© 2008 Pearson Addison Wesley. All rights reserved Chapter Thirteen Oligopoly and Monopolistic...

Chapter Thirteen

Oligopoly and Monopolistic Competition

折扣戰開打速食業掀戰火 2009.02.23. 15:45

• 全台速食業降價大戰！麥當勞推出低價套餐，業績立即成長一倍，眼看對手業績成長一倍，肯德基跟上價格戰！七種套餐第二套通通半價。麥當勞區分時段，肯德基乾脆全日不限時段，不過肯德基有期限，優惠到三月二十二日，等於與競爭對手有了相同的降幅，預期達到兩位數的業績成長。而原先堅持不降價的摩斯漢堡市場被夾擊，也將在三月份推出一百元到一二十元的套餐，並且結合消費券，優惠到九月。

國際油價重返 50 美元　國內汽柴油漲 0.3元 2009/03/20 江佩君

• 國際油價單日大漲 7% ，每桶重返 50 美元，為了反應國際油價漲勢，中油在今 (20) 日下午宣布，從明 (21) 日零時起，國內汽、柴油將同步調漲，汽、柴油每公升均調漲 0.3 元，台塑石化則是從明日中午 12 點起跟進漲價。

• 中油是依據浮動油價制度計算，汽油本應調漲 0.6 元、而柴油也應漲 0.4 元，在中油持續補貼汽油每公升 0.3 元及柴油每公升 0.1 元後，實際本次汽、柴油各調漲 0.3 元。台塑石化也在稍晚宣布跟進，汽、柴油都是每公升分別調漲 0.3 元。但台塑石化表示，考量近期國際油價波動較大，為了給消費大眾更多因應的時間，決定延長自明(21) 日中午 12 點起，才會調漲國內汽柴油批售價格。

• Oligopoly– A small group of firms in a market with

substantial barriers to entry• Cartel

– A group of firms that explicitly agree to coordinate their activities

• Monopolistic competition– A market structure in which firms have

market power but no additional firm can enter and earn positive profits

• In this chapter, we examine eight main topics– Market structures– Cartels– Noncooperative oligopoly– Cournot oligopoly model– Stackelberg oligopoly model– Comparison of collusive, Cournot,

Stackelberg, and competitive equilibria– Bertrand oligopoly model– Monopolistic competition

Market Structures

• Markets differ according to the number of firms in the market, the ease with which firms may enter and leave the market, and the ability of firms in a market to differentiate their products from those of their rivals.

Table 13.1Properties of Monopoly, Oligopoly, Monopolistic Competition, and Competition

Cartels: Cooperative Oligopoly Models

• Firms have an incentive to form a cartel in which each firm reduces its output so that firms’ individual and collective profits rise.

• Cartels often fail because a government forbids them and because each firm in a cartel has an incentive to cheat on the cartel agreement by producing extra output.

Why Cartels Form

• A cartel forms if members of the cartel believe that they can raise their profits by coordinating their actions.

• Although cartels usually involve oligopolies, cartels may form in a market that would otherwise be competitive.

Figure 13.1 Competition Versus Cartel

a) The marginal cost and average cost of one of the firms in the market are shown. A competitive firm produces units of output, whereas a cartel member produces . At the cartel price, , each cartel member has an incentive to increase its output from

to (where the dotted line at intersects the curve).

m cq q

Figure 13.1 Competition Versus Cartel

b) The competitive equilibrium, , has more output and a lower price than the cartel equilibrium, .me

Figure 13.1Competition Versus Cartel

Laws Against Cartels

• Virtually all industrialized nations have antitrust laws—or, as they are known in other countries, competition policies—that limit or forbid some or all cartels.

• 台灣：公平交易法

• Some cartels persist for three reasons.• First, international cartels and cartels within

certain countries operate legally: OECD• Second, Some illegal cartels operate

believing that they can avoid detection or that the punishment will be insignificant.

• Third, some firms are able to coordinate their activity without explicitly colluding and thereby running afoul of competition laws.

Why Cartels Fail

• Cartels fail if noncartel members can supply consumers with large quantities of goods.

• Each member of a cartel has an incentive to cheat on the cartel agreement.

