Monopoly, Monopolistic Competition, and Oligopolies A Review

Efficiency $ o Q LMC LATC

Monopoly

An algebraic exercise: The following is the market demand for a patented cancer drug produced by ABC pharmaceutical company. Q = 100,000 – 100 P ABC’s production cost function for this drug is: TC = 2,000, Q +.04 Q2 Demand : P = Q MR = Q MC = Q Setting MR = MC, Q = Q.10 Q = 995 Qe = 9950 Pe = Profit = P.Q – TC =8,995, – 2,000,000. – 49,975. – 3,996,001 = 2,950,023.75

Monopolistic Competition The characteristics of a monopolistic market: ·Many firms producing similar but differentiated products ·Relatively free entry and exit ·Each firm perceives a demand curve reflecting the relationship between its price the quantity demanded of its own product. ·The firm can influence the price by change the quantity it supplies or by differentiating its product from those of its competitors. ·The firm’s output and price are in equilibrium when the price the firm charges is consistent with its market share

Monopolistic competition: A firm’s market share

Demand facing firm:

S-R Equilibrium

L-R Equilibrium

Oligopoly A few firms producing similar goods Limited entries Interdependence –The kinked demand curve model –The Cournot model –Price leadership models –The Game theory

The Cournot Model

The Cournot Equilibrium

The Kinked Demand Curve Model

Tech-Based Price Leadership

Size-Based Leadership

Algebraic derivation of the leader’s demand: If the market demand is Qdm = 1000 – 20 P and the small firms’ supply is: Qss = P, the demand faced by the leader is: QdL = Qdm –Qss = 1000 – 20 P – ( P ) = P

The Game Theory The prisoner’s dilemma Dominant Strategy The Nash Equilibrium

The Prisoner’s Dilemma Jack: 2 years Jack: 5 years Jill: 5 years Jack: 10 years Jill: 1 year Jack: 1 year Jill: 10 yeas Jack Jill Confess Not confess ConfessNot confess Jill: 2 years