1. Why are we “Speed Reviewing”?
Having you review on your own wouldn’t be effective
Lecturing about every concept would be too boring.
“Speed Reviewing” will help you identify what you need to study.
So you must come see me about specific things you don’t understand.

2. Unit IV: Imperfect Competition
Half Way
Unit IV: Imperfect Competition

3. Imperfect Competition To sell more a firm must lower its price.
The cost curves are the same
The MR= MC rule still applies
Shut down rule still applies
All have a downward sloping demand curve.
To sell more a firm must lower its price.
5. All are inefficient.
6. MR < Demand

4. Characteristics of Monopolies

5. 5 Characteristics of a Monopoly
1. Single Seller
The Firm IS the Industry
2. Unique good with no close substitutes
3. “Price Maker”
The firm can change the price by changing the quantity it produces
4. High Barriers to Entry
New firms CANNOT enter market
No immediate competitors
5. Some “Nonprice” Competition

6. Drawing Monopolies

7. MR is below Demand P
$100 80 60 40 D Q MR

8. Why is MR less than Demand?P Qd TR MR
$11 -

9. Why is MR less than Demand?P Qd TR MR
$11 -
$10 1 10
$10

10. Why is MR less than Demand?P Qd TR MR
$11 -
$10 1 10 $9 2 18 8
$10 $9 $9

11. Why is MR less than Demand?P Qd TR MR
$11 -
$10 1 10 $9 2 18 8 $8 3 24 6
$10 $9 $9 $8 $8 $8

12. Why is MR less than Demand?P Qd TR MR
$11 -
$10 1 10 $9 2 18 8 $8 3 24 6 $7 4 28
$10 $9 $9 $8 $8 $8 $7 $7 $7 $7

13. Why is MR less than Demand?P Qd TR MR
$11 -
$10 1 10 $9 2 18 8 $8 3 24 6 $7 4 28 $6 5 30
$10 $9 $9 $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6

14. Why is MR less than Demand?P Qd TR MR
$11 -
$10 1 10 $9 2 18 8 $8 3 24 6 $7 4 28 $6 5 30 $5
$10 $9 $9 $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6 $5 $5 $5 $5 $5 $5

15. Why is MR less than Demand?P Qd TR MR
$11 -
$10 1 10 $9 2 18 8 $8 3 24 6 $7 4 28 $6 5 30 $5 $4 7 -2
$10 $9 $9 $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6 $5 $5 $5 $5 $5 $5 $4 $4 $4 $4 $4 $4 $4

16. Why is MR less than Demand?P Qd TR MR
$11 -
$10 1 10 $9 2 18 8 $8 3 24 6 $7 4 28 $6 5 30 $5 $4 7 -2
$10 $9 $9 $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6 $5 $5 $5 $5 $5 $5 $4 $4 $4 $4 $4 $4 $4

17. Why is MR less than Demand?P Qd TR MR
$11 -
$10 1 10 $9 2 18 8 $8 3 24 6 $7 4 28 $6 5 30 $5 $4 7 -2
$10 $9 $9
MR IS LESS THAN
PRICE $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6 $5 $5 $5 $5 $5 $5 $4 $4 $4 $4 $4 $4 $4

18. Elastic vs. Inelastic Range of Demand Curve

19. Elastic and Inelastic RangeP
$100 80 60 40 D Q MR

20. Elastic and Inelastic Range
$200
150
100 50
Dollars Q
$750
500
250
Dollars Q

21. Elastic and Inelastic Range
$200
150
100 50
Total Revenue Test
If price falls and TR increases then demand is elastic.
Dollars MR D Q
$750
500
250
Dollars TR Q

22. Elastic and Inelastic Range
$200
150
100 50
Total Revenue Test
If price falls and TR increases then demand is elastic.
Dollars MR D Q
Total Revenue Test
If price falls and TR falls then demand is inelastic.
$750
500
250
Dollars
When MR goes negative, TR will fall TR Q

23. Putting Demand, MR, and Cost Together

24. MR = MC Rule Still Applies How much is the TR, TC and Profit or Loss?Q
200
175
150
125
100 75 50 25
Price, costs, and revenue $9 8 7 6 5 4 3 2 MC
ATC
Profit =$5 D MR

