Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006
250 PRICE AND OUTPUT UNDER MONOPOLISTIC COMPETITION AND OLIGOPOLY [CHAP. 10(4) Even in markets in which there are many small sellers of a good or service (say, gasoline stations) a change inprice by one of them affects nearby stations significantly and evokes a response. In such cases, the oligopolymodel is the more appropriate model to use.Despite these serious criticisms, however, the monopolistic competition model provides some important insights,such as its emphasis on product differentiation and selling expenses, that are applicable to oligopolistic markets.OLIGOPOLY DEFINED10.9 (a) Define oligopoly. (b) What is the single most important characteristic in oligopolistic markets and(c) to what problem does it lead? (d) What does oligopoly theory achieve?(a) Oligopoly is the form of market organization in which there are few sellers of a commodity. If there are onlytwo sellers, we have a duopoly. If the product is homogeneous (e.g., steel, cement, copper), we have a pureoligopoly. If the product is differentiated (e.g., cars, cigarettes), we have a differentiated oligopoly. For simplicity,in the text and in that which follows we deal mostly with a pure duopoly. Oligopoly is the most prevalentform of market organization in the manufacturing sector of modern economies and arises for the samegeneral reasons as monopoly (i.e., economies of scale, control over the source of raw materials, patents,and government franchise).(b) The interdependence among the firms in the industry is the single most important characteristic setting oligopolyapart from other market structures. This interdependence is the natural result of fewness. That is, sincethere are few firms in an oligopolistic industry, when one of them lowers its price, undertakes a successfuladvertising campaign, or introduces a better model, the demand curve faced by other oligopolists will shiftdown. So the other oligopolists react.(c) There are many different reaction patterns of the other oligopolists to the actions of the first, and unless anduntil we assume a specific reaction pattern, we cannot define the demand curve faced by our oligopolist. So wehave an indeterminate solution. But even if we assume a particular reaction pattern so that we may have adeterminate solution, this is only one out of many possible solutions.(d ) Because of the situation outlined in (c), we do not now have a general theory of oligopoly. All we have arespecific cases or models, a few of which are discussed in Sections 10.6 to l0.11. These few models, however,do accomplish three things: (1) they show clearly the nature of oligopolistic interdependence, (2) they pointout the gaps that a satisfactory theory of oligopoly must fill, and (3) they give some indication as to how verydifficult this branch of microeconomics really is and how long we may have to wait to get a general theory ofoligopoly. In short, oligopoly theory is one of the least satisfactory segments of microeconomics.THE COURNOT, BERTRAND, AND EDGEWORTH MODELS10.10 Assume that (1) there are only two firms, A and B, selling a homogeneous commodity produced at zerocost, (2) the total market demand function for this commodity is given by QD ¼ 240 2 10P, where P isgiven in dollars, and (3) firm A enters the market first, followed by firm B, but each always assumes, indetermining its best level of output, that the other will hold output constant.With reference to the above, (a) show with the aid of a diagram how duopolists A and B reach theequilibrium point. (b) What price will each charge when in equilibrium? How does this compare withthe monopoly price? With the perfectly competitive price? (c) What quantity will each produce when inequilibrium? How does this compare with the monopoly output? With the perfectly competitive output(d) How much profit will each duopolist make when in equilibrium? How does this compare with themonopoly profits? With the case of perfect competition? (e) What would happen to the equilibriumindustry output and price if one more firm entered this industry? If many more firms came in?(a)Assumptions 1, 2, and 3 given in this problem define the Cournot model. The way duopolists A and B reachtheir equilibrium point is shown in Fig. 10-13. Before duopolist B enters the market, duopolist A will maximizetotal profits at point A on D ¼ d A . This is the monopoly solution. When duopolist B enters the industry, Bwill sell at point B on d B . Duopolist A reacts by selling at point A 0 on dA 0 . The process will continue until eachduopolist will be in equilibrium at point E on d E .
