Dr. R. JAYARAJ

Q Cost ATC 1000 $50 Example: 1000 homes need electricity. Electricity Economies of scale due to huge FC ATC is lower if one firm services all 1000 homes than if two firms each service 500 homes. 500 $80

D P Q A competitive firm’s demand curve

D P Q A monopolist’s demand curve

A monopoly’s revenue 9 QPTRARMR 0$ n.a.

Answers Here, P = AR, same as for a competitive firm. Here, MR < P, whereas MR = P for a competitive firm $ n.a $ 0$4.500 MRARTRPQ – $4

BSNL’s D and MR Curves Q P, MR Demand curve ( P ) MR $

1. The profit- maximizing Q is where MR = MC. 2. Find P from the demand curve at this Q. Quantit y Costs and Revenue MR D MC Profit-maximizing output P Q

Quantit y Costs and Revenue ATC D MR MC Q P ATC

P = MC Deadweight loss P P=MC Quantit y Price D MR MC QMQM QEQE Socially efficient quantity is found where MC and D curve intersect

Consumer surplus Deadweight loss Monopol y profit P=MC Quantit y Price D MR PMPM QMQM

Monopoly profit P=MC Quantit y Price D MR Q

SUMMARY

Monopolistic competition

Role of Location

profit ATC P Quantit y Price ATC D MR MC Q

losses Quantit y Price ATC Q P MC D MR

The level of output that minimizes ATC is greater than the output that maximizes the monopolistic competitor’s profits. Hence, we say the monopolistic competitor operates with excess capacity. Quantity Price ATC D MR Q MC P = ATC markup

1. Excess capacity  The monopolistic competitor operates on the downward-sloping part of its ATC curve, produces less than the cost-minimizing output.  Under perfect competition, firms produce the quantity that minimizes ATC. 2. Markup over marginal cost  Under monopolistic competition, P > MC.  Under perfect competition, P = MC.

Comparing Perfect & Monop. Competition yes none, price- taker firm has market power? downward- sloping horizontalD curve facing firm differentiatedhomogenous the products firms sell zero long-run econ. profits yes free entry/exit many number of sellers monopolistic competition perfect competition

Comparing Monopoly & Monop. Competition yes firm has market power? downward- sloping downward- sloping (market demand) D curve facing firm manynoneclose substitutes zeropositivelong-run econ. profits yesnofree entry/exit manyonenumber of sellers monopolistic competition monopoly

Comparing Oligopoly & Monop. Competition highlow likelihood of fierce competition lowhigh importance of strategic interactions between firms manyfewnumber of sellers monopolistic competition oligopoly

SUMMARY

BETWEEN MONOPOLY AND PERFECT COMPETITION

Oligopoly Because of the few sellers, the key feature of oligopoly is the tension between cooperation and self-interest. A Duopoly Example A duopoly is an oligopoly with only two members. It is the simplest type of oligopoly.

Oligopoly

Competition, Monopolies, and Cartels

The Equilibrium for an Oligopoly

Equilibrium for an Oligopoly

How the Size of an Oligopoly Affects the Market Outcome

Game Theory

More on Assumptions

More on Common Knowledge A Johari window is a game created by Joseph Luft and Harry Ingham in 1955

Incomplete Information vs Asymmetric Knowledge

History of Game Theory

Prisoner’s Dilemma Two criminals-Bonnie and Clyde-minor crime of carrying unregistered gun- police suspect that two criminals have committed a Bank robbery together-but due to the lack of evidence police convict them of their major crimes- Police question them-deal-choices 1.Lock up for 1 yr. 2.If u confess to the bank robbery and implicate your partner, you will be free. Your partner will be in jail for 20 yrs. 3.But if u both confess to the crime, you will get an immediate sentence up to 8 yrs.

Bonnie’s Decision ConfessRemain Silent Confess Remain Silent Bonnie gets 8 yrs Clyde gets 8 yrs Bonnie gets 20 yrs Clyde goes free Bonnie goes free Clyde gets 20 yrs Bonnie gets 1 yr Clyde gets 1 yr Clyde’s Decision What do u expect them to do? Would they confess or remain silent? Figure shows choices. Each prisoner has 2 strategies: confess or remain silent. The sentence depend of their strategy he choose and strategy chosen by the partner.

1.Bonnie’s decision: “If Clyde remains silent, I will confess, since then I will go free rather than spending time in jail. If he confess, I too will confess, since then I will spend 8 yrs in jail rather than 20 yrs.” Dominant strategy (for bonnie). If it is the best strategy for a player to follow regardless of strategies pursued by other players. 2. Clyde’s Decision: He faces exactly same choices as Bonnie, and he reasons in much the same way. (Dominant Strategy) 3.In the end, both Bonnie and Clyde confess, and both spend 8 yrs in jail. If they had both remain silent, both of them would have been better off, spending 1 yr in Jail on the gun charge. 4. Therefore, Cooperation between the 2 prisoners is difficult to maintain because, cooperation is individually irrational.

Decision of the United States (U.S.) Arm U.S. at risk USSR at risk U.S. at risk and weak USSR safe and powerful U.S. safe and powerful USSR at risk and weak U.S. safe USSR safe Disarm Decision of the Soviet Union (USSR)

Exxon’s Decision Drill Two Wells Drill Two Wells Exxon gets $4 million profit Chevron gets $4 million profit Chevron gets $6 million profit Exxon gets $3 million profit Chevron gets $3 million profit Exxon gets $6 million profit Chevron gets $5 million profit Exxon gets $5 million profit Drill One Well Drill One Well Chevron’s Decision

The Equilibrium for an Oligopoly

Jack’s Decision High Production High Production: 40 Gal. Jack gets $1,600 profit Jill gets $1,600 profit Jack gets $1,500 profit Jill gets $2,000 profit Jack gets $2,000 profit Jill gets $1,500 profit Jack gets $1,800 profit Jill gets $1,800 profit Low Production: 30 gal. Low Production Jill’s Decision 40 gal. 30 gal.

Summery: When firm in an oligopoly individually choose production to maximize profit, they produce a quantity of output greater than the level produced by monopoly and less than the level produced by competition. The oligopoly price is less than the competitive price.

Normal Form Games  Simple games without „timing”, i.e. where players make decisions simultaneously. Dynamic games can be reduced into a normal form.  The set of strategies is simply the set of possible choices for each player.  Normal (Strategic) Form Game consists of the following elements: N={1,.., n} the finite set of players S={S 1,.., S n } the set of strategies, including a (possibly infinite) set for each player U(s 1,.., s n ) the vector of payoff functions, where s i  S i for each player  If the set of strategies is small and countable (typically 2-5), then we can use a game matrix to represent a normal-form game

Game Matrix  Example 1: Advertising game  N={1, 2}  S={S 1, S 2 } and S 1 = S 2 = {A, N}  U(s 1, s 2 ) = { u 1 (s 1, s 2 ); u 2 (s 1, s 2 )}  u 1 (A, A) = 40; u 1 (A, N) = 60; u 1 (N, A) = 30; u 1 (N, N) = 50  u 2 (A, A) = 40; u 2 (A, N) = 30; u 2 (N, A) = 60; u 2 (N, N) = 50 Player 2 AN Player 1 A40, 4060, 30 N30, 6050, 50