Why Cartels Fail

• It is in each firm’s best interest for all other firms to honor the cartel agreement—thus driving up the market price—while it ignores the agreement and makes extra, profitable sales at the high price.

• Fig. 13.1: At the cartel price, , each cartel member has an incentive to increase its output from to (where the dotted line at intersects the curve).

*qMCmp

Maintaining Cartels

• To keep firms from violating the cartel agreement, the cartel must be able to detect cheating and punish violators.

Detection and Enforcement

• Cartels may divide the market by region or by customers, so that a firm that tries to steal another firm’s customer is more likely to be detected.

• Other cartels use industry organizations to detect cheating. e.g. Market share, “Low price” ads.

Detection and Enforcement

• GE and Westinghouse “most-favored-nation clauses”: If either company cheats by cutting prices, it has to lower prices to all previous buyers as well.

• Another means of enforcing a cartel agreement is through threats of violence.

Government Support

• Professional baseball teams have been exempted from some U.S. antitrust laws since 1922.

• As a result, they can use the courts to help enforce certain aspects of their cartel agreement.

Barriers to Entry

• Barriers to entry that limit the number of firms help the cartel detect and punish cheating.

• The fewer the firms in a market, the more likely it is that other firms will know if a given firm cheats and the easier it is to impose costs on that firm.

Mergers

• If antitrust or competition laws prevent firms from colluding, they may try to merge instead.

• Eg. 錢櫃與好樂迪 KTV• Recognizing this potential problem, many

countries set laws to restrict the ability of firms to merge if the effect would be anticompetitive.

Noncooperative Oligopoly

• Although there is only one model of competition and only one model of monopoly, there are many models of noncooperative oligopolistic behavior that have many possible equilibrium prices and quantities.

• Which model is appropriate to use depends on the characteristics of the market, such as the type of actions firms take – such as set quantity or price – and whether firms act simultaneously or sequentially.

• Three best-known oligopoly models:

— Cournot model, firms simultaneously

choose quantities without colluding.

— Stackelberg model, a leader firm chooses

its quantity and then the other, follower

firms independently choose their quantities.

— Bertrand model, firms simultaneously and

independently choose prices.

• For the single-period oligopoly models in which the only action that a firm can take is to set either its quantity or its price: A set of actions that the firms take is a Nash equilibrium if, holding the actions of all other firms constant, no firm can obtain a higher profit by choosing a different action.

Cournot Model of Oligopoly

• If firms set output simultaneously and let the market determine the price, a Cournot model works well.

• If one firm can set output before other firms, a Stackelberg model is appropriate.

Cournot Model of Oligopoly

• To simplify our analysis of the Cournot oligopoly model, we examine a market in which– There are two firms, and no other firms

can enter.– The firms sell identical (undifferentiated,

homogeneous) products.– The firms compete in a market that lasts

for only one period, and the product or service that they sell cannot be stored and sold later.

Cournot Model of Airline Market

• Cournot equilibrium (Nash equilibrium in quantities)– A set of quantities sold by firms such that,

holding the quantities of all other firms constant, no firm can obtain a higher profit by choosing a different quantity.

Figure 13.2American Airlines’ Profit-Maximizing Output

Figure 13.2 American Airlines’ Profit-Maximizing Output

a) If American is a monopoly, it picks its profit-maximizing output, units (thousand passengers) per quarter, so that its marginal revenue, , equals its marginal cost, .MC

Figure 13.2 American Airlines’ Profit-Maximizing Output

b) If American believes that United will fly

units pre quarter, its residual demand curve, , minus . American maximizes its profit at ,where its marginal revenue, , equals .

Uq64Aq

64UqrD

Cournot Model of Airline Market

• Residual demand curve– The market demand that is not met by

other sellers at any given price.

Figure 13.3American’s and United’s Best-Response Curves

Figure 13.3 American and United’s Best-Response Curves

• The best-response curves show the output each firm picks to maximize its profit, given its belief about its rival’s output.

• The Cournot equilibrium occurs at the intersection of the best-response curves.

Algebraic Approach

• The market demand function is

(13.1)

where price, , is the dollar cost of a one-way flight, and is total quantity of the two airlines combined.

