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November 15, 2013

November 15, 2013. Collect Current Event Return and Review Ch. 10 Quiz Begin Chapter 11- Monopolistic Competition and Oligopoly HW: Watch the 3 Monopolistic Competition Videos on Class Website Complete Monopolistic Competition Packet Do Monopolistic Competition FRQ

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November 15, 2013

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  1. November 15, 2013 Collect Current Event Return and Review Ch. 10 Quiz Begin Chapter 11- Monopolistic Competition and Oligopoly HW: Watch the 3 Monopolistic Competition Videos on Class Website Complete Monopolistic Competition Packet Do Monopolistic Competition FRQ Read Ch. 11, pages 217-223 (stop at Oligopoly) Upcoming: Review Session WILL BE NEXT WEDNESDAY (11/20) Unit II Exam- The Theory of the Firm (Ch. 7-11) is 11/21 & 11/22

  2. Chapter 10- Pure Monopoly Quiz Solutions C C A D B C B A B C A D A B C

  3. Chapter 11: Monopolistic Competition and Oligopoly

  4. Monopolistic Competition Many firms sell similar but not identical products. Relatively large # of sellers (not nearly as much as perfect competition) Slightly differentiated products (distinguish from competition through reputation, customer service, location, brand name, packaging, etc.) Examples: Retail stores, movies, textbooks, restaurants, computers, apartments, fast-food, night clubs, etc. Easy entry and exit into industry Advertising (non-price competition: Make price less of a factor in consumers mind) 11-4 LO1

  5. Monopolistic Competition • Degree of Industry Concentration (extent to which largest firms control bulk of output in an industry) • Measured 2 ways: • 1.Four-Firm Concentration Ratio. • % of 4 largest firms 2. Herfindahl index • Sum of squared market shares Output of four largest firms Total output in the industry 4-Firm CR = HI = (%S1)2 + (%S2)2 + (%S3)2 + …. 10,000 is highest (100% squared) 11-5 LO1

  6. Price and Output • Elastic down-sloping demand curve. • Produce where MR=MC • Short run: profit or loss • Long run: normal profit (Accounting Profit yes, Economic Profit no) • Easy entry and exit shifts demand curve! • Productive inefficiency: P > min ATC • Allocative inefficiency: P > MC 11-6 LO2

  7. 2 Monopolistic competitors in the short run (a) Firm makes profit (b) Firm makes losses MC MC Price Price ATC ATC Price Price ATC ATC Demand Demand MR MR Profit Losses 0 0 Quantity Quantity Profit- maximizing quantity Loss- minimizing quantity

  8. The Long Run: Only a Normal Profit MC ATC P= ATC Price and Costs D3 MR = MC MR 0 Q3 Quantity 11-8 LO2

  9. MC ATC P= min ATC Price and Costs D3 MR = MC MR 0 Qm Quantity Monopolistic Competition: Efficiency P=MC=Min ATC for pure competition (recall) P) Price is Lower Excess Capacity at Minimum ATC Qe Monopolistic competition is not efficient 11-9 LO2

  10. November 18, 2013 Review Weekend HW: Monopolistic Competition Packet and FRQ Begin Oligopoly? HW: Watch 3 Oligopoly Videos on class website (Introduction, Game Theory, Kinked Demand Curve) ***AP Economics Review Session: Wednesday 2-3*** Unit III Exam: The Theory of the Firm Thursday & Friday, Nov. 21/22

  11. Oligopoly • A few large producers • Homogeneous or differentiated products • Limited control over price • Mutual interdependence • Strategic behavior • Entry barriers • Mergers 11-11 LO3

  12. Oligopolistic Industries • Four-firm concentration ratio • 40% or more to be oligopoly • Shortcomings • Localized markets • Inter-industry competition • World price • Dominant firms 11-12 LO3

  13. High Concentration Industries 11-13 LO1

  14. Game Theory Overview • Oligopolies display strategic pricing behavior • Mutual interdependence • Collusion • Incentive to cheat • Prisoner’s dilemma 11-14 LO4

  15. Game Theory Overview RareAir’s Price Strategy • 2 competitors • 2 price strategies • Each strategy has a payoff matrix • Greatest combined • profit • Independent actions • stimulate a response High Low A B $12 $15 High $12 $6 Uptown’s Price Strategy C D $6 $8 Low $15 $8 11-15 LO4

  16. Game Theory Overview RareAir’s Price Strategy • Independently lowered prices in expectation of greater profit leads to worst combined outcome • Eventually low outcomes make firms return to higher prices. High Low A B $12 $15 High $12 $6 Uptown’s Price Strategy C D $6 $8 Low $15 $8 11-16 LO4

  17. 3 Oligopoly Models • Kinked Demand Curve • Collusive Pricing • Price Leadership • Reasons for 3 models • Diversity of oligopolies • Complications of interdependence 11-17 LO5

  18. Kinked-Demand Theory • Noncollusive oligopoly • Uncertainty about rivals reactions • Rivals match any price change • Rivals ignore any price change • Assume combined strategy • Match price reductions • Ignore price increases 11-18 LO5

  19. Price Price and Costs 0 0 Quantity Quantity Kinked Demand Curve Rivals Ignore Price Increase MC1 D2 e e P0 P0 MR2 f f D2 MC2 MR2 g Rivals Match Price Decrease g D1 D1 Q0 Q0 MR1 MR1 11-19 LO5

  20. Kinked Demand Curve • Criticisms • Explains inflexibility, not price • Prices are not that rigid • Price wars 11-20 LO6

  21. Price and Costs Quantity Cartels and Other Collusion MC P0 ATC A0 MR=MC Economic Profit D MR Q0 11-21 LO6

  22. Global Perspective 11-22 LO6

  23. Overt Collusion • Cartels - a group of firms or nations that collude • Formally agreeing to the price • Sets output levels for members • Collusion is illegal in the United States • OPEC 11-23 LO6

  24. Obstacles to Collusion Demand and cost differences Number of firms Cheating Recession New entrants Legal obstacles 11-24 LO6

  25. Price Leadership Model • Price Leadership • Dominant firm initiates price changes • Other firms follow the leader • Use limit pricing to block entry of new firms • Possible price war 11-25 LO6

  26. Oligopoly and Advertising • Prevalent to compete with product development and advertising • Less easily duplicated than a price change • Financially able to advertise 11-26 LO7

  27. Positive Effects of Advertising Low-cost way of providing information to consumers Enhances competition Speeds up technological progress Can help firms obtain economies of scale 11-27 LO7

  28. Oligopoly and Advertising Source: Advertising Age http://www.adage.com 11-28 LO7

  29. Negative Effects of Advertising Can be manipulative Contains misleading claims that confuse consumers Consumers pay high prices for a good while forgoing a better, lower priced, unadvertised version of the product. 11-29 LO7

  30. Global Perspective 11-30 LO7

  31. Oligopoly and Efficiency • Oligopolies are inefficient • Productively inefficient P > minATC • Allocatively inefficient P > MC • Qualifications • Increased foreign competition • Limit pricing • Technological advance 11-31 LO7

  32. Oligopoly in the Beer Industry • The beer industry is now an oligopoly. • Changes in demand • Change in tastes • Consumed at home and mass produced • Changes in supply • Technological advance • Economies of scale 11-32

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