Understanding Cartels, Collusion, and Monopolistic Competition in Economic Structures
This overview explores the concepts of cartels, collusion, and monopolistic competition within economic structures. It highlights how firms can act collectively, resulting in market dynamics similar to monopolies, exemplified by entities like DeBeers and OPEC. Additionally, it delves into key concepts such as the Prisoner’s Dilemma in collusion scenarios, illustrating the incentives to cheat for higher profits. Various market structures, including oligopolies characterized by high interdependence among few firms, are also discussed, along with strategic behaviors and real-world examples from industries such as fast food and airlines.
Understanding Cartels, Collusion, and Monopolistic Competition in Economic Structures
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Presentation Transcript
Other Industry Structures Holmes Econ 10
Coverage • Cartels/Collusion • Monopolistic Competition • Oligopoly
Cartels/Collusion • Many firms acting as one • Examples: • DeBeers (diamonds) • Sunkist (oranges) • OPEC (oil) • Result: monopoly output with many firms
Game: Prisoner’s Dilemma Clyde Bonnie If Bonnie confesses and Clyde does not, then Bonnie gets $2 and Clyde sings. Where are they happiest? A: Both don’t confess. If you are Bonnie and Clyde doesn’t confess, what should you do? If you are Bonnie and Clyde confesses, what should you do? There is an incentive to cheat.
PD and Collusion Group is best when all cooperate (keep output low). Cheat ==> lower profits for all. Some notable examples of collusion in the US: American/EasySabre Archer Daniels Midland
Monopolistic Competition • Many firms • Similar products • Some perceived differences • Downward sloping demand • Examples: gas stations, pizzerias
Compared to monopoly, MC has... • …more elastic demand • …tendency towards zero profit. MC $ ATC AVC D MR Q
Why to zero profit? If firms are making profit, others enter. What happens to demand for PH pizza when new pizzeria? MC $ ATC A: D falls AVC D MR Q
Why to zero profit? If firms are making profit, others enter. What happens to demand for PH pizza when new pizzeria? MC $ ATC A: D falls AVC D MR Q
Why to zero profit? If firms are making profit, others enter. What happens to demand for PH pizza when new pizzeria? MC $ ATC A: D falls AVC D MR Q
Tables • Same as monopoly • Practice problems on web
DWL Which is government more likely to be interested in? Windows PH pizza P P MC MC ATC ATC D AVC AVC MC D MC Q Q
Oligopoly • Few firms • High interdependence • Many models • Examples: • almost everything: airlines, soda, fast food...
Game: Hotelling Ice Cream on beach exercise
Real world examples? • Location • Car dealers • Interstate: Fast food • Other • gimmicks (rugrats, etc.) • warranties • sales: Coke/Pepsi • political: Median voter theorem
Strategic Behavior • Firms anticipate and react to competitors’ actions • Game theory: viewing agents as playing a game
An entry/exit game (old, new) NEW FIRM OLD FIRM -2, -2 Enter Big Factory 4, 0 Don’t Enter Old anticipates what new will do. 2, 2 Small Factory Enter 6, 0 Don’t Enter