339 , Q pp

Algebraic Approach

• The residual demand American faces is

(13.2)

Using algebra, we can rewrite this inverse residual demand function as

(13.3).339 A Up q q

( ) 339 . A U Uq Q p q p q

Algebraic Approach

• If a demand curve is linear, the corresponding marginal revenue curve is twice as steep.

• Thus the marginal revenue function is

(13.4)

.339 2 r

A UMR q q

Algebraic Approach

• American Airlines’ best response—its profit-maximizing output, given —is the output that equates its marginal revenue, Equation 13.3, and its marginal cost:

339 2 147 . rA UMR q q MC

Algebraic Approach

• We can write American’s best-response output, ,as a function of :

(13.5)

• By the same reasoning, United’s best-response function is

(13.6)

2 A Uq q

2 U Aq q

Algebraic Approach

• A Cournot equilibrium is a pair of quantities,

and , such that Equations 13.5 and 13.6 both hold: Each firm is on its best-response curve.

The Cournot Equilibrium with Two or More Firms

• The marginal revenue for a typical Cournot firm is , where

is the elasticity of the residual demand curve the firm faces.

r(1 1/ ) rMR p

Equation 13.7

Equation 13.8

Equation 13.9

• , where is the market elasticity of demand and is the number of firms with identical cost. Thus we can write a typical Cournot firm’s profit-maximizing condition as

(13.10)

MR p MCn

• A Cournot firm’s Lerner Index depends on the elasticity the firm faces:

(13.11)

• As the number of firms grows large, the residual demand elasticity a firm faces approaches , so the Lerner Index approaches zero, which is the same as with price-taking, competitive firms.

Equation 13.12: Linear Case

Equation 13.13

Equation 13.14

Equation 13.15

Equation 13.16

Equation 13.17

Table 13.2Cournot Equilibrium Varies with the Number of Firms

The Cournot Model with Nonidentical Firms

• Firms with Unequal Costs• If firms’ marginal costs vary, then so will the

firms’ first-order condition and hence their best-response functions.

• The Nash-Cournot equilibrium shows that the relatively low-cost firm produces more.

• As long as the products are not differentiated, the firms charge the same price.

The Cournot Model with Nonidentical Firms

• Firms with Differentiated Products• A firm can charge a higher price if

differentiation causes its residual demand curve to become less elastic.

• If consumers think products differ, the Nash-Cournot quantities and prices will differ across firms.

Stackelberg Model of Oligopoly

• Suppose that one of the firms, called the leader, can set its output before its rival, the follower, sets its output.

• This type of market, in which the firms make decisions sequentially, arises naturally if one firm enters a market before another.

Calculus Solution-Airline Example: Equation 13.28

Calculus Solution: Airline Example

• The market price depends on the output of both firms, p(q1 + q2).

• The Stackelberg leader’s profit is a function of its own and the follower’s output.

• By replacing the follower’s output with the follower’s best-response function, we can write the leader’s profit function as function of its own output only as shown in equation (13.29).

Equation 13.29

Equation 13.30

Figure 13-4Stackelberg Equilibrium

Figure 13.4 Stackelberg Equilibrium

a) The residual demand the Stackelberg leader faces is the market demand minus the quantity produced by the follower, , given the leader’s quantity, . The leader chooses so that its marginal revenue, , equals its marginal cost. The total output, , is the sum of the output of the two firms.

rMR96Aq

Figure 13.4 Stackelberg Equilibrium

b) The quantity the follower produces is its best response to the leader’s output, as given by its Cournot best-response curve.

Why Moving Sequentially is Essential

• The answer is that when the firms move simultaneously, United doesn’t view American’s warning that it will produce a large quantity as a credible threat.

• If United believed that threat, it would indeed produce the Stackelberg follower output level.

Figure 13.5(a)Effect of a Government Subsidy on a Cournot Equilibrium

Figure 13.5(b)Effect of a Government Subsidy on a Cournot Equilibrium

Figure 13.5 Effect of a Government Subsidy on a Cournot Equilibrium

a) A government subsidy that lowers United’s marginal cost from to cause United’s best-response output to American’s to rise from to 88.

2 $99MC1 $147MC

Figure 13.5 Effect of a Government Subsidy on a Cournot Equilibrium

b) If both airlines’ marginal costs are $147, the Cournot equilibrium is . If United’s marginal cost falls to $99, its best-response function shifts outward. It now sells more tickets in response to any given American output than previously. At the new Cournot equilibrium, , United sells , while American sells only .

