676 lines
124 KiB
HTML
676 lines
124 KiB
HTML
<html><head><meta http-equiv="Content-Type" content="text/html; charset=utf-8"/><title>Unit 4: Imperfect Competition</title><style>
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/* cspell:disable-file */
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/* webkit printing magic: print all background colors */
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html {
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-webkit-print-color-adjust: exact;
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}
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* {
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box-sizing: border-box;
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-webkit-print-color-adjust: exact;
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}
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html,
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body {
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margin: 0;
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padding: 0;
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}
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@media only screen {
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body {
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margin: 2em auto;
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max-width: 900px;
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color: rgb(55, 53, 47);
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}
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}
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body {
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line-height: 1.5;
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white-space: pre-wrap;
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}
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a,
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a.visited {
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color: inherit;
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text-decoration: underline;
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}
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.pdf-relative-link-path {
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font-size: 80%;
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color: #444;
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}
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h1,
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h2,
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h3 {
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letter-spacing: -0.01em;
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line-height: 1.2;
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font-weight: 600;
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margin-bottom: 0;
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}
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.page-title {
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font-size: 2.5rem;
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font-weight: 700;
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margin-top: 0;
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margin-bottom: 0.75em;
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}
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h1 {
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font-size: 1.875rem;
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margin-top: 1.875rem;
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}
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h2 {
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font-size: 1.5rem;
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margin-top: 1.5rem;
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}
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h3 {
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font-size: 1.25rem;
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margin-top: 1.25rem;
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}
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.source {
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border: 1px solid #ddd;
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border-radius: 3px;
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padding: 1.5em;
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word-break: break-all;
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}
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.callout {
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border-radius: 3px;
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padding: 1rem;
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}
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figure {
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margin: 1.25em 0;
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page-break-inside: avoid;
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}
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figcaption {
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opacity: 0.5;
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font-size: 85%;
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margin-top: 0.5em;
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}
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mark {
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background-color: transparent;
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}
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.indented {
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padding-left: 1.5em;
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}
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hr {
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background: transparent;
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display: block;
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width: 100%;
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height: 1px;
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visibility: visible;
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border: none;
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border-bottom: 1px solid rgba(55, 53, 47, 0.09);
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}
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img {
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max-width: 100%;
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}
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@media only print {
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img {
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max-height: 100vh;
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object-fit: contain;
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}
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}
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@page {
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margin: 1in;
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}
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.collection-content {
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font-size: 0.875rem;
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}
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.column-list {
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display: flex;
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justify-content: space-between;
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}
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.column {
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padding: 0 1em;
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}
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.column:first-child {
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padding-left: 0;
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}
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.column:last-child {
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padding-right: 0;
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}
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.table_of_contents-item {
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display: block;
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font-size: 0.875rem;
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line-height: 1.3;
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padding: 0.125rem;
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}
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.table_of_contents-indent-1 {
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margin-left: 1.5rem;
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}
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.table_of_contents-indent-2 {
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margin-left: 3rem;
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}
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.table_of_contents-indent-3 {
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margin-left: 4.5rem;
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}
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.table_of_contents-link {
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text-decoration: none;
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opacity: 0.7;
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border-bottom: 1px solid rgba(55, 53, 47, 0.18);
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}
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table,
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th,
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td {
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border: 1px solid rgba(55, 53, 47, 0.09);
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border-collapse: collapse;
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}
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table {
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border-left: none;
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border-right: none;
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}
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th,
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td {
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font-weight: normal;
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padding: 0.25em 0.5em;
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line-height: 1.5;
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min-height: 1.5em;
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text-align: left;
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}