25. How much is the TR, TC, and Profit or Loss?Q
200
175
150
125
100 75 50 25
Price, costs, and revenue MC
ATC
140
Loss
AVC D MR Q

27. Monopolies and Efficiency

28. Monopolies are inefficient because they…
Charge a higher price
Under produce
Not allocativly efficiency
Produce at higher costs
No productive efficiency
Have little incentive to innovate

29. EFFICIENCY OF PERFECT COMPETITION
An industry in
pure competition
MB=MC P
S = MC CS Pc PS D Q Qc

30. INEFFICIENCY OF PURE MONOPOLY
S = MC
At MR=MC
A monopolist will sell less units at a higher price than in competition Pm Pc D MR Q Qm Qc

31. Result is DEADWEIGHT LOSS to society
CS and PS of a Monopoly P
Result is DEADWEIGHT LOSS to society
S = MC CS Pm Pc PS D MR Q Qm Qc

32. Are Monopolies Productively Efficient?
No. They are not producing at the lowest cost (min ATC)
Does Price = Min ATC? Q
200
175
150
125
100 75 50 25
Price, costs, and revenue MC
ATC D MR

33. Does Price = MC? Do Monopolies Have Allocative Efficiency?
No. Price is greater. The monopoly is under producing.
Does Price = MC? Q
200
175
150
125
100 75 50 25
Price, costs, and revenue MC
ATC D MR

34. Regulating Monopolies

35. Why Regulate? How do they regulate?
Why would the government regulate an monopoly?
To keep prices low
To make monopolies efficient
How do they regulate?
Price controls: Price Ceilings

36. 1.Socially Optimal Price
Where should the government place the price ceiling?
1.Socially Optimal Price
P = MC (Allocative Efficiency) OR
2. Fair-Return Price (Break–Even)
P = ATC (Normal Profit)
NOT THE SAME AS PRODUCTIVE EFFICIENCY

37. REGULATED NATURAL MONOPOLY
Monopoly Price
MR = MC P Pm
Price and Costs
ATC MC D MR Q Qm

38. REGULATED NATURAL MONOPOLY
Fair-Return Price
Normal Profit Only
TR = TC
Price and Costs
ATC Pf MC D MR Q Qf

39. REGULATED NATURAL MONOPOLY
Socially-Optimum
Price
P = MC
Price and Costs
ATC MC Pr D MR Q Qr

40. Price Discrimination

41. PRICE DISCRIMINATION Definition:
Practice of selling the same products to different buyers at different prices
Requires the following conditions:
Firm must have monopoly power
Firm must be able to segregate the market
Consumers must not be able to resell product

42. A perfectly discriminating can charge each person differently so the Marginal Revenue = DemandMC P
ATC
Price and Costs
MR=D D Q Q1 Q2

43. What output do they make? Where is Consumer Surplus?MC P
ATC
Price and Costs
MR=D D Q Q2

44. Where is the Profit? Profit with price discrimination MC P ATC
Price and Costs
MR=D D Q Q2

45. Why does MR equal Demand?

46. Why does MR equal Demand?P Qd TR MR
$11 -
$10 1 10 $9 2 19 9 $8 3 27 8 $7 4 34 7 $6 5 36 6 $5 35 $4 39
$10
$10 $9
$10 $9 $8
$10 $9 $8 $7
$10 $9 $8 $7 $6
$10 $9 $8 $7 $6 $5
$10 $9 $8 $7 $6 $5 $4

47. What’s the Point? Perfectly price discriminating firms:
Make more profit
Produce more
Produce at allocative efficiency

48. Monopoly Practice FRQ

49. Monopolistic Competition

50. FOUR MARKET MODELS Monopolistic Competition:
Relatively Large Number of Sellers
Differentiated Products
Some control over price
Easy Entry and Exit
Non-price competition (Advertising)
Market Structure Continuum
Pure
Competition
Monopoly
Monopolistic
Oligopoly

51. Differentiated Products
Goods are NOT identical.
Firms seek to capture a piece of the market by making unique goods.
Since these products have substitutes, firms use NON-PRICE Competition
Examples:
Fast Food Restaurants
Furniture companies
Jewelry stores
Hair Salons
Clothing Manufacturers

52. “Monopolistic” +”Competition”
Monopolistic Qualities
Control over price of own good due to differentiated product.
D > MR
Plenty of non-price competition
Not efficient
Perfect Competition Qualities
Large number of smaller firms
Relatively easy entry and exit
Zero Economic Profit in Long-Run since firms can enter.

