1 Chapter 11 Price Searcher Markets with High Entry Barriers

2 Overview Causes of high barriers to entry Causes of high barriers to entry Monopolies Monopolies Analyzing the monopoly graph Analyzing the monopoly graph Oligopolies Oligopolies Game theory (collusion vs. cheating) Game theory (collusion vs. cheating) Problems of markets with high barriers to entry Problems of markets with high barriers to entry Problems with regulation Problems with regulation

3 High Barriers to Entry What causes high barriers to entry: 1. Economies of scale 2. Government licensing and other legal barriers to entry

4 High Barriers to Entry 3. Patents 4. Control over an essential resource

5 Monopoly A monopoly is a market characterized by: 1. High barriers to entry 2. A single seller of a well-defined product that has no good substitutes

6 Monopoly The demand curve for a monopolist is the market demand curve (D). A monopolist maximizes profits by producing where MR=MC.

7 Monopoly *With high barriers to entry, a monopoly can continue to make an economic profit* Is it possible for a monopoly to make an economic loss?

8 Oligopoly Oligopoly: a market that consists of a small number of sellers Ex. automobiles, crude oil, tennis balls, etc.

9 Oligopoly The characteristics of an oligopoly are: 1. A small number of rival firms 2. Interdependence among the sellers 3. High barriers to entry in the market (Substantial economies of scale) (Substantial economies of scale)

10 Prisoner’s Dilemma The Prisoners Dilemma….

11 Prisoner’s Dilemma Dominant Strategy: A strategy that is best for a player in a game regardless of the strategies chosen by other players

12 Game theory Game theory: the analysis of strategic choices made by competitors in a conflict situation. Real life applications: Ex. Group work for classes Ex. Shoveling a communal driveway

13 Classic Example of Game Theory

14 Repeated Games Over time and repeated play, people are more likely to cooperate Tit-for-tat: cooperate for the first 2 rounds, and then do whatever the other player did in the last round

15 Collusion Collusion: the agreement among firms to avoid competitive practices. Firms will agree to limit output and keep prices high.

16 Oligopoly Prices and Profits Competitive Price ≤ Oligopoly Price ≤ Monopoly Price 1. Firms collude: price will be closer to monopoly price. 2. Firms cheat: price will be closer to competitive price.

17 Obstacles to Collusion 1. Collusion is more difficult the more firms there are in the market. 2. It is difficult to detect and eliminate price cuts 3. Low barriers to entry

18 Obstacles to Collusion 4. Unstable Demand Conditions 5. Antitrust laws A. Sherman Antitrust Act (1890) B. Clayton Act (1914)

19 Problems with High Barriers to Entry 1. The discipline of market forces is weakened 2. Reduced competition results in inefficiency 3. Resources will be wasted by firms attempting to maintain grants of protection

20 Potential Solutions to High Barriers to Entry 1. Antitrust legislation 2. Reduce artificial barriers that limit competition

21 Potential Solutions to High Barriers to Entry 3. Regulate the price and output of firms in the market Does not work because: A. Lack of Information B. Cost Shifting C. Regulators may become biased

22 Potential Solutions to High Barriers to Entry 4. Government produces the goods and services instead of the private sector

23 Review 1. Know what we mean by high barriers to entry and how it relates to a monopoly. 2. Understand the monopoly graph and what happens in the long-run. 3. Understand the characteristics of an oligopoly. 4. Know the concept of the prisoner’s dilemma game and game theory 5. Understand the obstacles to collusion

24 Review 6. Know why high barriers to entry can be problematic. 7. Understand the potential solutions for high barriers to entry.