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th {
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color: rgba(55, 53, 47, 0.6);
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}
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ol,
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ul {
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margin: 0;
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margin-block-start: 0.6em;
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margin-block-end: 0.6em;
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}
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li > ol:first-child,
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li > ul:first-child {
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margin-block-start: 0.6em;
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}
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ul > li {
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list-style: disc;
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}
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ul.to-do-list {
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text-indent: -1.7em;
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}
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ul.to-do-list > li {
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list-style: none;
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}
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.to-do-children-checked {
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text-decoration: line-through;
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opacity: 0.375;
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}
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ul.toggle > li {
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list-style: none;
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}
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ul {
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padding-inline-start: 1.7em;
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}
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ul > li {
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padding-left: 0.1em;
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}
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ol {
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padding-inline-start: 1.6em;
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}
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ol > li {
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padding-left: 0.2em;
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}
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.mono ol {
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padding-inline-start: 2em;
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}
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.mono ol > li {
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text-indent: -0.4em;
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}
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.toggle {
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padding-inline-start: 0em;
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list-style-type: none;
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}
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/* Indent toggle children */
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.toggle > li > details {
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padding-left: 1.7em;
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}
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.toggle > li > details > summary {
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margin-left: -1.1em;
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}
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.selected-value {
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display: inline-block;
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padding: 0 0.5em;
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background: rgba(206, 205, 202, 0.5);
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border-radius: 3px;
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margin-right: 0.5em;
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margin-top: 0.3em;
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margin-bottom: 0.3em;
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white-space: nowrap;
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}
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.collection-title {
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display: inline-block;
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margin-right: 1em;
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}
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.simple-table {
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margin-top: 1em;
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font-size: 0.875rem;
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empty-cells: show;
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}
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.simple-table td {
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height: 29px;
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min-width: 120px;
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}
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.simple-table th {
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height: 29px;
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min-width: 120px;
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}
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.simple-table-header-color {
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background: rgb(247, 246, 243);
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color: black;
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}
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.simple-table-header {
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font-weight: 500;
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}
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time {
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opacity: 0.5;
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}
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.icon {
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display: inline-block;
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max-width: 1.2em;
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max-height: 1.2em;
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text-decoration: none;
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vertical-align: text-bottom;
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margin-right: 0.5em;
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}
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img.icon {
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border-radius: 3px;
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}
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.user-icon {
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width: 1.5em;
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height: 1.5em;
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border-radius: 100%;
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margin-right: 0.5rem;
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}
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.user-icon-inner {
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font-size: 0.8em;
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}
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.text-icon {
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border: 1px solid #000;
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text-align: center;
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}
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.page-cover-image {
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display: block;
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object-fit: cover;
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width: 100%;
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max-height: 30vh;
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}
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.page-header-icon {
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font-size: 3rem;
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margin-bottom: 1rem;
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}
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.page-header-icon-with-cover {
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margin-top: -0.72em;
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margin-left: 0.07em;
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}
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.page-header-icon img {
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border-radius: 3px;
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}
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.link-to-page {
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margin: 1em 0;
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padding: 0;
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border: none;
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font-weight: 500;
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}
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p > .user {
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opacity: 0.5;
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}
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td > .user,
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td > time {
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white-space: nowrap;
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}
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input[type="checkbox"] {
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transform: scale(1.5);
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margin-right: 0.6em;
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vertical-align: middle;
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}
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p {
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margin-top: 0.5em;
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margin-bottom: 0.5em;
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}
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.image {
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border: none;
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margin: 1.5em 0;
