Week 7 Notes, Ch. 8-9
Week 7 Notes, Ch. 8-9 Econ 1051
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This 6 page Class Notes was uploaded by Lauren Pike on Sunday October 11, 2015. The Class Notes belongs to Econ 1051 at University of Missouri - Columbia taught by George Chikhladze,Martha Steffens in Fall 2015. Since its upload, it has received 117 views. For similar materials see General Economics in Economcs at University of Missouri - Columbia.
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Date Created: 10/11/15
Chapter 8 Continued Barriers to entry 0 economies of scale natural monopolies 0 legal barriers patents and licenses o patent exclusive right of an inventor to useallow another to use hisher invention I protects inventor from rivals I provides inventor w monopoly position for life of patent ownership of essential resources pricing network effects customers derive greater benefit from joining a network that many other consumers usebelong to Monopoly Demand 0 demand curve is also market demand curve downsloping curve increase sales only by charging lower price charging higher price means less sales MRltP for every unit of output except the first monopolist will choose a price about MC 0 they ll produce less than a purely competitive industry Output and Price Determination o monopolies have same cost structure as PC firm but losses are still possible 0 MRMC rule still applies 0 misconceptions concerning monopolies o monopolists don t charge highest price bc yield is smaller than average total profit monopolist seeks to max total profit not max unit profit possibility of econ profit higher than PC firm but losses are still possible I monopolist will not persist in operating at loss in longrun Economic Effects of Monopoly 0 price output and efficiency 0 MRltP MR curve lies below demand curve 0 yields neither productiveallocative efficiency I outputltdemand o PCgtMC o Pgtmin ATC 0 income transfer 0 monopoly levies private tax on consumers since they choose their price 0 monopoly increase income inequality 0 cost complications 0 4 reasons why cost of PC and monopoly firms differ I econs of scale I xinefficiency firm produces output higher cost than necessary to produce it I need for monopolypreserving expenditures 0 rentseeking expenditures any action designed to gain special benefit from the gov taxpayers expense I very long run 0 general view of economists is that pure monopolists won t be technologically progressive though firms can reduce costs in very long run 0 absence of competitors means no pressure for tech advances Price Discrimination 0 definition charging dif prices or the same product to dif buyersbased on volumes 0 conditions 0 monopoly power firm must be monopolistic or at least possess some monopoly power ability to control output price 0 market segregation must be able to segregate buyers into distinct classes each w dif willingness to pay usually based off dif elasticities of demand 0 no resale original purchaser can t resell productservice if they can resell causes competition at high price segment of market I ex airlines electric utilities movies Monopoly and Antitrust policy 0 monopolies not widespread 0 research and tech advances may undermine monopoly power 0 patents eventually expire o antitrust policy 0 if monopoly appears to be unsustainable over long period of time society might ignore it o gov may file charges if monopoly was achieved through anticompetitive actions creates substantial econ inefficiency and appears to be longlasting o Sherman Act 1890 has 2 provisions I any form of trust illegal I every person who tries to monopolize commits felony 0 rule of reason court ruling that only monopolies unreasonably attainedmaintained are illegal I court can issue injunctions to prohibits anticompetitive behaviors I break up monopolies into competing firms Chapter 9 Monopolistic Competition and Pure Monopolies Monopolistic competition 0 characteristics 0 relatively large of sellers more PC I 2570 firms approximately but not 100s and 1000s of PC industry I this means 0 small market shares each firm has comparatively small of total market which leads to limited control over market price no collusion relatively large means collusion is unlikely independent action w numerous firms no feeling of interdependence among them each firm can determine own price wo considering other firms 0 differentiated products more monopolistic I firms try to distinguish its productservice from all competing ones on basis of different attributes such as o differences in functional feature matierials design 0 quality of service 0 location and accessibility 0 brand names and packaging 0 some control over price 0 easy entry and exit from industry more PC I most monopolistically comp industries are more comp than monopolistic I because competitors are small firms econ of scale fewer and capital requirements are low I financial barriers may result from need to advertise I easy exit bc nothing prevents unprofitable firms from staying 0 advertising I expense of product differences are wasted if consumers aren t made aware of those differences this leads to heavy advertising I goal is to make price less of a factor 0 examples of industries I jewelry asphalt commercial signs real estate in metro areas providers of professional services Price and Output in Monopolistic Competition 0 firm s demand curve 0 curve highly but not perfectly elastic I more elastic than pure monopoly bc monopolistic comp seller has many competitors I demand not perfectly elastic like PC curve bc o mono comp has fewer rivals 0 products are