ECON 1123 1st Edition Lecture 22 Outline From Previous Lecture Lecture 21 I Characteristics of Monopolistic Competition II Brands III Persuasive Advertising IV Comparison between monopolistic competitive firms and perfectly competitive firms Outline of Current Lecture 22 I Monopolistic Competition A Short Run Economic Profits B Long Run Zero Economic Profits C Monopolistic Versus Pure Competition II Oligopoly A Definition B Cartel C Price Leadership Dominant Firm Competitive Fringe Lecture 22 Notes I Monopolistic Competition A Short Run Economic Profits For monopolistic competition you still compare the price to the average total cost to find profitablitiy The major difference is the more elastic demand schedule B Long Run Zero Economic Profits ATC will be tangent to the demand schedule In the long run Pmc ATC will give zero economic profits D Monopolistic Versus Pure Competition Pure competition price marginal cost economic efficiency Monopolistic competition price marginal cost economic inefficiency Pure competition in the long run production is at minimum average total costs In monopolistic competition production is at a point higher than minimum ATC These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Higher average costs are incurred by producing a variety of differentiated products II Oligopoly A Definition Oligopoly A market with a few firms dominating the industry 1 Each firm must consider its competitors reactions when making its own decisions mutual interdependence 2 Significant barriers to entry government regulations like patents and licenses start up costs capital barrier economies of scale product differentiation access to suppliers distribution networks B Cartel Cartel like OPEC organization of petroleum exporting countries Cartel An agreement between firms or countries in an industry to formally collude on price and output then agree on distribution of production output quotas Cartels are inherently unstable because individual firms or countries can earn higher profits by selling more than their production quota As more firms cheat on the quota agreements prices fall and the cartel falls Cartels stability is enhanced by 1 fewer members with similar goals 2 non price competition is very difficult better service Price leadership model 1 One very large relative to market firm Gas Prom Russian Firm Natural Gas and other smaller firms fringe 2 The dominant firm establishes the market price and all the other firms charge the same price The dominant firm establishes price where its marginal revenue marginal cost The competitive fringe can effectively sell as much as they like at the dominant firm price Game theory uses mathematical analysis to model oligopolistic mutual interdependence C Price Leadership Dominant Firm Competitive Fringe
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