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padding: 0;
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border-radius: 0;
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text-align: center;
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}
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.code,
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code {
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background: rgba(135, 131, 120, 0.15);
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border-radius: 3px;
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padding: 0.2em 0.4em;
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border-radius: 3px;
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font-size: 85%;
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tab-size: 2;
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}
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code {
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color: #eb5757;
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}
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.code {
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padding: 1.5em 1em;
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}
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.code-wrap {
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white-space: pre-wrap;
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word-break: break-all;
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}
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.code > code {
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background: none;
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padding: 0;
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font-size: 100%;
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color: inherit;
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}
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blockquote {
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font-size: 1.25em;
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margin: 1em 0;
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padding-left: 1em;
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border-left: 3px solid rgb(55, 53, 47);
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}
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.bookmark {
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text-decoration: none;
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max-height: 8em;
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padding: 0;
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display: flex;
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width: 100%;
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align-items: stretch;
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}
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.bookmark-title {
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font-size: 0.85em;
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overflow: hidden;
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text-overflow: ellipsis;
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height: 1.75em;
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white-space: nowrap;
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}
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.bookmark-text {
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display: flex;
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flex-direction: column;
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}
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.bookmark-info {
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flex: 4 1 180px;
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padding: 12px 14px 14px;
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display: flex;
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flex-direction: column;
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justify-content: space-between;
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}
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.bookmark-image {
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width: 33%;
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flex: 1 1 180px;
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display: block;
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position: relative;
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object-fit: cover;
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border-radius: 1px;
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}
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.bookmark-description {
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color: rgba(55, 53, 47, 0.6);
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font-size: 0.75em;
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overflow: hidden;
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max-height: 4.5em;
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word-break: break-word;
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}
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.bookmark-href {
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font-size: 0.75em;
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margin-top: 0.25em;
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}
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.sans { font-family: ui-sans-serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Helvetica, "Apple Color Emoji", Arial, sans-serif, "Segoe UI Emoji", "Segoe UI Symbol"; }
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.code { font-family: "SFMono-Regular", Menlo, Consolas, "PT Mono", "Liberation Mono", Courier, monospace; }
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.serif { font-family: Lyon-Text, Georgia, ui-serif, serif; }
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.mono { font-family: iawriter-mono, Nitti, Menlo, Courier, monospace; }
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.pdf .sans { font-family: Inter, ui-sans-serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Helvetica, "Apple Color Emoji", Arial, sans-serif, "Segoe UI Emoji", "Segoe UI Symbol", 'Twemoji', 'Noto Color Emoji', 'Noto Sans CJK JP'; }
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.pdf:lang(zh-CN) .sans { font-family: Inter, ui-sans-serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Helvetica, "Apple Color Emoji", Arial, sans-serif, "Segoe UI Emoji", "Segoe UI Symbol", 'Twemoji', 'Noto Color Emoji', 'Noto Sans CJK SC'; }
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.pdf:lang(zh-TW) .sans { font-family: Inter, ui-sans-serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Helvetica, "Apple Color Emoji", Arial, sans-serif, "Segoe UI Emoji", "Segoe UI Symbol", 'Twemoji', 'Noto Color Emoji', 'Noto Sans CJK TC'; }
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.pdf:lang(ko-KR) .sans { font-family: Inter, ui-sans-serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Helvetica, "Apple Color Emoji", Arial, sans-serif, "Segoe UI Emoji", "Segoe UI Symbol", 'Twemoji', 'Noto Color Emoji', 'Noto Sans CJK KR'; }
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.pdf .code { font-family: Source Code Pro, "SFMono-Regular", Menlo, Consolas, "PT Mono", "Liberation Mono", Courier, monospace, 'Twemoji', 'Noto Color Emoji', 'Noto Sans Mono CJK JP'; }
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.pdf:lang(zh-CN) .code { font-family: Source Code Pro, "SFMono-Regular", Menlo, Consolas, "PT Mono", "Liberation Mono", Courier, monospace, 'Twemoji', 'Noto Color Emoji', 'Noto Sans Mono CJK SC'; }
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.pdf:lang(zh-TW) .code { font-family: Source Code Pro, "SFMono-Regular", Menlo, Consolas, "PT Mono", "Liberation Mono", Courier, monospace, 'Twemoji', 'Noto Color Emoji', 'Noto Sans Mono CJK TC'; }
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.pdf:lang(ko-KR) .code { font-family: Source Code Pro, "SFMono-Regular", Menlo, Consolas, "PT Mono", "Liberation Mono", Courier, monospace, 'Twemoji', 'Noto Color Emoji', 'Noto Sans Mono CJK KR'; }
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.pdf .serif { font-family: PT Serif, Lyon-Text, Georgia, ui-serif, serif, 'Twemoji', 'Noto Color Emoji', 'Noto Serif CJK JP'; }
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.pdf:lang(zh-CN) .serif { font-family: PT Serif, Lyon-Text, Georgia, ui-serif, serif, 'Twemoji', 'Noto Color Emoji', 'Noto Serif CJK SC'; }
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.pdf:lang(zh-TW) .serif { font-family: PT Serif, Lyon-Text, Georgia, ui-serif, serif, 'Twemoji', 'Noto Color Emoji', 'Noto Serif CJK TC'; }
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.pdf:lang(ko-KR) .serif { font-family: PT Serif, Lyon-Text, Georgia, ui-serif, serif, 'Twemoji', 'Noto Color Emoji', 'Noto Serif CJK KR'; }
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.pdf .mono { font-family: PT Mono, iawriter-mono, Nitti, Menlo, Courier, monospace, 'Twemoji', 'Noto Color Emoji', 'Noto Sans Mono CJK JP'; }
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.pdf:lang(zh-CN) .mono { font-family: PT Mono, iawriter-mono, Nitti, Menlo, Courier, monospace, 'Twemoji', 'Noto Color Emoji', 'Noto Sans Mono CJK SC'; }
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.pdf:lang(zh-TW) .mono { font-family: PT Mono, iawriter-mono, Nitti, Menlo, Courier, monospace, 'Twemoji', 'Noto Color Emoji', 'Noto Sans Mono CJK TC'; }
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.pdf:lang(ko-KR) .mono { font-family: PT Mono, iawriter-mono, Nitti, Menlo, Courier, monospace, 'Twemoji', 'Noto Color Emoji', 'Noto Sans Mono CJK KR'; }
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.highlight-default {
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color: rgba(55, 53, 47, 1);
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}
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.highlight-gray {
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color: rgba(120, 119, 116, 1);
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fill: rgba(120, 119, 116, 1);
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}
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.highlight-brown {
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color: rgba(159, 107, 83, 1);
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fill: rgba(159, 107, 83, 1);
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}
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.highlight-orange {
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color: rgba(217, 115, 13, 1);
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fill: rgba(217, 115, 13, 1);