53. Drawing Monopolistic Competition

54. MONOPOLISTIC COMPETITION
PRICE AND OUTPUT IN
MONOPOLISTIC COMPETITION MC
What Happens?
ATC $4 $2
Price and Costs
Short-Run
Economic
Profits D MR Q1
Quantity

55. MONOPOLISTIC COMPETITION
PRICE AND OUTPUT IN
MONOPOLISTIC COMPETITION MC
New Firms Enter
ATC $4 $2
Price and Costs
Short-Run
Economic
Profits D MR Q1
Quantity

56. LONG- RUN EQUILIBRIUM MC ATC Normal Profit D MR Price and Costs $4 $2$1 D MR Q1
Quantity

57. MONOPOLISTIC COMPETITION
PRICE AND OUTPUT IN
MONOPOLISTIC COMPETITION MC
What happens?
ATC $7
Price and Costs $1
Short-Run
Economic
Loss D MR Q1
Quantity

58. MONOPOLISTIC COMPETITION
PRICE AND OUTPUT IN
MONOPOLISTIC COMPETITION MC
Long-Run Equilibrium
Normal
Profit
Only
ATC $7
Price and Costs D MR Q3
Quantity

59. MONOPOLISTIC COMPETITION AND EFFICIENCY

60. MONOPOLISTIC COMPETITION
AND EFFICIENCY
Not Productively Efficient
 Minimum ATC
Not Allocatively Efficient
Price  MC
Firm has Excess Capacity
Graphically…

61. MONOPOLISTIC COMPETITION
AND EFFICIENCY
Excess Capacity
The gap between the minimum ATC output and the profit maximizing output
Given current resources, the firm can produce at minimum ATC, but they decide not to.

62. MONOPOLISTIC COMPETITION
AND EFFICIENCY MC
Long-Run Equilibrium
ATC P3
= A3
Excess Capacity
Price and Costs D MR Q3
Quantity

63. Oligopoly

64. FOUR MARKET MODELS Oligopoly: A Few Large Producers
Identical or Differentiated Products
Mutual Interdependence
Firms use Strategic Pricing
High Entry Barriers
Examples: Cereal Companies, Car Producers
Market Structure Continuum
Pure
Competition
Monopoly
Monopolistic
Oligopoly

65. HOW DO OLIGOPOLIES OCCUR?
Oligopolies occur when only a few large firms start to control an industry.
High barriers to entry keep others from entering.
Types of Barriers to Entry
Economies of Scale
High Start-up Costs
Ownership of Raw Materials

66. Game Theory

67. The study of how people behave in strategic situations
What is game theory?
The study of how people behave in strategic situations
A thorough understanding of game theory helps firms in an oligopoly maximize profit.

68. A B C D A Game-Theory Overview OLIGOPOLY BEHAVIOR $12 $15 $6 $8
RareAir’s Price Strategy
High
Low B A D C
$12
$15 $6 $8
High
Low
Uptown’s Price Strategy

69. Greatest Combined Profit if both Sell High
OLIGOPOLY BEHAVIOR
Greatest Combined Profit if both Sell High
RareAir’s Price Strategy
High
Low B A D C
$12
$15 $6 $8
High
Low
Uptown’s Price Strategy

70. Each firm recognizes that more profit is made if they lower price
OLIGOPOLY BEHAVIOR
Each firm recognizes that more profit is made if they lower price
RareAir’s Price Strategy
High
Low B A D C
$12
$15 $6 $8
High
Low
Uptown’s Price Strategy

