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ECN212 Week 09 Note

by: Phoebe Chang

ECN212 Week 09 Note ECN 212

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Phoebe Chang
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Cartels, Oligopolies, and Monopolistic Competition
William Foster
Class Notes
economic, Macroeconomic, Math, Money, Cartels, competition, monopoly
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This 5 page Class Notes was uploaded by Phoebe Chang on Sunday April 3, 2016. The Class Notes belongs to ECN 212 at a university taught by William Foster in Spring 2016. Since its upload, it has received 25 views.

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Date Created: 04/03/16
ECN212​ Cartels,Oligopolies,andMonopolistic Competition SpringSEMESTER2016 Professor:Dr.WilliamFoster EliteNotetaker:Phoebe( Introduction ● President Jimmy Carter (1979) ○ Our neck is stretched over the fence and OPEC has a knife ● OPEC ○ aka Organization of Petroleum Exporting Countries ○ They’re acartel ■ A group of suppliers that tries to act as if they were a monopoly ■ Cocaine is the largest cartel market (inelastic) ■ They can increase price but only temporarily ■ Cartel will try to move a market from competitive toward monopoly (profit will be shared by members of cartel) The Wealth of Nations ● Law ○ People of the same trade are not allowed to meet with each other ○ It’ll create conspiracy against the public Cartels ● Facts ○ No legal in the States ○ Very few of them can create a pure monopoly ○ Can reduce quantity & raise price (coke) ● Tend to collapse due to ○ Cheating by cartel members ○ New entrants and demand response ○ Government prosecution and regulation 1 ● Only way to fix it is toegalize​it ● Incentive to Cheat ○ The more successful it is in raising profits, the greater it has the incentive to cheat ○ Monopoly vs Cartel ■ Monopoly has no incentive to increase output ■ An individual member of a cartel has an incentive to increase output (cheat) ○ No one wins the cheating game ○ Examples ■ Domination of oil market ■ Saudi Arabia vs Russia ■ Two strategies: Cheat or Cooperate by cutting back on production ■ Overfishing ■ All countries want to cooperate and catch fewer fish ■ IF one cut back, another will have incentive to cheat ■ Therefore, result of overfishing ○ Prisoner's' Dilemma ■ The pursuit of individual interest leads to a group outcome that is in interest of no one ○ Dominant Strategy ■ A strategy that has a higher payoff than any other strategy regardless of what other player does ● New Entrants / Demand Response Breakdown Cartels ○ Higher prices attracts new entrants into the industry ■ Oil industry ■ Incoming Great Britain, Netherlands, African, Canada ○ Higher price leads to conservation ■ Interest in substitutes (e.g. natural gas, solar) ■ Demand for higher mileage cars ■ Easier to maintain a natural resource than a manufactured good (e.g. oil, diamonds, nutmeg) ○ Successful cartel can control key input that can’t be duplicated easily ■ NBA— salary cap 2 ■ NBA is a buyer’s cartel ■ Teams that cheat will be kicked out of league ● Government Prosecution and Regulation ○ Antitrust Laws ■ Give the gov the power to regulate or prohibit practices that may be anticompetitive ■ E.g. Archer Daniels Midland (USA) ● Government-Supported Cartels ○ Government-controlled milk cartels raise the price of milk ○ Cartels problems in poor countries ■ More corrupted governments ■ New ideas can’t enter the market ■ People trying to get monopoly privileges than innovating ● Successful vs Unsuccessful Cartels ○ Easier to have cartel when there are fewer substitutions ○ Harder to cheating when there are fewer firms ○ Entry can be prevented when the food is limited Oligopolies ● Facts ○ A market that is dominated by a small numbers of firms ○ Can’t form a cartel since the prices are lower than monopoly levels ○ Have some market power ○ Prices are above competitive levels ○ When a firm reduces output, other firms in the industry will gain the most benefit ● Examples ○ Automobiles ○ Soft-drinks ○ Aircrafts ● Price leadership ○ When one firm raise the price, the others do the same 3 Monopolistic Competition ● Facts ○ A market with a large number of firms selling similar but not the same products ○ E.g. Music ● Characteristics ○ Each firms face a downward sloping demand curve ○ Each firm's differentiates their product ○ Each firm makes zero average profit ○ There are no barriers to entry ● Compare to competition ○ Both P=AC ○ Competition minimizes AC ○ Product differentiation is good for long run Economics of Advertising ● Facts ○ Used to differentiate products and build identity ● Information Advertising ○ Advertising about price, quality and availability ○ Inform the health benefits ○ Effects ■ Improves the competitive process ■ Improves consumer welfare ■ Advertising had lower prices (e.g. eyeglasses in US) ● Signaling ○ Ad itself to be informative ○ Product debut + advertising = signals ■ “Big deal” when there’s a lot of ads ■ E.g. introduction to iPhone ○ Greater hit product = greater incentive to advertise ● Advertising as Part of the Product ○ Mind changing ads ■ “Things go better with Coke" 4 ■ “The real thing" ○ Gives richer memories on certain brand ● Persuasion Advertising ○ Create market power by brand differentiation ○ Using celebrities to influence the public ○ E.g. Hard liquor   5


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