differentiated so they aren t perfect subs 0 price elasticity of demand depends on of rivals and degree of product differences I higher in of rivals and low product differences higher elasticity o shortrun Profit or loss 0 max profitsmin losses using MCMR again 0 longrun only a normal profit 0 profits firms enter I as new firms enter demand falls bc each firm has smaller share of total demand and faces larger of subs I when entry of new firms reduces demand causes demand curve to lie tangent to ATC curve firms make a normal profit 0 losses firms leave I some firms exit when faced w loss I w fewer subs and greater market share demand increases and firms go back to making normal profit Mono Comp and Efficiency 0 yields neither productive nor allocative efficiency in longrun equil o mono comp causes under allocation of goods 0 consumers pay higher than comp price and obtain less than optimal output 0 excess capacity gap between min ATC output and profit max output plant equipment that s underused bc firm is producing less than min ATC output 0 product variety and improvement 0 mono comp has two virtues I promotes product variety I promotes product improvement 0 many mono comp firms are unhappy wjust normal profit so they ll improve products and increase differentiation to make econ profit consumers tastes cause variation in products both further differentiate products and expand choices firm constantly manages price product and advertising Oligopoly 0 characteristics 0 few large producers 0 control over price but mutual interdependence I price maker but must consider how rival firms will react o strategic behavior selfinterest either homogenous or differentiated products I differentiated oligopolies engage in nonprice comp and advertising entry barriers I econs of scale I ownership and control of raw materials mergers I increase market share I increase firm s monopoly power I increase buyer of inputs obtain lower prices on production inputs I decrease comp Oligopoly Behaviors 0 game theory study of how pplfirms behave in strategic situations 0 prisoner s dilemma o mutual interdependence revisited O O O o bc oligopolistic firms are interdependent selling strategies affect one another 0 collusion cooperation w rivals firms reach agreement to fix prices divide markets or othenNise restrict competition between the two 0 incentive to cheat firms may feel pressure to secretly violate terms of collusion agreement to gain profits Kinked Demand Model 0 per se violation collusive action that violates antitrust laws even if action was unsuccessful o gov has to show that there was conspiracy to fix prices rig bids and divide markets 0 kinked demand curve demand curve based on the assumption that rivals will ignore price increase and follow price decrease 0 price inflexibility o if oligopolist raises prices it will lose customers 0 if it decreases prices other firms will match and profits will be small 0 price leadership involves implicit understanding by which oligopolists can coordinate prices wo collusion o dominant firm initiates price changes and other firms follow lead 0 price leader is likely to observe the following tactics I infrequent price changesonly made when cost and demand conditions are altered significantly I communications firms publicizes need to change prices to other firms through press releases speeches I avoidance of price wars Collusion o cartel formal agreement among producers to set price and indiv firm s output levels of a product overt usually between foreign nationsproducers o more common types of collusion are covert include conspiracies to fix prices rig bids and divide up markets 0 JointProfitMaximization 0 each firm finds it more profitable to charge same price but only if rivals do too o in order to ensure this obvious answer is to collude o obstacles to collusion o demand and cost differences I even though products could be the same not likely that firms will have identical costs and profit max qtys o of firms I increase in of firms means it s less likely to agree on terms of collusion chea ng recession I means decreased demand and increased ATC so may be more profitable to cut prices 0 potential entry I greater prices and profits that result from collusion attract more firms which would increase supply and decrease prices I successful collusion requires oligopolists to block other firms Advertising and Oligopolies c an oligopolist s market share is determined through product advertising bc 0 product development and advertising are less easily duplicated than price cuts 0 oligopolists have enough financial resources to engage in product development and advertising 0 positive effects of advertising 0 provides info to consumers minimizes search time diminishes monopoly power enhances competition and leads to efficiency speeds up tech progress can increase sales and output leading to econs of scale 0 potential negative effects of advertising much designed to manipulatepersuade customers sometimes based on misleading claims can achieve substantial brand loyalty which can lead to monopoly power can be selfcancelling when other firms run similar ads selfcancellingincrease monopoly power leads to inefficiency Oligopolies and Efficiency 0 oligopolist s production occurs where PgtMC and ATC o oligopoly is less desirable than pure monopoly bc gov regulates monopolies 0 production is below output at which ATC is minimized o neither allocative PMC or productive Pmin ATC efficiency is met 0 benefits 0 increased foreign comp 0 limit pricing 0 tech advance 00000 00000
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