ECONOMICS IRENE PINI IRENE PINI classe LMG/01 Facoltà di Giurisprudenza Università degli studi di Macerata

I have chosen those three topics for my short report: - Monopolistic Competition; - Oligopoly; - Collusion and cartel.

MONOPOLISTIC COMPETITION  Monopolistic competition is a kind of imperfectly competitive market, in which there are many firms offering similar but not identical products. (For instance, we can consider the market for computer games, movies, books, CDs, and so on.)

 There are two differences between this two market structures: - excess capacity: a monopolistically competitive firm, could increase the quantity it produces and lower the average total cost of production; - mark-up or marginal cost: while in a competitive firm price equals marginal cost, in a monopolistically competitive firm, price exceeds marginal cost, because the firm always has some market power. Monopolistic vs Perfect Competition

Social inefficiencies: -prices are higher than in the perfect competition; -the number of firms may not be the “ideal” one, as there may be too much or too little entry; -firms that sell highly differentiated consumer goods spend between 10 and 20% of role in advertising. Monopolistic competition has both positive and negative aspects:

The role of advertising and brand names: - critics argue that firms use advertising and brand names in order to manipulate people’s tastes, to take advantage of consumers irrationality and to reduce competition. - on the other hand, defenders of advertising argue that firms use them to provide information, to take advantage of price differences, and to convey the existence of new products; so, each firm has less market power and new firms are allowed to enter more easily.

Example: For instance, imagine a famous brand name of cookies. When you go to do shopping, you find lots of cookies on the shelves. The unfamiliar firms can offer the same food at lower prices, but you have no way of knowing that. By contrast, the brand name cookies offer a consistent product across all cities in the country. The brand name is useful to you to judge the quality of what you are about to buy.

OLIGOPOLY  Oligopoly is another kind of imperfectly competitive market, in which only a few sellers offer similar or identical products.

 When a market has only a small group of sellers, there is tension between firms, as they face the same problems; they observe the behaviour of their rivals and act accordingly. In an oligopoly, firms can non-cooperate if they act by their own, without any agreement; this behaviour often cause a price war. On the other hand, if they cooperate, they make an agreement called...

COLLUSION CARTEL It is an agreement about quantities to produce or prices to charge. The group of firms acting in unison.

 In 50s the American mathematician John Nash showed that in every game there are economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen. The Nash equilibrium

If both players choose strategy A, they gain €3: this outcome represents the Nash equilibrium. If you reveal Paul's strategy to Harry and vice versa, you will see that no player deviates from the original choice. This equilibrium exist if no player change his strategy, despite knowing the actions of their opponents. For example, Paul and Harry can choose two alternatives: A) gain €3 or B) lose €3.

 As the number of firms in oligopoly is small, each firm must act strategically, and it has to consider how its decisions might affect the production decisions of all the other firms. Game theory is the study of how people behave in strategic situations, so when each person, when deciding what action to take, must consider how others might respond to that action. The Game Theory

 The prisoners' dilemma is a particular game between two captured prisoners that illustrates why cooperation is difficult to maintain even when is mutually beneficial. The Prisoners' dilemma

Two criminals suspected of committing a crime. The sentence each prisoner gets depends on the strategy he or she chooses and the strategy chosen by his or her partner in crime. It doesn't matter what the other criminal do, the dominant strategy for each prisoner is confessing, and act for self-interest. Only with the cooperation or altruism they can avoid a long time of detention. In the oligopoly, the profit that each firm earns depends on both its production decision and the production decision of the other oligopolist.

Examples: As an example of oligopoly, we mention the market for tennis balls, power tools, computers and aircrafts industries. We can consider the market of cars too: in fact, there are few car firms throughout the world (such as BMW, Audi, Mercedes, Volkswagen, Volvo, Pegeout, Renault, Nissan, Skoda) against the demand for millions of cars every day.

THE END THE END thank you for your attention