71. BUT if both lower price they end up in the Worst Case
OLIGOPOLY BEHAVIOR
BUT if both lower price they end up in the Worst Case
RareAir’s Price Strategy
High
Low B A D C
$12
$15 $6 $8
High
Low
Uptown’s Price Strategy

72. To make more profit, firms may try to cooperate (collude)
OLIGOPOLY BEHAVIOR
To make more profit, firms may try to cooperate (collude)
RareAir’s Price Strategy
High
Low B A D C
$12
$15 $6 $8
High
Low
Uptown’s Price Strategy

73. To make more profit, firms may try to cooperate (collude)
OLIGOPOLY BEHAVIOR
To make more profit, firms may try to cooperate (collude)
RareAir’s Price Strategy
High
Low B A D C
$12
$15 $6 $8
High
Low
Uptown’s Price Strategy

74. But now each firm has the incentive to cheat.
OLIGOPOLY BEHAVIOR
But now each firm has the incentive to cheat.
RareAir’s Price Strategy
High
Low B A D C
$12
$15 $6 $8
High
Low
Uptown’s Price Strategy

75. What did we learn? Oligopoly pricing must be strategic
Oligopolies have a tendency to collude to gain profit.
(Collusion is the act of cooperating with rivals in order to “rig” a situation.)
Collusion results in the incentive to cheat.

76. Oligopoly Graph

77. Not one standard model because there are colluding Oligopolies and noncolluding Oligopolies

78. Colluding Oligopoly

79. Cartel = Colluding Oligopoly
CARTELS AND COLLUSION
Cartel = Colluding Oligopoly
A cartel is a group of producers that create a formal agreement to fix prices high.
Cartels set price and output at an agreed upon price
Firms require identical or highly similar demand and costs
Cartel must have a way to punish cheaters
Together they act as a monopoly

80. Colluding Oligopolists Will Split the Monopoly Profits.
CARTELS AND OTHER COLLUSION
Colluding Oligopolists Will
Split the Monopoly Profits. D MC
ATC MR
Economic
Profit
MR = MC
Price and costs Q0 P0 A0

81. Non Colluding Oligopoly

82. Kinked Demand Curve Model
Noncollusive firms are likely to react to competitor’s pricing in two ways:
1. Match price-If one firm cuts it’s prices, then the other firms follow suit causing inelastic demand
2. Ignore change-If one firm raises prices, others maintain same price causing elastic demand

83. KINKED DEMAND THEORY:
The demand and MR curves if other firms match lower pricing
If this firm lowers its price and others follow, Qd will increase mildly
Price D1
Quantity
MR1

84. KINKED DEMAND THEORY:
The demand and MR curves if other firms ignore higher pricing
If this firm increases its price and others ignore it, Qd for this firm will decrease significantly
Price D2
MR2
Quantity

85. Two sets of curves based on the pricing decisions of other firms
The firm’s demand and
marginal revenue curves
Price D2
MR2 D1
Quantity
MR1

86. Two sets of curves based on the pricing decisions of other firms
Rivals tend to
follow a price cut
Price D2
MR2 D1
Quantity
MR1

87. Two sets of curves based on the pricing decisions of other firms
Rivals tend to
follow a price cut
or ignore a
price increase
Price D2
MR2 D1
Quantity
MR1

88. Two sets of curves based on the pricing decisions of other firms
Effectively creating
a kinked demand curve
Price D2
MR2 D1
Quantity
MR1

89. Two sets of curves based on the pricing decisions of other firms
Effectively creating
a kinked demand curve
Price D
Quantity

90. Two sets of curves based on the pricing decisions of other firms
What about MR?
Price D2
MR2 D1
Quantity
MR1

91. Two sets of curves based on the pricing decisions of other firms
Since we use sections of both MR curves, the MR has a vertical gap.
MR2
Price D
Quantity
MR1

92. NONCOLLUSIVE OLIGOPOLY
KINKED DEMAND THEORY:
NONCOLLUSIVE OLIGOPOLY
Profit maximization
MR = MC occurs
at the kink.
MR2
Price D
Quantity
MR1