96Uq 2e

Table 13.3Effects of a Subsidy Given to United Airlines

Comparison of Collusive, Cournot, Stackelberg, and Competitive Equilibria

• The duopoly Cournot and Stackelberg equilibria (in the table, American is the leader) lie between the extreme cases of monopoly or cartel and price taking. The Stackelberg equilibrium is closer to the price-taking equilibrium than the Cournot equilibrium in terms of total output, price, consumer surplus, welfare, and deadweight loss.

Equation 13.33

Table 13.4 Comparison of Airline Market Structures

Figure 13.6(a)Duopoly Equilibria

Figure 13.6(a) Duopoly Equilibria

• The intersection of the best-response curves determines the Cournot equilibrium.

• The possible cartel equilibria lies on the contract curve.

• If the firms act as price takers, each firm produces where its residual demand equals its marginal cost.

Figure 13.6(b) Duopoly Equilibria

• The highest possible profit for the two firms combined is given by the profit possibility frontier.

• It reflects all the possible collusive equilibria, including the one indicated where the firms split the market equally.

• All equilibria except collusive ones lie within the profit possibility frontier.

Figure 13.6(b)Duopoly Equilibria

Bertrand Oligopoly Model

• In 1883, Joseph Bertrand argued that oligopolies set prices, and then consumers decide how many units to buy. The resulting Nash equilibrium is called a Bertrand equilibrium: a set of prices such that no firm can obtain a higher profit by choosing a different price if the other firms continue to charge these prices.

Figure 13.7 Bertrand Equilibrium with Identical Products

• With identical products and constant marginal and average cost of $5, Firm 1’s best-response curve starts at $5 and then lies slightly above the 45o line. That is, Firm 1 undercuts its rival’s price as long as its price remains above $5. the best-response curves intersect at , the Bertrand or Nash equilibrium, where both firms charge $5.

Figure 13.7Bertrand Equilibrium with Identical Products

Bertrand Equilibrium with Identical Products

• In this equilibrium, each firm makes zero profit. Thus the Bertrand equilibrium when firms produce identical products is the same as the price-taking, competitive equilibrium.

Bertrand Versus Cournot

• The Bertrand equilibrium differs substantially from the Cournot equilibrium.

• When firms produce identical products and have a constant marginal cost, the Cournot model is more plausible than the Bertrand.

• The Bertrand model—unlike the Cournot—appears inconsistent with real oligopoly markets in at least two ways.

• First, the Bertrand model’s “competitive” equilibrium price is implausible. If there is only a small number of firms, why would they compete so vigorously that they would make no profit?

• Second, the Bertrand equilibrium price, which depends only on cost, is insensitive to demand conditions and the number of firms.

• As a result, it seems more likely that when firm’s products are identical, firms set quantities rather than prices.

Equation 13.34

Bertrand Equilibrium with Differentiated Products

• Markets with differentiates goods, the Bertrand equilibrium is plausible, and the two “problems” of the homogeneous-goods model disappear: Firms set prices above marginal cost, and prices are sensitive to demand conditions.

• Many economists believe that price-setting models are more plausible than quantity-setting models when goods are differentiated.

Equation 13.35

Equation 13.36

Equation 13.37: Coke’s Demand Function

Equation 13.38: Coke’s Profit

Equation 13.39: Profit Maximization Condition

Equation 13.40: Best-Response Function

Equation 13.41: Best Response Function Given MC=$5

Equation 13.42: Pepsi’s Demand Function

Equation 13.43: Best-Response Function Given MC=$5

Bertrand Equilibrium with Differentiated Products

• The Bertrand best-response curves have different slopes than the Cournot best-response curves.

• The Cournot curves slope downward, showing that a firm produces less the more its rival produces. The Bertrand best-response curves slope upward, indicating that a firm charges a higher price the higher the price its rival charges.

Figure 13.8 Bertrand Equilibrium with Differentiated Products

• If both firms have a constant marginal cost of $5, the best-response curves of Coke and Pepsi intersect at , where each sets a price of $13 per unit. If Coke’s marginal cost rises to $14.5, its best-response function shift upward. In the new equilibrium, , Coke charges a higher price, $18, than Pepsi, $14.