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}
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.highlight-yellow {
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color: rgba(203, 145, 47, 1);
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fill: rgba(203, 145, 47, 1);
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}
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.highlight-teal {
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color: rgba(68, 131, 97, 1);
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fill: rgba(68, 131, 97, 1);
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}
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.highlight-blue {
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color: rgba(51, 126, 169, 1);
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fill: rgba(51, 126, 169, 1);
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}
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.highlight-purple {
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color: rgba(144, 101, 176, 1);
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fill: rgba(144, 101, 176, 1);
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}
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.highlight-pink {
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color: rgba(193, 76, 138, 1);
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fill: rgba(193, 76, 138, 1);
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}
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.highlight-red {
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color: rgba(212, 76, 71, 1);
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fill: rgba(212, 76, 71, 1);
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}
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.highlight-gray_background {
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background: rgba(241, 241, 239, 1);
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}
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.highlight-brown_background {
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background: rgba(244, 238, 238, 1);
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}
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.highlight-orange_background {
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background: rgba(251, 236, 221, 1);
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}
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.highlight-yellow_background {
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background: rgba(251, 243, 219, 1);
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}
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.highlight-teal_background {
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background: rgba(237, 243, 236, 1);
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}
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.highlight-blue_background {
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background: rgba(231, 243, 248, 1);
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}
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</style></head><body><article id="1253df77-88d6-403d-8022-c5ef0d1b1dd7" class="page sans"><header><h1 class="page-title">Unit 4: Imperfect Competition</h1><table class="properties"><tbody><tr class="property-row property-row-created_time"><th><span class="icon property-icon"><svg viewBox="0 0 14 14" style="width:14px;height:14px;display:block;fill:rgba(55, 53, 47, 0.45);flex-shrink:0;-webkit-backface-visibility:hidden" class="typesCreatedAt"><path d="M7.01356 14.0001C8.8042 14.0001 10.5958 13.3107 11.9575 11.9324C14.681 9.21201 14.6808 4.7603 11.9571 2.04013C9.23336 -0.680043 4.77573 -0.680043 2.05199 2.04013C0.727519 3.36277 0 5.13301 0 6.99553C0 8.8764 0.727811 10.6285 2.05199 11.9509C3.43207 13.3106 5.22243 14.0001 7.01356 14.0001ZM3.72947 7.00914V8.461V8.65543H3.92382H5.34563H8.2794H8.4738V8.461V5.52541V3.37947V3.18502H8.2794H6.82747H6.63307V3.37947V6.81467H3.92382H3.72947V7.00914ZM1.83985 6.99553C1.83985 5.61698 2.38099 4.32597 3.36061 3.3477C5.36746 1.34337 8.64803 1.34062 10.6585 3.33944C10.6613 3.34219 10.6639 3.34494 10.6668 3.3477C12.676 5.3546 12.6763 8.63642 10.6668 10.6434C8.65705 12.6504 5.37031 12.6504 3.36061 10.6434C2.38099 9.66506 1.83985 8.37408 1.83985 6.99553Z"></path></svg></span>Created</th><td><time>@January 10, 2022 10:05 AM</time></td></tr><tr class="property-row property-row-multi_select"><th><span class="icon property-icon"><svg viewBox="0 0 14 14" style="width:14px;height:14px;display:block;fill:rgba(55, 53, 47, 0.45);flex-shrink:0;-webkit-backface-visibility:hidden" class="typesMultipleSelect"><path d="M4,3 C4,2.447715 4.447715,2 5,2 L12,2 C12.5523,2 13,2.447716 13,3 C13,3.55228 12.5523,4 12,4 L5,4 C4.447715,4 4,3.55228 4,3 Z M4,7 C4,6.447715 4.447715,6 5,6 L12,6 C12.5523,6 13,6.447716 13,7 C13,7.55228 12.5523,8 12,8 L5,8 C4.447715,8 4,7.55228 4,7 Z M4,11 C4,10.447715 4.447715,10 5,10 L12,10 C12.5523,10 13,10.447716 13,11 C13,11.55228 12.5523,12 12,12 L5,12 C4.447715,12 4,11.55228 4,11 Z M2,4 C1.44771525,4 1,3.55228475 1,3 C1,2.44771525 1.44771525,2 2,2 C2.55228475,2 3,2.44771525 3,3 C3,3.55228475 2.55228475,4 2,4 Z M2,8 C1.44771525,8 1,7.55228475 1,7 C1,6.44771525 1.44771525,6 2,6 C2.55228475,6 3,6.44771525 3,7 C3,7.55228475 2.55228475,8 2,8 Z M2,12 C1.44771525,12 1,11.5522847 1,11 C1,10.4477153 1.44771525,10 2,10 C2.55228475,10 3,10.4477153 3,11 C3,11.5522847 2.55228475,12 2,12 Z"></path></svg></span>Tags</th><td></td></tr></tbody></table></header><div class="page-body"><h1 id="570c07aa-90e8-4a33-b3ca-8bfbe878ae9a" class="">4.1 - Introduction to Imperfectly Competitive Markets</h1><h2 id="c4935c86-a6ca-4d58-9dea-ecc2464f32eb" class="">Market Structures</h2><h3 id="fc6bf161-9735-400b-ba5a-5bf69a18532b" class="">Perfect Competition</h3><ul id="4982387c-c1d6-4638-81f7-d755b8bd3614" class="bulleted-list"><li style="list-style-type:disc">Many firms in competition with each other</li></ul><ul id="424c7880-8005-4fe0-a2e2-d8c4aa782e69" class="bulleted-list"><li style="list-style-type:disc">Goods being sold are <strong>identical</strong>, with no product differentiation</li></ul><ul id="6447b001-5dca-4943-a004-fc08a5a6fa68" class="bulleted-list"><li style="list-style-type:disc">Individual firms have no control over prices, they are called "price takers"</li></ul><ul id="537b2672-19a9-4be6-88f5-21ff6cfa3a27" class="bulleted-list"><li style="list-style-type:disc">Low barrier to entry (solely startup cost)</li></ul><ul id="e8b73fed-a97d-4746-af0c-a320d756e2ac" class="bulleted-list"><li style="list-style-type:disc">Well informed buyers and sellers</li></ul><h3 id="5d9f04ec-fe72-4412-8d83-f94a53a8b7a4" class="">Monopolistic Competition</h3><ul id="efa40c1b-2d2b-4536-aafc-600f2336655f" class="bulleted-list"><li style="list-style-type:disc">Many firms in competition with each other</li></ul><ul id="d5fd2f99-0267-4a37-b9d9-ccb6195f7d67" class="bulleted-list"><li style="list-style-type:disc">There is some amount of differentiation between products</li></ul><ul id="b5a61242-7325-459c-bcae-de70cf18487f" class="bulleted-list"><li style="list-style-type:disc">Individual firms have no control over prices, they are called "price takers"</li></ul><ul id="e0232c49-92c1-4725-b253-b154d26722ae" class="bulleted-list"><li style="list-style-type:disc">Low barrier to entry (solely startup cost)</li></ul><ul id="0ebbe964-e573-4abd-b205-cb6fc21732f4" class="bulleted-list"><li style="list-style-type:disc">Monopolistic competitors use non-price competition (Advertising, giveaways, promotions, etc.)</li></ul><h3 id="57a32c49-ebdd-4d23-b802-51cb98d20f83" class="">Oligopoly</h3><ul id="85f1d114-151e-4172-abc1-25ad9ca523c8" class="bulleted-list"><li style="list-style-type:disc">Few firms control the market</li></ul><ul id="0e2fcb24-a61e-410b-a4b1-c935b3a235b0" class="bulleted-list"><li style="list-style-type:disc">Firms have a strong control over price, and frequently collude to set prices</li></ul><ul id="de09eac6-1579-4aa1-8988-fb2dc61b479d" class="bulleted-list"><li style="list-style-type:disc">Firms can also engage in price wars and predatory pricing</li></ul><ul id="e6cb6a69-d4db-40a1-9612-8ebe1277a6f3" class="bulleted-list"><li style="list-style-type:disc">Medium barrier to entry</li></ul><ul id="437b55e6-d626-45d9-b5d8-1b6747251642" class="bulleted-list"><li style="list-style-type:disc">Price Leadership: Unofficial collusion where firms follow a single firm when that firm changes their price</li></ul><h3 id="19a650cc-a71b-4699-bbec-85f2c84c356d" class="">Monopoly</h3><ul id="8ecccfa0-a868-43ab-81b4-8f226f55e065" class="bulleted-list"><li style="list-style-type:disc">One firm has absolute control over the market</li></ul><ul id="53d80640-210a-484e-bcc8-93c0d610e381" class="bulleted-list"><li style="list-style-type:disc">No variety of goods</li></ul><ul id="ad68f1dd-9f87-40b1-9bf3-d092ade6849d" class="bulleted-list"><li style="list-style-type:disc">Firm is a price maker, they are able to set the price to whatever they want</li></ul><ul id="e78d3421-92bb-4d6b-b875-78e7a1e24495" class="bulleted-list"><li style="list-style-type:disc">High barrier to entry</li></ul><h2 id="ec4f4b33-7332-4ccf-89e2-0a0ef5714d6f" class="">Price Control or Price “Makers”</h2><p id="b6412249-c965-430a-9ac4-4227ebc281fd" class="">All <strong>imperfectly competitive</strong> firms exert some control over price. This ability comes from either the <em>type of product</em> they sell OR the <em>amount of competition</em>.</p><p id="e1785d23-c97c-48ba-a23b-21ac2863f6d6" class="">
|
||
