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Oligopoly• Defining characteristics• Market Size: few firms• Market Power: some• Product Differentiation: different• Barriers to Entry: Significant• Long Run Economic Profits: likely• Five Forces Model- In bookHandful of companies: CenterTop box: barrier issue—if it’s hard to get in then they’ll likely stay only a few companiesBottom box: product differentiation—more different is more powerLeft Box:Right Box: Demand for the buyersThis helps us see how competitive a market might beContestable Markets: easy entry and exit possibility maintains competitive conditions without actual entry and exitGuided 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 ofindividuals 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• This is called a cartel: joint P and Q decisions (OPEC is an example! They try and collaboratively set quantities based on reported reserves)• Cartel: collaboratively decide how much to produce and price• Cartels & price fixing: illegal (Drug cartels)• 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—becomesan avenue you can do• for a cartel to succeed….• Inelastic Demand (raise in price can improve revenue)• Must play by the rule (OPEC cartels because individual nations cheat—as long as the agreement holds, the cartel can be successful till someonecheats—really hard to enforce rules cause it’s illegal)• Entry must be difficult (if anyone can get involved—it wont have the power we associate with a cartel)• Price-Leadership Model• One firm dominates (big firm calls the shots)• Other firms follow (small firms do the best to operate within the margin)• 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• Cournot Model• Assume a duopoly (2 firms)• Firms react to each other• 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• “In-between” outcomeMonopolistic Competition******this does not mean monopoly: THIS IS CLOSEST TO PERFECT COMPETITION• Defining Characteristics• Market Size: many firms• Market Power: none• Product Differentiation: different-- only thing that keeps it from not being perfect• Barriers to Entry: none• Long Run Economic Profits: none• Horizontal Differentiation: improves the product for some but makes it worse for others• Ex. Sea salt and vinegar potato chips• 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• Informs consumers- perfect competition needs perfect information• Promotes competition• 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• Case against advertising• Manipulates tastes- often used not for educating but for manipulation to convince you you want something you don’t need• Wastes scarce resources• Creates barrier to entry- new companies have to compete with a high amount of advertising even if their product is better• Fosters inefficiencyGRAPHDemand curve slopes downPerfect competition—— perfectly flat lineIn 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 lossesIn the long run…profit/loss will go away because firms can enter and


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