Figure 13.8Bertrand Equilibrium with Differentiated Products

Differentiating Products

• If Bertrand model demonstrates that firms can profit from selling differentiated produces. If products are homogeneous, Bertrand firms cannot charge above marginal cost. With differentiated products, they can charge prices above marginal cost and make larger profits.

Product Differentiation and Price

• The reason differentiation allows a firm to charge a higher price is that the residual demand curve the firm faces (the market demand minus the quantity supplied by rivals at each price) become less elastic.

Product Differentiation and Welfare

• Although differentiation leads to high prices, which harm consumers, differentiation is desirable in its own right. Consumers value having a choice, and some may greatly prefer a new brand to existing ones.

Monopolistic Competition

• Monopolistically competitive markets do not have barriers to entry, so firms enter the market until no new firm can enter profitably.

• In contrast to competitive firms (which face horizontal residual demand curves and charge prices equal to marginal cost), monopolistically competitive firms face downward-sloping residual demand curves, so they charge prices above marginal cost.

台灣的獨占性競爭產業

資料來源：「產業經濟學」，陳正倉、林恵玲、陳忠榮、莊春發合著

個案研究－台灣本國銀行的獨占性競爭• 台灣本國銀行業 ( 產業代號 6512) 在民國 85 年時共有

42 家，為 10.14% ，為 34.89% 。在 91 年底時共有 52 家，分支機構 ( 分行 ) 共 3, 068 家。對多數的存款人而言，銀行是個提供存款服務的廠商，絕大部分的銀行其存款利率相同，即使有差異，也非常小，而銀行員的服務也大致相同，因此銀行是一個獨占性競爭的產業。最特別的是，由於銀行及其分支機構多，因此短短不到500 公呎的一條街上，就有好幾家銀行 ( 例如台北市館前路、羅斯福路 3 段 ) 。存款戶在選擇銀行時，主要的考慮因素大概就是距離住家或辦公室的遠近 ( 當然還有一些其他因素，如服務態度、等候時間等等 ) 。距離近，則存提款、辦理轉帳繳稅、繳費很方便，距離遠，則耗時費事。而銀行為了能夠吸收最多的客戶，也就朝人口聚集最多的地點設立分行，這是為什麼短短一條街有很多家銀行的緣故。

1CR 4CR

Monopolistically Competitive Equilibrium

• In a monopolistically competitive market, each firm tries to maximize its profit; however, each makes zero economic profit due to entry.

• Two conditions hold in a monopolistically competitive equilibrium: Marginal revenue equals marginal cost (because firms set output to maximize profit), and price equals average cost (because firms enter until no further profitable entry is possible).

• Minimum Efficient Scale (full capacity)– The smallest quantity at which the

average cost curve reaches its minimum• Because a monopolistically competitive

equilibrium occurs in the downward-sloping section of the average cost curve, a monopolistically competitive firm operates at less than full capacity in the long run.

Figure 13.9 Monopolistically Competitive Equilibrium

• A monopolistically competitive firm, facing residual demand curve , sets its output where its marginal revenue equals its marginal cost: . Because firms can enter this market, the profit of the firm is driven to zero, so price equals the firm’s average cost: .

rMR MC

Figure 13.9Monopolistically Competitive Equilibrium

Fixed Costs and the Number of Firms

• The number of firms in a monopolistically competitive equilibrium depends on firms’ costs. The larger each firm’s fixed cost, the smaller the number of monopolistically competitive firms in the market equilibrium.

• Although entry is free, if the fixed costs are high, few firms may enter.

Figure 13.10 Monopolistic Competition Among Airlines

a) If each identical airline has a fixed cost of $2.3 million and there are two firms in the market, each firm flies units (thousands of passengers) per quarter at a price of per passenger and makes a profit of $1.8 million. This profit attracts entry.

Figure 13.10 Monopolistic Competition Among Airlines

b) After a third firm enters, the residual demand curve shifts, so each flies

units at and makes zero profit, which is the monopolistically competitive equilibrium.

48q $195p

Figure 13.10Monopolistic Competition Among Airlines

© 2008 Pearson Addison Wesley. All rights reserved Chapter Thirteen Oligopoly and Monopolistic...

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