</p><p id="6219aa71-da0b-4601-9d07-9eff14c298d9" class="">Price-making firms face a <strong>downward-sloping</strong> demand curve, greater than the marginal revenue curve.</p><h2 id="40ca394f-2eb6-46dc-8f97-220704f7c5ed" class="">Why Imperfectly Competitive Firms are Inefficient</h2><h3 id="4baac43c-5b77-403a-9748-c23385fd5d95" class="">Defining Efficiency</h3><ul id="eb199d2d-8826-48e5-8b4a-cf5313f1b64a" class="bulleted-list"><li style="list-style-type:disc"><strong>Allocative Efficiency (</strong><strong><style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>P</mtext><mo>=</mo><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">\textrm{P} = \textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">P</span></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">=</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span></span></span></span></span><span></span></span></strong><strong>): </strong>The price of a good should be equal to the value of the resources (land, labor, capital) used to produce it. Also known as the Socially Efficient quantity of output. </li></ul><ul id="641863c8-c72d-488f-b44d-11796c22c3b4" class="bulleted-list"><li style="list-style-type:disc"><strong>Productive Efficiency (</strong><strong><style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>P</mtext><mo>=</mo><mtext>min ATC</mtext></mrow><annotation encoding="application/x-tex">\textrm{P} = \textrm{min ATC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">P</span></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">=</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">min ATC</span></span></span></span></span></span><span></span></span></strong><strong>): </strong>The least costly production techniques are used. </li></ul><p id="d33c4412-f4ea-4372-b4c2-13560ee83737" class="">In perfect competition, a firm’s <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>P</mtext><mo>=</mo><mtext>MC</mtext><mo>=</mo><mtext>min ATC</mtext></mrow><annotation encoding="application/x-tex">\textrm {P} = \textrm{MC} = \textrm{min ATC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">P</span></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">=</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">=</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">min ATC</span></span></span></span></span></span><span></span></span>. Therefore, perfectly competitive firms are also 100% efficient. </p><p id="5b0119c7-8d3f-478f-a196-27f5506a3a5d" class="">The same is not true for imperfectly competitive firms, as they are able to make a profit in the long run.</p><h1 id="0a03dc66-4948-4683-bb3a-f613e634ef97" class="">4.2 - Monopolies</h1><p id="784f85cb-7d06-452f-ad6e-b149c0be1da7" class="">A <strong>monopoly</strong> is a firm that is the sole seller of a product without close substitutes. </p><h2 id="3cf07c96-47e5-439b-b9cc-1c2696f12467" class="">Why Monopolies Arise</h2><p id="ad71dea1-9a5e-4874-82cc-5df51a8e1bf8" class="">The main cause of monopolies is <strong>barriers to entry</strong>—other firms cannot enter the market.</p><p id="ed86037a-5ca2-406f-870e-08863bc79321" class="">Three sources of barriers to entry:</p><ol type="1" id="b1d50941-6cfd-43e7-b831-08ad81b19f9e" class="numbered-list" start="1"><li>A single firm owns a key resource. Eg: DeBeers owns most of the world’s diamond mines.</li></ol><ol type="1" id="d70bcb1b-7df1-45c1-8cef-924b6f86a93c" class="numbered-list" start="2"><li>The government gives a single firm the exclusive right to produce the good.</li></ol><ol type="1" id="051b642a-124b-44b8-8b37-fd3ff488ceef" class="numbered-list" start="3"><li><strong>Natural monopoly:</strong> a single firm can produce the entire market <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>Q</mi></mrow><annotation encoding="application/x-tex">Q</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.8777699999999999em;vertical-align:-0.19444em;"></span><span class="mord mathnormal">Q</span></span></span></span></span><span></span></span> at a lower cost than could several firms.</li></ol><p id="97156d4f-3e1e-4fc9-9439-981a2b478156" class="">For a monopoly, the <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>ATC</mtext></mrow><annotation encoding="application/x-tex">\textrm{ATC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">ATC</span></span></span></span></span></span><span></span></span> curve slopes downwards as they have huge <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>FC</mtext></mrow><annotation encoding="application/x-tex">\textrm{FC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">FC</span></span></span></span></span></span><span></span></span> and small <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">\textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span></span></span></span></span><span></span></span>.</p><h2 id="c8ca5de4-97c2-4179-968d-821a4d75f235" class="">Monopoly vs. Perfect Competition: Demand Curves</h2><p id="ccf80bb8-a04b-48f6-b0e3-45deb8a91fd5" class="">In a competitive firm, the market supply curve is perfectly elastic.</p><p id="fd858448-670c-4201-a90f-6c8d117170a6" class="">A monopolist is the only seller, so it faces the market demand curve. To sell a larger <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>Q</mi></mrow><annotation encoding="application/x-tex">Q</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.8777699999999999em;vertical-align:-0.19444em;"></span><span class="mord mathnormal">Q</span></span></span></span></span><span></span></span>, the monopoly must reduce its <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi></mrow><annotation encoding="application/x-tex">P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span>.</p><p id="3797103f-40de-4cae-a29f-769b941ca1fa" class="">In a monopoly, <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>P</mtext><mo>=</mo><mtext>AR</mtext></mrow><annotation encoding="application/x-tex">\textrm P = \textrm {AR}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">P</span></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">=</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">AR</span></span></span></span></span></span><span></span></span> and <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MR</mtext><mo><</mo><mtext>P</mtext></mrow><annotation encoding="application/x-tex">\textrm{MR} < \textrm{P}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.72243em;vertical-align:-0.0391em;"></span><span class="mord text"><span class="mord textrm">MR</span></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel"><</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">P</span></span></span></span></span></span><span></span></span>.</p><h2 id="664bc490-eb12-4ece-8f1e-54a3500feff2" class="">Understanding the Monopolist’s MR</h2><ul id="92ca835c-ed63-4e8c-b9f4-f7e509edf59e" class="bulleted-list"><li style="list-style-type:disc">Increasing <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>Q</mi></mrow><annotation encoding="application/x-tex">Q</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.8777699999999999em;vertical-align:-0.19444em;"></span><span class="mord mathnormal">Q</span></span></span></span></span><span></span></span> has two effects on revenue:<ul id="9bd8275e-ce68-44c8-affd-ba1697e24b47" class="bulleted-list"><li style="list-style-type:circle"><strong>Output effect:</strong> higher output raises revenue</li></ul><ul id="805ad4f8-9a5e-4fc1-ad11-dd9504f4fb20" class="bulleted-list"><li style="list-style-type:circle"><strong>Price effect:</strong> lower price reduces revenue</li></ul></li></ul><ul id="7d15963e-9a20-48e6-913e-0c7ee9c1ae32" class="bulleted-list"><li style="list-style-type:disc">To sell a larger <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>Q</mi></mrow><annotation encoding="application/x-tex">Q</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.8777699999999999em;vertical-align:-0.19444em;"></span><span class="mord mathnormal">Q</span></span></span></span></span><span></span></span>, the monopolist must reduce the price on all the units it sells.</li></ul><ul id="1cabbcba-8787-4e89-9472-8d4ff2599108" class="bulleted-list"><li style="list-style-type:disc">Hence, <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MR</mtext><mo><</mo><mtext>P</mtext></mrow><annotation encoding="application/x-tex">\textrm{MR} < \textrm P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.72243em;vertical-align:-0.0391em;"></span><span class="mord text"><span class="mord textrm">MR</span></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel"><</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">P</span></span></span></span></span></span><span></span></span>.</li></ul><ul id="4f43817d-a8b8-43de-92c6-4a0c1b3425de" class="bulleted-list"><li style="list-style-type:disc"><style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MR</mtext></mrow><annotation encoding="application/x-tex">\textrm {MR}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MR</span></span></span></span></span></span><span></span></span> could even be negative if the price effect exceeds the output effect.</li></ul><h2 id="5c75bcb7-beda-4108-9735-73ddc40d5d55" class="">Profit Maximization</h2><ul id="e6ecf967-5904-4522-9d4f-50def4812dee" class="bulleted-list"><li style="list-style-type:disc">Like a competitive firm, a monopolist maximizes profit by producing the quantity where <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MR</mtext><mo>=</mo><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">\textrm{MR} = \textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MR</span></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">=</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span></span></span></span></span><span></span></span>.</li></ul><ul id="6ad69563-e6d5-4db0-b779-013b114d5afb" class="bulleted-list"><li style="list-style-type:disc">Once the monopoly has its price maximizing quantity of output, it will identify the price consumers are willing to pay from the demand curve at that quantity <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>Q</mi></mrow><annotation encoding="application/x-tex">Q</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.8777699999999999em;vertical-align:-0.19444em;"></span><span class="mord mathnormal">Q</span></span></span></span></span><span></span></span>.</li></ul><ul id="09b9ac63-423b-4f16-9933-aa858064f04c" class="bulleted-list"><li style="list-style-type:disc">Because this <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi></mrow><annotation encoding="application/x-tex">P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span> must be greater than the <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MR</mtext><mo>=</mo><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">\textrm{MR} = \textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MR</span></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">=</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span></span></span></span></span><span></span></span> point, monopolies are guaranteed to make long run profits.