Oligopoly Defining characteristics cid 127 Market Size few firms cid 127 Market Power some Product Differentiation different Barriers to Entry Significant Long Run Economic Profits likely Five Forces Model In book Handful of companies Center Top box barrier issue if it s hard to get in then they ll likely stay only a few companies Bottom box product differentiation more different is more power Left Box Right Box Demand for the buyers This helps us see how competitive a market might be Contestable Markets easy entry and exit possibility maintains competitive conditions without actual entry and exit Guided walking tours of the Freedom Trail in Boston would be a constable market because entry exit is easy and sunk costs are negligible There aren t tons of individuals or firms producing this service but any can come a long and enter Oligopoly Models Collusion Model also known as price fixing gas stations with gasoline setting one price Cartel collaboratively decide how much to produce and price Cartels price fixing illegal Drug cartels an avenue you can do for a cartel to succeed Inelastic Demand raise in price can improve revenue cheats really hard to enforce rules cause it s illegal This is called a cartel joint P and Q decisions OPEC is an example They try and collaboratively set quantities based on reported reserves Tacit Collusion implicitly agree figure out a way to cooperate without making it apparent if you get caught it s against the law if you pull it off becomes cid 127 Must play by the rule OPEC cartels because individual nations cheat as long as the agreement holds the cartel can be successful till someone Entry must be difficult if anyone can get involved it wont have the power we associate with a cartel Price Leadership Model cid 127 One firm dominates big firm calls the shots cid 127 Other firms follow small firms do the best to operate within the margin cid 127 Might see predatory pricing If a large firm in an industry cable TV they could eliminate competition by undercutting them if it looks like it will reduce competition justice dept will get involved if i m selling below what it costs to produce and it effects others justice dept will get involved Because they have market power we get a lower quantity for higher price and therefore will have deadweight loss but more efficient than a monopoly Cournot Model Assume a duopoly 2 firms Firms react to each other In between outcome Monopolistic Competition Defining Characteristics cid 127 Market Size many firms this does not mean monopoly THIS IS CLOSEST TO PERFECT COMPETITION cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 Market Power none Product Differentiation different only thing that keeps it from not being perfect Barriers to Entry none Long Run Economic Profits none Ex Sea salt and vinegar potato chips Horizontal Differentiation improves the product for some but makes it worse for others Vertical Differentiation improves the product in a way that makes all buyers better off Ex Amazon Kindle with free 3G capability Role of Advertising Case for advertising Promotes competition Informs consumers perfect competition needs perfect information Supports innovation allows us to replace inferior technology with the new Signals quality even if advertising budgets are outrageous if a firm can spend money on an advertisement confidence in the product is high cid 127 Manipulates tastes often used not for educating but for manipulation to convince you you want something you don t need Creates barrier to entry new companies have to compete with a high amount of advertising even if their product is better Case against advertising cid 127 Wastes scarce resources Fosters inefficiency GRAPH Demand curve slopes down Perfect competition perfectly flat line In the short run if QTC at q0 is less than P0 then firms will have economic profits If ATC at q1 is greater than p1 then firms will have economic losses In the long run profit loss will go away because firms can enter and exit GRAPH cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127
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