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

PURE COMPETITION AND MONOPOLY, MONOPOLISTICS

AND OLIGOPOLYPertemuan 19

Matakuliah : J0114-Teori EkonomiTahun : 2009

Bina Nusantara University 3

Four Market Models

• Pure Competition• Pure Monopoly• Monopolistic Competition• Oligopoly

Market Structure Continum

PureCompetition

MonopolisticCompetition Oligopoly

PureMonopoly

Imperfect Competition


Pure Competition• Very Large Numbers• Standardized Product• “Price Takers”• Free Entry and Exit• Perfectly Elastic Demand

– Average Revenue– Total Revenue– Marginal Revenue

Graphically…


Firm’sDemandSchedule(AverageRevenue)

Firm’sRevenue

Data

Pure Competition

Pri

ce a

nd

Rev

enu

e

2 4 6 8 10 12

131

262

393

524

655

786

917

1048

$1179

Quantity Demanded (Sold)

D = MR = AR

TR

P QDTR MR

$131131131131131131131131131131131

0123456789

10

$0131262393524655786917

104811791310

$131131131131131131131131131131

]]]]]]]]]]


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

http://highered.mcgraw-hill.com/sites/0073126632/student_view0/chapter22/origin_of_the_idea.html

http://highered.mcgraw-hill.com/sites/0073126632/student_view0/chapter22/origin_of_the_idea.html


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

Bina Nusantara University 80 1 2 3 4 5 6

$142

132

122

112

102

92

82

Price and Marginal RevenueMarginal Revenue is Less Than Price

D

• A Monopolist isSelling 3 Units at$142

• To Sell More (4), Price Must BeLowered to $132

• All Customers Must Pay the SamePrice

• TR Increases $132 Minus $30 (3x$10)

Gain = $132

Loss = $30


Monopoly Revenue and CostsRevenue and Cost Data of a Pure Monopolist

(1)Quantity

Of Output

(2)Price

(AverageRevenue)

(3)Total

Revenue(1) X (2)

(4)MarginalRevenue

(5)Average

Total Cost

(6)Total Cost

(1) X (5)

(7)Marginal

Cost

(8)Profit (+)

or Loss (-)

0123456789

10

$172162152142132122112102928272

$0162304426528610672714736738720

$16214212210282624222

2-18

$190.00135.00113.33100.00

94.0091.6791.4393.7597.78

103.00

$100190270340400470550640750880

1030

$90807060708090

110130150

$-100-28+34+86

+128+140+122

+74-14

-142-310

Revenue Data Cost Data

]]]]]]]]]]

]]]]]]]]]]

Can you See Profit Maximization?


$200

150

100

50

0

$750

500

250

0

2 4 6 8 10 12 14 16 18

2 4 6 8 10 12 14 16 18

Pri

ceT

ota

l Rev

enu

eMonopoly Revenue and Costs

Demand, Marginal Revenue, and Total Revenue for a Pure Monopolist

Elastic Inelastic

Demand and Marginal Revenue Curves

Total-Revenue Curve

DMR

TR


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


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



In Monopolistic CompetitionShort-Run Profits

Quantity

Pri

ce

an

d C

os

ts

MR = MC

MC

MR

D1

ATC

EconomicProfit

Q1

A1

P1

0



In Monopolistic CompetitionShort-Run Losses

Quantity

Pri

ce

an

d C

os

ts

MR = MC

MC

MR

D2

ATC

Loss

Q2

A2

P2

0



In Monopolistic CompetitionLong-Run Equilibrium

Quantity

Pri

ce

an

d C

os

ts

MR = MC

MC

MR

D3

ATC

Q3

P3=A3

0


Three Oligopoly Models

• Kinked Demand Curve : Noncollusive Oligpoly• Collusive Pricing : Cartel and other Collusion• Price Leadership Model


Pri

ce

Pri

ce a

nd

Co

sts

Quantity Quantity0 0

Kinked-Demand CurveNoncollusive Oligopoly

P0

MR2

D2

D1

MR1

e

f

g

Rivals IgnorePrice Increase

Rivals MatchPrice Decrease

Q0

Competitor and Rivals Strategize Versus Each OtherConsumers Effectively Have 2 Partial Demand Curves

and Each Part Has Its Own Marginal Revenue Part

MR2

D2

D1

MR1Q0

MC1

MC2

P0

Resulting in a Kinked-Demand Curve to the Consumer – Price and Output Are Optimized at the Kink

e

f

g


Kinked-Demand CurveNoncollusive Oligopoly

• Criticisms of the Model– Doesn’t Explain How Price Gets to the

Kink (P0)– Oligopoly Prices Are Not As Rigid During

Instability as the Model Indicates– Possibility of Price Wars


Pri

ce a

nd

Co

sts

Quantity

Cartels and Other Collusion

• Price and Output– Collusion and Tendency Toward Joint-

Profit Maximization

D

MR=MC

ATC

MC

MR

P0

A0

Q0

EconomicProfit

Effectively SharingThe Monopoly Profit


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


Price Leadership Model

• Leadership Tactics• Infrequent Price Changes• Communications• Limit Pricing• Breakdowns in Price Leadership:

– Price Wars

Documents

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