</li></ul><h2 id="2d08dc71-4ee3-4a93-af38-9c3d96af8234" class="">A Monopoly Does Not Have an <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>S</mi></mrow><annotation encoding="application/x-tex">S</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.05764em;">S</span></span></span></span></span><span></span></span> Curve</h2><p id="a11a7238-95b0-4e41-92ae-c4094f73c63e" class="">A competitive firm:</p><ul id="313164b2-2e18-4c69-acbc-a56fd5e8aee4" class="bulleted-list"><li style="list-style-type:disc">takes <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi></mrow><annotation encoding="application/x-tex">P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span> as given</li></ul><ul id="3d577bd6-f3d1-43bc-a4ee-1e7e9e7e05ed" class="bulleted-list"><li style="list-style-type:disc">has a supply curve that shows how its <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>Q</mi></mrow><annotation encoding="application/x-tex">Q</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.8777699999999999em;vertical-align:-0.19444em;"></span><span class="mord mathnormal">Q</span></span></span></span></span><span></span></span> depends on <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi></mrow><annotation encoding="application/x-tex">P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span></li></ul><p id="56976969-9cd0-489c-bd88-f885fa3261f3" class="">A monopoly firm:</p><ul id="b8703074-6963-433e-b3d7-d7f17877301b" class="bulleted-list"><li style="list-style-type:disc">is a “price-maker”, not a “price-taker”</li></ul><ul id="9fa9b738-6cc9-45b7-b9c6-11068bb48901" class="bulleted-list"><li style="list-style-type:disc"><style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>Q</mi></mrow><annotation encoding="application/x-tex">Q</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.8777699999999999em;vertical-align:-0.19444em;"></span><span class="mord mathnormal">Q</span></span></span></span></span><span></span></span> does not depend on <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi></mrow><annotation encoding="application/x-tex">P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span></li></ul><ul id="6456301f-70e9-437e-a6fe-fc979d322dd5" class="bulleted-list"><li style="list-style-type:disc"><style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>Q</mi></mrow><annotation encoding="application/x-tex">Q</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.8777699999999999em;vertical-align:-0.19444em;"></span><span class="mord mathnormal">Q</span></span></span></span></span><span></span></span> and <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi></mrow><annotation encoding="application/x-tex">P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span> are jointly determined by <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MR</mtext></mrow><annotation encoding="application/x-tex">\textrm{MR}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MR</span></span></span></span></span></span><span></span></span>, <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">\textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span></span></span></span></span><span></span></span>, and the demand curve.</li></ul><p id="57bb1da7-8558-4560-a812-a11b46982886" class="">Because of this, there is no supply curve for monopolies. </p><h2 id="35b70392-30d4-475d-8abd-e111c5e1a592" class="">The Welfare Cost of Monopoly</h2><p id="227154aa-6ac5-47ac-a337-c7d96c9a6bfc" class="">The value to buyers of an additional unit, <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi></mrow><annotation encoding="application/x-tex">P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span>, exceeds the cost of the resources needed to produce that unit, <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">\textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span></span></span></span></span><span></span></span>. This creates a <strong>deadweight loss</strong>, which could be recouped were the market in perfect competition. This takes away from the consumer surplus and the total surplus, and brings some additional producer surplus.</p><p id="585f3912-cbb5-47bf-96d9-1c9d70153ef4" class="">In perfect competition, <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi><mo>=</mo><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">P = \textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">=</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span></span></span></span></span><span></span></span>, but in a monopoly, <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi><mo>></mo><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">P > \textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.72243em;vertical-align:-0.0391em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span></span></span></span></span><span></span></span>. The deadweight loss created by the monopoly is the difference between <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi></mrow><annotation encoding="application/x-tex">P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span> and <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">\textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span></span></span></span></span><span></span></span> which would not be present in perfect competition.</p><h2 id="c3a852b7-381b-4fe0-8d44-73f35c387341" class="">Public Policy towards Monopolies</h2><ul id="6c4a5138-1225-4a25-97e2-44e16ca92e23" class="bulleted-list"><li style="list-style-type:disc">Increasing competition with antitrust laws<ul id="2d4d7a59-5cbd-490d-bb0e-fbc8153376da" class="bulleted-list"><li style="list-style-type:circle">Ban some anticompetitive practices, allow govt to break up monopolies.</li></ul><ul id="2b8ab842-a36d-475f-9305-b402bb2784fe" class="bulleted-list"><li style="list-style-type:circle">e.g., Sherman Antitrust Act (1890), Clayton Act (1914)</li></ul></li></ul><ul id="5ca5143e-53ae-4fe6-9cec-5eca7ae757aa" class="bulleted-list"><li style="list-style-type:disc">Regulation<ul id="502954b7-8284-45bc-8180-fd2420dc138b" class="bulleted-list"><li style="list-style-type:circle">Government agencies set the monopolist’s price</li></ul><ul id="9d0c36e6-3740-45b9-a64b-285748b18b0e" class="bulleted-list"><li style="list-style-type:circle">For natural monopolies, <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MC</mtext><mo><</mo><mtext>ATC</mtext></mrow><annotation encoding="application/x-tex">\textrm{MC} < \textrm{ATC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.72243em;vertical-align:-0.0391em;"></span><span class="mord text"><span class="mord textrm">MC</span></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel"><</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">ATC</span></span></span></span></span></span><span></span></span> at all <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>Q</mi></mrow><annotation encoding="application/x-tex">Q</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.8777699999999999em;vertical-align:-0.19444em;"></span><span class="mord mathnormal">Q</span></span></span></span></span><span></span></span>, so marginal cost pricing would result in losses.<ul id="2da693bb-8313-41d4-a47c-e934ac739348" class="bulleted-list"><li style="list-style-type:square">For these firms, regulators might subsidize the monopolist or set <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi><mo>=</mo><mtext>ATC</mtext></mrow><annotation encoding="application/x-tex">P = \textrm{ATC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">=</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">ATC</span></span></span></span></span></span><span></span></span> for zero economic profit.</li></ul></li></ul></li></ul><ul id="ae67fe03-73b3-4fd4-ac98-b30d5dd6908c" class="bulleted-list"><li style="list-style-type:disc">Public ownership<ul id="58b9aa8c-a763-40e6-8b79-71443c0f7700" class="bulleted-list"><li style="list-style-type:circle">Example: US Postal Service</li></ul><ul id="056d44fb-e63f-40e6-84e4-40822b6ef2fe" class="bulleted-list"><li style="list-style-type:circle">Problem: Public ownership is usually less efficient since no profit motive to minimize costs<ul id="65a575b1-bc69-4325-94b4-54ac3477370f" class="bulleted-list"><li style="list-style-type:square">^ bullshit</li></ul></li></ul></li></ul><ul id="9b42f27e-ae49-49b9-83d6-68c004516a7b" class="bulleted-list"><li style="list-style-type:disc">Doing nothing<ul id="3a31fbb3-1047-474a-9e9c-96698214eeb7" class="bulleted-list"><li style="list-style-type:circle">The foregoing policies all have drawbacks, so the best policy may be no policy.<ul id="602957f1-e6d3-46b8-ae1c-d9636bfd5e3e" class="bulleted-list"><li style="list-style-type:square">^ also bullshit</li></ul></li></ul></li></ul><h2 id="776a33b7-23be-4160-b287-de097b0ec616" class="">Conclusion</h2><ul id="2e945556-43d4-4951-af24-d3c0d813d3fd" class="bulleted-list"><li style="list-style-type:disc">In the real world, <em>pure</em> monopoly is rare.</li></ul><ul id="78d729be-0b78-4614-9ac9-42572b933248" class="bulleted-list"><li style="list-style-type:disc">Yet, many firms have market power, due to:<ul id="1f9d24f8-3134-46fe-9972-6639737d194d" class="bulleted-list"><li style="list-style-type:circle">selling a unique variety of product</li></ul><ul id="a5947f03-dc12-4aa8-94f1-d15f8ab55fc4" class="bulleted-list"><li style="list-style-type:circle">having a large market share and few significant competitiors</li></ul></li></ul><ul id="b735b5ea-c583-4f5b-886c-5eb93f1c9d44" class="bulleted-list"><li style="list-style-type:disc">In many such cases, most of the results from this chapter apply, including:<ul id="c90cacb0-462c-4ff4-98f1-46d2c8ddda91" class="bulleted-list"><li style="list-style-type:circle">markup of price over marginal cost</li></ul><ul id="39b69aff-a79a-40e9-b4b3-bdbc6d7dc9ec" class="bulleted-list"><li style="list-style-type:circle">deadweight loss</li></ul></li></ul><h1 id="0e4080d2-7772-4b94-b424-6189cd60ec42" class="">4.3 - Price Discrimination</h1><ul id="a090d18d-50c8-44ce-8397-5f9b12deeaf8" class="bulleted-list"><li style="list-style-type:disc">Discrimination: treating people differently based on some characteristic, e.g. race or gender.</li></ul><ul id="667a6cb4-682e-4cce-8187-fbf0cc5f904d" class="bulleted-list"><li style="list-style-type:disc"><strong>Price discrimination: </strong>selling the same good at different prices to different buyers. </li></ul><ul id="4043b4c0-7348-4ca8-a2be-e736c636552a" class="bulleted-list"><li style="list-style-type:disc">The characteristic used in price determination is willingness to pay (WTP):<ul id="8555bf02-b4cd-4649-a2eb-762a6442910d" class="bulleted-list"><li style="list-style-type:circle">A firm can increase profit by increasing the price for buyers with a higher WTP.</li></ul></li></ul><h2 id="4e59ec72-8a13-4258-b6ef-10a9e4f30cbb" class="">Perfect Price Discrimination vs. Single Price Monopoly</h2><div id="f83e45f0-aff6-4706-836f-c1bd3cef3bdf" class="column-list"><div id="d76ea4d7-af37-44d2-9c2a-6b32cb58765e" style="width:50%" class="column"><p id="9b604725-fe97-4c28-a98a-0319de07b524" class="">In a <strong>single price monopoly</strong>, a firm charges a fixed price for all buyers. This price is greater than the MC for the good, and therefore results in a deadweight loss. </p><p id="ceef1620-8301-4d2e-9d82-3f8aa649ec34" class="">
