2. PURE COMPETITION AND MONOPOLY, MONOPOLISTICS AND OLIGOPOLY Pertemuan 19 Matakuliah: J0114-Teori Ekonomi Tahun: 2009

3. Bina Nusantara University 3 Four Market Models Pure Competition Pure Monopoly Monopolistic Competition Oligopoly Market Structure Continum Pure Competition Monopolistic Competition Oligopoly Pure Monopoly Imperfect Competition

4. Bina Nusantara University 4 Pure Competition Very Large Numbers Standardized Product “Price Takers” Free Entry and Exit Perfectly Elastic Demand –Average Revenue –Total Revenue –Marginal Revenue Graphically…

5. Bina Nusantara University 5 Firm’s Demand Schedule (Average Revenue) Firm’s Revenue Data Pure Competition Price and Revenue 24681012 131 262 393 524 655 786 917 1048 $1179 Quantity Demanded (Sold) D = MR = AR TR PQDQD MR $131 131 0 1 2 3 4 5 6 7 8 9 10 $0 131 262 393 524 655 786 917 1048 1179 1310 $131 131 ] ] ] ] ] ] ] ] ] ]

6. Bina Nusantara University 6 Pure Monopoly Single Seller No Close Substitutes “Price Maker” Blocked Entry Nonprice Competition Examples –Regulated Monopolies –Near-Monopolies –Western Union-Frisbee-De Beers Dual Objectives of Study O 22.1 Characteristics

7. Bina Nusantara University 7 Pure Monopoly Economies of Scale Legal Barriers to Entry –Patents –Licenses Ownership or Control of Essential Resources Pricing and Other Strategic Barriers to Entry Barriers to Entry Monopoly Status is Secure No Governmental Regulation Firm is a Single-Price Monopolist (No Price Discrimination) Monopoly Demand

8. Bina Nusantara University 8 0 123456 $142 132 122 112 102 92 82 Price and Marginal Revenue Marginal Revenue is Less Than Price D A Monopolist is Selling 3 Units at $142 To Sell More (4), Price Must Be Lowered to $132 All Customers Must Pay the Same Price TR Increases $132 Minus $30 (3x$10) Gain = $132 Loss = $30

9. Bina Nusantara University 9 Monopoly Revenue and Costs Revenue and Cost Data of a Pure Monopolist (1) Quantity Of Output (2) Price (Average Revenue) (3) Total Revenue (1) X (2) (4) Marginal Revenue (5) Average Total Cost (6) Total Cost (1) X (5) (7) Marginal Cost (8) Profit (+) or Loss (-) 0 1 2 3 4 5 6 7 8 9 10 $172 162 152 142 132 122 112 102 92 82 72 $0 162 304 426 528 610 672 714 736 738 720 $162 142 122 102 82 62 42 22 2 -18 $190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.75 97.78 103.00 $100 190 270 340 400 470 550 640 750 880 1030 $90 80 70 60 70 80 90 110 130 150 $-100 -28 +34 +86 +128 +140 +122 +74 -14 -142 -310 Revenue Data Cost Data ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Can you See Profit Maximization?

10. Bina Nusantara University 10 $200 150 100 50 0 $750 500 250 0 24681012141618 24681012141618 Price Total Revenue Monopoly Revenue and Costs Demand, Marginal Revenue, and Total Revenue for a Pure Monopolist Elastic Inelastic Demand and Marginal Revenue Curves Total-Revenue Curve D MR TR

11. Bina Nusantara University 11 Monopolistic Competition Characteristics –Small Market Shares –No Collusion –Independent Action Differentiated Products –Product Attributes –Service –Location –Brand Names and Packaging –Some Control Over Price Easy Entry and Exit Advertising –Nonprice Competition Monopolistically Competitive Industries

12. Bina Nusantara University 12 Price and Output Determination The Firm’s Demand Curve The Short Run: –Profit or Loss The Long Run: –Only a Normal Profit –Profits: Firms Enter –Losses: Firm’s Leave Complications –Product Variety In Monopolistic Competition

13. Bina Nusantara University 13 Price and Output Determination In Monopolistic Competition Short-Run Profits Quantity Price and Costs MR = MC MC MR D1D1 ATC Economic Profit Q1Q1 A1A1 P1P1 0

14. Bina Nusantara University 14 Price and Output Determination In Monopolistic Competition Short-Run Losses Quantity Price and Costs MR = MC MC MR D2D2 ATC Loss Q2Q2 A2A2 P2P2 0

15. Bina Nusantara University 15 Price and Output Determination In Monopolistic Competition Long-Run Equilibrium Quantity Price and Costs MR = MC MC MR D3D3 ATC Q3Q3 P3=A3P3=A3 0

16. Bina Nusantara University 16 Three Oligopoly Models Kinked Demand Curve : Noncollusive Oligpoly Collusive Pricing : Cartel and other Collusion Price Leadership Model

17. Bina Nusantara University 17 Price Price and Costs Quantity 0 0 Kinked-Demand Curve Noncollusive Oligopoly P0P0 MR 2 D2D2 D1D1 MR 1 e f g Rivals Ignore Price Increase Rivals Match Price Decrease Q0Q0 Competitor and Rivals Strategize Versus Each Other Consumers Effectively Have 2 Partial Demand Curves and Each Part Has Its Own Marginal Revenue Part MR 2 D2D2 D1D1 MR 1 Q0Q0 MC 1 MC 2 P0P0 Resulting in a Kinked-Demand Curve to the Consumer – Price and Output Are Optimized at the Kink e f g

18. Bina Nusantara University 18 Kinked-Demand Curve Noncollusive Oligopoly Criticisms of the Model –Doesn’t Explain How Price Gets to the Kink (P 0 ) –Oligopoly Prices Are Not As Rigid During Instability as the Model Indicates –Possibility of Price Wars

19. Bina Nusantara University 19 Price and Costs Quantity Cartels and Other Collusion Price and Output –Collusion and Tendency Toward Joint-Profit Maximization D MR=MC ATC MC MR P0P0 A0A0 Q0Q0 Economic Profit Effectively Sharing The Monopoly Profit

20. Bina Nusantara University 20 Cartels and Other Collusion Covert Collusion –Tacit Understandings Obstacles to Collusion –Demand and Cost Differences –Number of Firms –Cheating –Recession –Potential Entry –Legal Obstacles: Antitrust Law

21. Bina Nusantara University 21 Price Leadership Model Leadership Tactics Infrequent Price Changes Communications Limit Pricing Breakdowns in Price Leadership: –Price Wars