CHAP. 10] PRICE AND OUTPUT UNDER MONOPOLISTIC COMPETITION AND OLIGOPOLY 251Fig. 10-13(b)(c)When in equilibrium, duopolists A and B will charge a price of $8. The monopoly price is $12 (givenby point A). The perfectly competitive price is zero (so that for each firm in long-run equilibrium,TR 2 TC ¼ 0).When in equilibrium, the duopolists will produce 80 units each, for a total of 160 units. This is 4/3 of themonopoly output of 120 units given by point A, and 2/3 of the perfectly competitive output of 240 units(when in long-run equilibrium).(d ) When in equilibrium, the duopolists will make $640 of profit each, for a total of $1280. This compares with atotal profit of $1440 under monopoly and zero profit under perfect competition.(e)If one more firm entered the industry, each of the three firms will produce 60 units or 1/4 of the total perfectlycompetitive output when in long-run equilibrium (so all three of them together will produce 180 units or 3/4ofthe total perfectly competitive output). The price would then fall to $6 (see Fig. 10-13). As more and morefirms enter the industry, the long-run equilibrium industry output and price approach the long-run perfectlycompetitive equilibrium output (of 240 units) and price (of zero dollars).This entire analysis can be extended to cases where costs of production are not zero.10.11 What would happen if, in determining the best level of output, each of the duopolists in Problem 10.10assumes that the other holds price (rather than output) constant?Prices will be undercut by each firm until they are driven down to the competitive level. For example, inFig. 10-13, before duopolist B enters the market, duopolist A will maximize total profits at point A on D ¼ d A .If duopolist B enters the market and assumes that duopolist A will hold the price constant, duopolist B cancapture the entire market by selling at a lower price, say at $11 per unit (see Fig. l0-13). This is so because theproduct is homogeneous. Duopolist A, having lost all sales and on the assumption that duopolist B keeps theprice at $11, lowers its price, say to $10, and will sell the entire quantity of 140 units in the market (see Fig.l0-13). Duopolist B now reacts and the process continues until the perfectly competitive price of $0 and outputof 240 units is established. This is the Bertrand model.10.12 Suppose that (1) there are two firms, A and B, selling a homogeneous commodity produced at zero cost,(2) d A and d B in Fig. l0-14 are duopolist A’s and duopolist B’s demand curves respectively, (3) themaximum output of each firm is 500 units per time period, and (4) each firm in attempting to maximizeits TR or total profit assumes that the other firm holds its price constant. Determine: (a) what happens if
- Page 216 and 217: 200 PRICE AND OUTPUT UNDER PERFECT
- Page 218 and 219: 202 PRICE AND OUTPUT UNDER PERFECT
- Page 220 and 221: 204 PRICE AND OUTPUT UNDER PERFECT
- Page 222 and 223: 206 PRICE AND OUTPUT UNDER PERFECT
- Page 224 and 225: 208 PRICE AND OUTPUT UNDER PERFECT
- Page 226 and 227: 210 PRICE AND OUTPUT UNDER PERFECT
- Page 228 and 229: CHAPTER 9Price and OutputUnder Pure
- Page 230 and 231: 214 PRICE AND OUTPUT UNDER PURE MON
- Page 232 and 233: 216 PRICE AND OUTPUT UNDER PURE MON
- Page 234 and 235: 218 PRICE AND OUTPUT UNDER PURE MON
- Page 236 and 237: 220 PRICE AND OUTPUT UNDER PURE MON
- Page 238 and 239: 222 PRICE AND OUTPUT UNDER PURE MON
- Page 240 and 241: 224 PRICE AND OUTPUT UNDER PURE MON
- Page 242 and 243: 226 PRICE AND OUTPUT UNDER PURE MON
- Page 244 and 245: 228 PRICE AND OUTPUT UNDER PURE MON
- Page 246 and 247: 230 PRICE AND OUTPUT UNDER PURE MON
- Page 248 and 249: 232 PRICE AND OUTPUT UNDER PURE MON
- Page 250 and 251: 234 PRICE AND OUTPUT UNDER PURE MON
- Page 252 and 253: 236 PRICE AND OUTPUT UNDER PURE MON
- Page 254 and 255: CHAPTER 10Price and OutputUnder Mon
- Page 256 and 257: 240 PRICE AND OUTPUT UNDER MONOPOLI
- Page 258 and 259: 242 PRICE AND OUTPUT UNDER MONOPOLI
- Page 260 and 261: 244 PRICE AND OUTPUT UNDER MONOPOLI
- Page 262 and 263: 246 PRICE AND OUTPUT UNDER MONOPOLI
- Page 264 and 265: 248 PRICE AND OUTPUT UNDER MONOPOLI