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</p></div><div id="0ae38b61-0fd2-4e4f-a84a-7987860f1b27" style="width:50%" class="column"><figure id="f0a34be7-4ead-4563-bb69-e7475b6d94f3" class="image"><a href="Unit%204%20Imperfect%20Competition%201253df7788d6403d8022c5ef0d1b1dd7/Untitled.png"><img style="width:336px" src="Unit%204%20Imperfect%20Competition%201253df7788d6403d8022c5ef0d1b1dd7/Untitled.png"/></a></figure></div></div><div id="db819bba-383c-485d-83e3-00d30626b384" class="column-list"><div id="18d12b61-9f5f-4cfb-afc3-7471eb8f5d6c" style="width:50%" class="column"><figure id="7ceba0a1-5c4d-4815-b3a5-2154708570d7" class="image"><a href="Unit%204%20Imperfect%20Competition%201253df7788d6403d8022c5ef0d1b1dd7/Untitled%201.png"><img style="width:782px" src="Unit%204%20Imperfect%20Competition%201253df7788d6403d8022c5ef0d1b1dd7/Untitled%201.png"/></a></figure></div><div id="b433543c-81e5-4455-b781-65a931a70622" style="width:50%" class="column"><p id="922f29ea-589a-4950-ae61-51fbbac7e550" class="">With <strong>perfect price discrimination</strong>, the monopolist produces the competitive quantity, but instead of charging a fixed price, charges every individual buyer their WTP.</p><p id="5ac8319f-b814-4666-a199-bf6142ede11d" class="">In this instance, the monopolist captures all CS as profit. The area which was a deadweight loss for a single-price monopoly instead becomes profit for the monopolist.</p></div></div><h2 id="57dfecb4-74f1-4575-b744-0ad5eec896b0" class="">Price Discrimination in the Real World</h2><ul id="effe0776-aa2c-4f99-986f-328e6e6e70e4" class="bulleted-list"><li style="list-style-type:disc">Perfect price discrimination is not realistic in the real world:<ul id="75b374c9-d997-4001-aa1b-7c5f11d91451" class="bulleted-list"><li style="list-style-type:circle">No firm knows every buyer’s WTP</li></ul><ul id="ba916e9b-6960-406f-b79a-6ebb915677b1" class="bulleted-list"><li style="list-style-type:circle">Buyers do not reveal it to sellers</li></ul></li></ul><ul id="510c19aa-b520-49a9-a15c-363130345441" class="bulleted-list"><li style="list-style-type:disc">So, firms divide customers into groups based on some observable trait that is likely related to WTP, such as age.</li></ul><h1 id="42bd63c0-db6d-484a-82aa-cc639b162881" class="">4.4 - Monopolistic Competition</h1><p id="9ec62940-846f-41e9-bab7-c9f0bf111a97" class=""><strong>Monopolistic competition:</strong> many firms sell similar, <em>but not identical</em>, products.</p><h3 id="addf03e3-2714-445b-9177-96ff0abb9b4c" class="">Characteristics</h3><ul id="d16650b6-7b2e-470f-afe9-0dec8b0e7c7d" class="bulleted-list"><li style="list-style-type:disc">Many sellers</li></ul><ul id="ef661380-5eee-419e-91e0-fa0607d60a7f" class="bulleted-list"><li style="list-style-type:disc">Product differentiation</li></ul><ul id="22867c55-43c8-42db-82eb-b1dd8eb04a44" class="bulleted-list"><li style="list-style-type:disc">Free entry and exit</li></ul><h3 id="d20f3656-80bb-48b3-be89-603917b09f30" class="">Examples</h3><ul id="9e9e10a8-1de2-4a52-9e49-fa40e057c950" class="bulleted-list"><li style="list-style-type:disc">apartments</li></ul><ul id="9110380a-3658-4801-a1d6-e4e95ceee2c5" class="bulleted-list"><li style="list-style-type:disc">books</li></ul><ul id="df71a389-8508-4948-a80d-c08607cd6c38" class="bulleted-list"><li style="list-style-type:disc">bottled water</li></ul><ul id="f79ef905-3e3b-46d5-942e-2b2d7a68393b" class="bulleted-list"><li style="list-style-type:disc">clothing</li></ul><ul id="a8e68417-a20e-4c68-bc24-1fe54cee4a12" class="bulleted-list"><li style="list-style-type:disc">fast food</li></ul><ul id="74c92762-c597-4252-8612-ad460db13420" class="bulleted-list"><li style="list-style-type:disc">night clubs</li></ul><h2 id="5175422e-67e2-4c47-b44d-7b35ca6ce377" class="">Comparing Perfect and Monopolistic Competiton</h2><ul id="388ae955-5d57-4ce3-a94e-6a5eeb2db222" class="bulleted-list"><li style="list-style-type:disc"><strong>Number of sellers:</strong> both perfect and monopolistic competition have many sellers</li></ul><ul id="59ef98af-e2b5-4920-b43a-2719b8d28ac8" class="bulleted-list"><li style="list-style-type:disc"><strong>Free entry and exit:</strong> both</li></ul><ul id="bc46b590-6a5a-4cd5-8e4a-1dea3ea448c2" class="bulleted-list"><li style="list-style-type:disc"><strong>Long-run economic profits:</strong> zero for both, as a result of the freedom to enter and exit the market freely</li></ul><ul id="53112049-2bf2-46bd-9d77-12936407533e" class="bulleted-list"><li style="list-style-type:disc"><strong>Firms sell:</strong> identical products in perfect competition, differentiated products in monopolistic competition</li></ul><ul id="ab68c7a0-7d1b-43ab-961d-1b3fd567d4ad" class="bulleted-list"><li style="list-style-type:disc"><strong>Market power:</strong> none for perfect competition, some for monopolistic competition as they have the ability to create product differentiation. Location can actually be an important form of “product differentiation” for firms in monopolistic competition.</li></ul><ul id="f2f4e366-52ef-449f-99b5-6bb9209cb9bb" class="bulleted-list"><li style="list-style-type:disc"><strong><style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>D</mi></mrow><annotation encoding="application/x-tex">D</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.02778em;">D</span></span></span></span></span><span></span></span></strong><strong> curve facing firm:</strong> horizontal in perfect competition, downward sloping in monopolistic competition. This is because firms in monopolistic competition have some market power.</li></ul><h2 id="396b8e18-a8e6-4945-a2fd-7ed48c409e9a" class="">Comparing Monopoly and Monopolistic Competition</h2><ul id="3fc41220-35e8-4c11-b95e-0cad4fd65ea9" class="bulleted-list"><li style="list-style-type:disc"><strong>Number of sellers: </strong>one in a monopoly, many in monopolistic competition</li></ul><ul id="614cddfb-c5d3-4078-90f3-f354642b9941" class="bulleted-list"><li style="list-style-type:disc"><strong>Free entry/exit: </strong>no for monopoly, yes for monopolistic competition</li></ul><ul id="0cc5de64-ca3f-4107-9b66-f782d58dc81a" class="bulleted-list"><li style="list-style-type:disc"><strong>Long-run economic profits: </strong>positive for a monopoly, zero for monopolistic competition</li></ul><ul id="e38aa5e0-4da5-4430-a6b6-99786c88544b" class="bulleted-list"><li style="list-style-type:disc"><strong>Firm has market power?:</strong> yes for both, though monopolies obviously have more power</li></ul><ul id="d5851a29-a899-4cd7-8128-5a842e7402f1" class="bulleted-list"><li style="list-style-type:disc"><style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>D</mi></mrow><annotation encoding="application/x-tex">D</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.02778em;">D</span></span></span></span></span><span></span></span> <strong>curve facing firm: </strong>both are downward sloping, but monopolies actually face the market demand curve, while firms in monopolistic competition all have unique demand curves.</li></ul><ul id="f357f1e7-65c0-455d-95a8-3d0ac4abb111" class="bulleted-list"><li style="list-style-type:disc"><strong>Close substitutes: </strong>none for monopoly, many for monopolistic competition</li></ul><h2 id="4eac7c23-ebb1-45cf-b727-a090ba0b6c06" class="">Monopolistic Competition in the Short Run</h2><div id="d81ec097-1b20-41d1-8b78-eca6e75f24cb" class="column-list"><div id="bd3caba9-91aa-48d8-9c95-698d8a8c382c" style="width:50%" class="column"><figure id="2132fbfc-3433-4c47-bb04-a35492f333a0" class="image"><a href="Unit%204%20Imperfect%20Competition%201253df7788d6403d8022c5ef0d1b1dd7/Untitled%202.png"><img style="width:711px" src="Unit%204%20Imperfect%20Competition%201253df7788d6403d8022c5ef0d1b1dd7/Untitled%202.png"/></a><figcaption>Short Run Profit</figcaption></figure></div><div id="a529136a-ef4e-4412-b9f2-92cac90b9848" style="width:50%" class="column"><figure id="ae1ee595-d99b-4e39-a63e-46a893d1670b" class="image"><a href="Unit%204%20Imperfect%20Competition%201253df7788d6403d8022c5ef0d1b1dd7/Untitled%203.png"><img style="width:786px" src="Unit%204%20Imperfect%20Competition%201253df7788d6403d8022c5ef0d1b1dd7/Untitled%203.png"/></a><figcaption>Short Run Loss</figcaption></figure></div></div><p id="7961e447-6433-4d47-a700-f9399349d9d0" class="">At each <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>Q</mi></mrow><annotation encoding="application/x-tex">Q</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.8777699999999999em;vertical-align:-0.19444em;"></span><span class="mord mathnormal">Q</span></span></span></span></span><span></span></span>, <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MR</mtext><mo><</mo><mi>P</mi></mrow><annotation encoding="application/x-tex">\textrm{MR} < P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.72243em;vertical-align:-0.0391em;"></span><span class="mord text"><span class="mord textrm">MR</span></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel"><</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span>. To maximize profit, the firm produces <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>Q</mi></mrow><annotation encoding="application/x-tex">Q</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.8777699999999999em;vertical-align:-0.19444em;"></span><span class="mord mathnormal">Q</span></span></span></span></span><span></span></span> where <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MR</mtext><mo>=</mo><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">\textrm{MR} = \textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MR</span></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">=</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span></span></span></span></span><span></span></span>, and then uses the <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>D</mi></mrow><annotation encoding="application/x-tex">D</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.02778em;">D</span></span></span></span></span><span></span></span> curve to set <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi></mrow><annotation encoding="application/x-tex">P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span>. The area of profit or loss is the difference between <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi></mrow><annotation encoding="application/x-tex">P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span> and <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>ATC</mtext></mrow><annotation encoding="application/x-tex">\textrm{ATC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">ATC</span></span></span></span></span></span><span></span></span>, times the quantity <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>Q</mi></mrow><annotation encoding="application/x-tex">Q</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.8777699999999999em;vertical-align:-0.19444em;"></span><span class="mord mathnormal">Q</span></span></span></span></span><span></span></span> produced at the profit maximizing quantity of output.</p><h2 id="f4ee2eb3-a72c-418a-a047-5fdef7bd09d0" class="">Going from Short Run to Long Run</h2><p id="7e3d1640-6de5-4c7a-9233-b485753e5779" class="">In the short run, firms in monopolistic competition behave very similarly to monopolies.</p><p id="ddd8b868-3692-4bc6-b0d9-0cdc61e8d25f" class="">In the long run, however, entry and exit in monopolistic competition drive economic profit to zero, similarly to perfect competition.