but Mutual Interdependence: Each firm is a price maker but it must consider how rivals will react to price changes. Characterized by strategic behavior and mutual interdependence. Strategic behavior: self-interested behavior that takes into account the reactions of others. Mutual interdependence: a situation in which a change in strategy (usually price) by one firm will affect the sales and profits of other firms. Entry Barriers: Same entry barriers for pure monopoly. Economies of scale, ownership of raw materials, and pricing and advertising. Mergers: Sometimes oligopolies come through mergers. Like steel, airlines, banking, and entertainment. Can allow firms to achieve greater economies of scale, lower prices, and increase market share. Oligopoly Behavior: A Game-Theory OverviewGame theory: the study of how people or firms behave in strategic situations. Mutual Interdependence Revisited: Firms can influence rival's profits by changing their pricing strategies. Each firm's profit depends on its own and rivals pricing strategies. Collusion: Collusion: a situation in which firms act together and in agreement to fix prices, divide markets, or otherwise restrict competition. Fixes mutually low price competitive strategies. Incentive to Cheat: Firms can agree to collude but secretly cheat. Both firms will probably cheat. Kinked-Demand ModelPer se violation: a collusive action, such as an attempt to fix prices or divide a market, that violates theantitrust laws, even if the action is unsuccessful. Kinked-Demand Curve: Kinked-demand curve: a demand curve based on the assumption that rivals will ignore a price increase and follow a price decrease. Rivals ignore and rivals match segment. If rivals ignore a price increase but match a price decrease, the marginal revenue curve will have an odd shape. Price Inflexibility: Kinked-demand explainswhy prices are generally stable in noncollusive oligopolistic industries. There are demand and cost reasons. Demand: if price raises, customers won't buy, if it lowers, sales will increase modestly. Cost: broken marginal-revenue curve means that even if an oligopolist's costs change a lot, the firm may have no reason to change its price. Price Leadership: Price Leadership: an implicit understanding that other firms will follow the lead when a certain firm in the industry initiates a price change. Dominant firm initiates price change. Infrequent price changes: price leader does not respond to small daily changes, only when cost and demand is significant and on an industry basis. Communications: price leader communicates price adjustments to industry through speeches, trade publication interviews, or press releases. Avoidance of price wars: price leaders try to prevent price wars.CollusionCollusion is tempting in kinked-demand and price leadership. Collusion reduces uncertainty. It has a variety of firms including a cartel. Cartel: a formal agreement among producers to set the price and the individual firm's output levels of a product. Cartels are overt, open to view. Most collusions are covert and illegal. Joint-Profit Maximization: Colluding can charge the same price among firms. Obstacles to Collusion: Demand and Cost Differences: Mainly with differentiated products. Profit-maximizing price will differ among firms. Number of Firms: The more the firms, the harder it is to create a cartel or other collusion. Cheating: Temptation for collusive oligopolists to cheat. Buyers can exploit the system and cause price wars. Cheating threatens collusion. Recession: Long lasting recession hurts collusion becausebad markets increase average total cost. Demand and marginal revenue curves shift to the left. Firms cut costs at expense of rivals. Potential Entry: The greater prices an profits may attract new entrants. Firms must block entry for successful collusion. Oligopoly and AdvertisingOligopolists would rather not compete on price. Each firm's share in the total market is dete4rmined through product development and advertising. Advertising affects prices, competition, and efficiently positively or negatively. Positive Effects of Advertising: Gives customers information. Low cost. Diminishes monopoly power. Enhances efficiency. Enhances competition. Introduces new products. Can reduce long-run average total cost by obtaining economies of scale. Potential Negative Effects of Advertising: Manipulates or persuades consumers. Can be misleading. Firms establish brand name loyalty. New entrants need to incur large advertising costs. Can be self-cancelling. Oligopoly and EfficiencyInefficiency: Production where price exceeds marginal cost and average total cost. Neither productive or allocative efficiency happens. Oligopoly less desirable than pure monopoly. Qualifications: Increased foreign competition. Limit pricing. Technological advance. Lecture 10 (October 27)Chapter 10: Wage DeterminationA Focus on Labor70% of all income is wages and salaries. Purely competitive labor market: a labor market in which a large number of similarly qualified workers independently offer their labor services to a large number of employers, none of whom can set the wage rate. Numerous employers compete to hire a specific type of labor, each worker with identical skills supplies that type, and individual employers and workers are wage takers because neither can control the market wage rate. Labor DemandLabor demand is schedule or curve showing amounts of labor buyers are willing and able to