- Page 268 and 269: 252 PRICE AND OUTPUT UNDER MONOPOLI
- Page 270 and 271: 254 PRICE AND OUTPUT UNDER MONOPOLI
- Page 272 and 273: 256 PRICE AND OUTPUT UNDER MONOPOLI
- Page 274 and 275: 258 PRICE AND OUTPUT UNDER MONOPOLI
- Page 276 and 277: 260 PRICE AND OUTPUT UNDER MONOPOLI
- Page 278 and 279: CHAPTER 11Recent and AdvancedTopics
- Page 280 and 281: 264 RECENT AND ADVANCED TOPICS IN M
- Page 282 and 283: 266 RECENT AND ADVANCED TOPICS IN M
- Page 284 and 285: 268 RECENT AND ADVANCED TOPICS IN M
- Page 286 and 287: 270 RECENT AND ADVANCED TOPICS IN M
- Page 288 and 289: CHAPTER 12Game Theory andOligopolis
- Page 290 and 291: 274 GAME THEORY AND OLIGOPOLISTIC B
- Page 292 and 293: 276 GAME THEORY AND OLIGOPOLISTIC B
- Page 294 and 295: 278 GAME THEORY AND OLIGOPOLISTIC B
- Page 296 and 297: 280 GAME THEORY AND OLIGOPOLISTIC B
- Page 298 and 299: 282 GAME THEORY AND OLIGOPOLISTIC B
- Page 300 and 301: 284 INPUT PRICING AND EMPLOYMENT [C
- Page 302 and 303: 286 INPUT PRICING AND EMPLOYMENT [C
- Page 304 and 305: 288 INPUT PRICING AND EMPLOYMENT [C
- Page 306 and 307: 290 INPUT PRICING AND EMPLOYMENT [C
- Page 308 and 309: 292 INPUT PRICING AND EMPLOYMENT [C
- Page 310 and 311: 294 INPUT PRICING AND EMPLOYMENT [C
- Page 312 and 313: 296 INPUT PRICING AND EMPLOYMENT [C
- Page 314 and 315: 298 INPUT PRICING AND EMPLOYMENT [C
CHAP. 10] PRICE AND OUTPUT UNDER MONOPOLISTIC COMPETITION AND OLIGOPOLY 251
Fig. 10-13
(b)
(c)
When in equilibrium, duopolists A and B will charge a price of $8. The monopoly price is $12 (given
by point A). The perfectly competitive price is zero (so that for each firm in long-run equilibrium,
TR 2 TC ¼ 0).
When in equilibrium, the duopolists will produce 80 units each, for a total of 160 units. This is 4/3 of the
monopoly output of 120 units given by point A, and 2/3 of the perfectly competitive output of 240 units
(when in long-run equilibrium).
(d ) When in equilibrium, the duopolists will make $640 of profit each, for a total of $1280. This compares with a
total profit of $1440 under monopoly and zero profit under perfect competition.
(e)
If one more firm entered the industry, each of the three firms will produce 60 units or 1/4 of the total perfectly
competitive output when in long-run equilibrium (so all three of them together will produce 180 units or 3/4of
the total perfectly competitive output). The price would then fall to $6 (see Fig. 10-13). As more and more
firms enter the industry, the long-run equilibrium industry output and price approach the long-run perfectly
competitive equilibrium output (of 240 units) and price (of zero dollars).
This entire analysis can be extended to cases where costs of production are not zero.
10.11 What would happen if, in determining the best level of output, each of the duopolists in Problem 10.10
assumes that the other holds price (rather than output) constant?
Prices will be undercut by each firm until they are driven down to the competitive level. For example, in
Fig. 10-13, before duopolist B enters the market, duopolist A will maximize total profits at point A on D ¼ d A .
If duopolist B enters the market and assumes that duopolist A will hold the price constant, duopolist B can
capture the entire market by selling at a lower price, say at $11 per unit (see Fig. l0-13). This is so because the
product is homogeneous. Duopolist A, having lost all sales and on the assumption that duopolist B keeps the
price at $11, lowers its price, say to $10, and will sell the entire quantity of 140 units in the market (see Fig.
l0-13). Duopolist B now reacts and the process continues until the perfectly competitive price of $0 and output
of 240 units is established. This is the Bertrand model.
10.12 Suppose that (1) there are two firms, A and B, selling a homogeneous commodity produced at zero cost,
(2) d A and d B in Fig. l0-14 are duopolist A’s and duopolist B’s demand curves respectively, (3) the
maximum output of each firm is 500 units per time period, and (4) each firm in attempting to maximize
its TR or total profit assumes that the other firm holds its price constant. Determine: (a) what happens if
Change language