1. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved. Contemporary Economics: An Applications Approach By Robert J. Carbaugh 3rd Edition Chapter 6: Imperfect Competition

2. Carbaugh, Chap. 6 2 Concentration ratios for selected US industries Monopolistic Competition IndustryRatio of top 4 firms Bakeries4% Metalworking machinery7 Concrete products8 Canvas bags9 Wood products11 Textiles14 Household furniture14 Apparel18 Paper19 Steel pipes20 Low-concentration industries (monopolistically competitive) Data for 1997 IndustryRatio of top 4 firms Batteries98% Clothes washing machines93 Glass containers91 Beer90 Lamp bulbs88 Tobacco88 Aircraft engines85 Breakfast cereals83 Automobile tires73 Military tanks67 High-concentration industries (oligopolistic)

3. Carbaugh, Chap. 6 3 Market outcomes under monopolistic competition Monopolistic Competition $ MR Demand = Price A MC ATC Total profit = $360 Short-run equilibrium $ MR Demand = Price B A MC Long-run equilibrium ATC 90165 Excess capacity 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 0120240 Quantity of pizzas per day 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 0 Quantity of pizzas per day

4. Carbaugh, Chap. 6 4 Effect of advertising on demand and total costs Advertising $ D 0 (before advertising) A Effect on demand Cost per case ($) B A Effect on average total costs ATC 1 (after advertising) B D 1 (after advertising) C ATC 0 (before advertising) 0 5 10 15 0246810121416 Quantity (mill. cases per month) 0 1 2 3 4 5 6 7 024681012141618 Quantity (mill. cases per month)

5. Carbaugh, Chap. 6 5 Profit maximization with price discrimination Price Discrimination $ MR Demand MC = ATC Non-students (less elastic submarket) $ MR Demand MC = ATC Students (more elastic submarket) 140 4080 0 1 2 3 4 5 6 7 8 9 10 11 12 0100200300 Quantity of tickets 0 1 2 3 4 5 6 7 8 9 10 11 12 0300 Quantity of tickets

6. Carbaugh, Chap. 6 6 Profit maximization with price discrimination Price Discrimination $ MR Demand MC = ATC Total market 0 1 2 3 4 5 6 7 8 9 10 11 12 0180 Quantity of tickets

7. Carbaugh, Chap. 6 7 Game theory and oligopoly behavior Oligopoly Behavior AB CD High Price Low Price High Price United’s price strategy American’s price strategy $75 $30 $60 $40 $30 $75

8. Carbaugh, Chap. 6 8 Maximizing OPEC profits Price and Output under Oligopoly $ MR Cartel ATC Demand = Price MC Total profit = $400 million 0 5 10 15 20 25 30 35 40 45 50 55 0204060 Oil (million barrels/day)