</p><ul id="94727004-d10c-4e78-a357-6a9343707035" class="bulleted-list"><li style="list-style-type:disc">When monopolistic firms earn a profit in the short run, it compels firms to enter which provides more close substitutes and less market share for the existing firms. This leads to the demand and <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MR</mtext></mrow><annotation encoding="application/x-tex">\textrm{MR}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MR</span></span></span></span></span></span><span></span></span> curves shifting left together so that the demand curve becomes tangent with <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>ATC</mtext></mrow><annotation encoding="application/x-tex">\textrm{ATC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">ATC</span></span></span></span></span></span><span></span></span>.</li></ul><ul id="a318f5bf-0c38-48e6-ab0c-6f1af89e231c" class="bulleted-list"><li style="list-style-type:disc">When monopolistic firms earn a loss in the short run, it compels firms to exit which provides less close substitutes and more market share for the existing firms. This leads to the demand and <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MR</mtext></mrow><annotation encoding="application/x-tex">\textrm{MR}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MR</span></span></span></span></span></span><span></span></span> curves shifting right together so that the demand curve becomes tangent with <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>ATC</mtext></mrow><annotation encoding="application/x-tex">\textrm{ATC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">ATC</span></span></span></span></span></span><span></span></span>.</li></ul><h2 id="d142b7bf-35ed-4327-9523-441e948b3948" class="">Monopolistic Competition in the Long Run</h2><div id="a0cd164b-4de3-4336-b1f4-87799e0828fa" class="column-list"><div id="80ede748-d000-44ac-875d-2632204fc37d" style="width:50%" class="column"><p id="4eeadb63-f61e-4cec-bb7c-8b5e1ff8ad8d" class="">In the long run, the economies of scale portion of the <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>ATC</mtext></mrow><annotation encoding="application/x-tex">\textrm{ATC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">ATC</span></span></span></span></span></span><span></span></span> curve will become tangent to the demand curve at the profit-maximizing price level. This results in a zero-profit equilibrium for firms in monopolistic competition.</p><p id="9409622c-a9b2-4680-8bfa-178f6c6d5d40" class="">Notice that the firm charges a markup of price over marginal cost and does not produce at minimum <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>ATC</mtext></mrow><annotation encoding="application/x-tex">\textrm{ATC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">ATC</span></span></span></span></span></span><span></span></span>.</p></div><div id="d425cab0-d58a-4689-8d62-2a28c00f63e5" style="width:50%" class="column"><figure id="17ff83e0-9326-4b52-9fef-b682ab8670f6" class="image"><a href="Unit%204%20Imperfect%20Competition%201253df7788d6403d8022c5ef0d1b1dd7/Untitled%204.png"><img style="width:806px" src="Unit%204%20Imperfect%20Competition%201253df7788d6403d8022c5ef0d1b1dd7/Untitled%204.png"/></a></figure></div></div><h2 id="f231ba7f-96f5-4d22-9318-1e06da387f55" class="">Why Monopolistic Competition is Less Efficient than Perfect Competition</h2><ol type="1" id="3477c0b2-0c62-40c2-8440-bf4f171dd00f" class="numbered-list" start="1"><li><strong>Excess capacity</strong><ul id="61117077-8279-46e5-b4f7-9fe5b11d57c9" class="bulleted-list"><li style="list-style-type:disc">The monopolistic competitor operates on the downward-sloping part of its <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>ATC</mtext></mrow><annotation encoding="application/x-tex">\textrm{ATC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">ATC</span></span></span></span></span></span><span></span></span> curve, therefore producing less than the cost-minimizing output.</li></ul><ul id="f1390eaf-8ee1-447e-82b2-f5bc101397f8" class="bulleted-list"><li style="list-style-type:disc">Under perfect competition, firms produce the quantity that minimizes <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>ATC</mtext></mrow><annotation encoding="application/x-tex">\textrm{ATC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">ATC</span></span></span></span></span></span><span></span></span>.</li></ul></li></ol><ol type="1" id="89e7cd81-ec4d-48c3-bcc1-56d1e0e922a1" class="numbered-list" start="2"><li><strong>Markup over marginal cost</strong><ul id="ee301cb9-8c41-4828-9942-c2e7efb9ec74" class="bulleted-list"><li style="list-style-type:disc">Under monopolistic competition, <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi><mo>></mo><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">P > \textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.72243em;vertical-align:-0.0391em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span></span></span></span></span><span></span></span>.</li></ul><ul id="a7c5d642-7eb9-4535-966f-db2b8cd4cca5" class="bulleted-list"><li style="list-style-type:disc">Under perfect competition, <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi><mo>=</mo><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">P = \textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">=</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span></span></span></span></span><span></span></span>.</li></ul></li></ol><h2 id="88f9350c-353a-4677-a7ac-496388000ff2" class="">Monopolistic Competition and Welfare</h2><ul id="c10213be-c357-4ed2-90a7-54ae674da542" class="bulleted-list"><li style="list-style-type:disc">Monopolistically competitive markets do not have all the desirable properties of perfectly competitive markets.</li></ul><ul id="88d0905a-f432-4aa0-ae3c-7b13a2f4574c" class="bulleted-list"><li style="list-style-type:disc">Because <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi><mo>></mo><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">P > \textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.72243em;vertical-align:-0.0391em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span></span></span></span></span><span></span></span>, the market quantity is below the socially efficient quantity.</li></ul><ul id="9ea3c89d-e722-4f7b-93be-09fa51d22d77" class="bulleted-list"><li style="list-style-type:disc">Yet, it is not easy for policymakers to fix this problem: firms earn zero profits, so cannot require them to reduce prices.</li></ul><ul id="04966d79-c8da-4855-b790-89a44f0080c7" class="bulleted-list"><li style="list-style-type:disc">Number of firms in the market may not be optimal, due to external effects from the entry of new firms:<ul id="70dd452a-7483-4cc2-b73c-f25a67f6136a" class="bulleted-list"><li style="list-style-type:circle"><strong>The product-variety externality:</strong> surplus <em>consumers</em> get from the introduction of new products.</li></ul><ul id="3ae75670-b28d-48dc-9d45-3455c10b9489" class="bulleted-list"><li style="list-style-type:circle"><strong>The business-stealing externality:</strong> losses incurred by existing firms when new firms enter market.</li></ul></li></ul><ul id="51021966-1c0d-42be-b6eb-3028ecba281b" class="bulleted-list"><li style="list-style-type:disc">The inefficiencies of monopolistic competition are subtle and hard to measure. No easy way for policymakers to improve the market outcome.</li></ul><h2 id="93f718c2-b43e-4c03-aca3-e21e4c1787df" class="">Advertising</h2><ul id="91202ff7-b9cc-425c-bf00-82ef5cf7b6ec" class="bulleted-list"><li style="list-style-type:disc">In monopolistically competitive industries, product differentiation and markup pricing lead naturally to the use of advertising.</li></ul><ul id="f0deca9e-18c7-4865-9b68-f2c33b63136a" class="bulleted-list"><li style="list-style-type:disc">In general, the more differentiated the products, the more advertising firms buy.</li></ul><ul id="f2a7856a-4357-4df2-88df-a2f1e8c96dbb" class="bulleted-list"><li style="list-style-type:disc">Economists disagree the social value of advertising.</li></ul><h3 id="f26a116f-f325-4eec-afd6-d0bb44030817" class="">Critiques of Advertising</h3><ul id="8e34d2d1-b999-4334-a222-637b94a7a02f" class="bulleted-list"><li style="list-style-type:disc">Society is wasting the resources it devotes to advertising.</li></ul><ul id="7d9aef73-6afc-4965-96fe-1d2ed11563fc" class="bulleted-list"><li style="list-style-type:disc">Firms advertise to manipulate people’s tastes.</li></ul><ul id="9aa9c819-49cb-4182-8a77-c6544e1fb0d6" class="bulleted-list"><li style="list-style-type:disc">Advertising impedes competition—it creates the perception that products are more differentiated than they really are, allowing higher markups.</li></ul><h3 id="ba1ab1fe-89c9-4745-80bb-381ba7bfea56" class="">Defense of Advertising</h3><ul id="999059c6-fb6e-475e-a11f-a943413ce80f" class="bulleted-list"><li style="list-style-type:disc">It provides useful information to buyers.</li></ul><ul id="0f36b804-dde6-47eb-ba63-46d908dc13b4" class="bulleted-list"><li style="list-style-type:disc">Informed buyers can more easily find and exploit price differences.</li></ul><ul id="77bce8e8-e428-4303-8ccd-eeebe7739a98" class="bulleted-list"><li style="list-style-type:disc">Thus, advertising promotes competition and reduces market power.</li></ul><h3 id="46c29fcb-b36e-4f75-b813-348930167381" class="">Advertising as a Signal of Quality</h3><p id="50162ca5-2073-4cac-9948-36abbbd0ddc5" class="">A firm’s willingness to spend huge amounts on advertising may signal the quality of its product to consumers, regardless of the content of ads.</p><ul id="64c1734e-43eb-49d9-a6b2-6585b84be700" class="bulleted-list"><li style="list-style-type:disc">Ads may convince buyers to try a product once, but the product must be of high quality for people to become repeat buyers.</li></ul><ul id="6706d2ab-57b6-4c61-9df5-34c29fa876c4" class="bulleted-list"><li style="list-style-type:disc">The most expensive ads are not worthwhile unless they lead to repeat buyers.</li></ul><ul id="e592bd11-a4e8-40ec-bc70-935b7db9ea0d" class="bulleted-list"><li style="list-style-type:disc">When consumers see expensive ads, they think the product must be good if the company is willing to spend so much on advertising.</li></ul><h2 id="8e5e00b0-4c95-4bc0-94b8-98767c4492cc" class="">Brand Names</h2><p id="471683cd-4565-4ae7-8b3d-682af0bc5aa1" class="">In many markets, brand name products coexist with generic ones. Firms with brand names usually spend more on advertising and charge higher prices for the products. They are able to charge more by creating a brand image.</p><h3 id="03a85cdf-eef9-4370-949d-ee1ef408613c" class="">Critique of Brand Names</h3><ul id="87cf6b8b-e786-46cd-8cdc-5f3a2b086d78" class="bulleted-list"><li style="list-style-type:disc">Brand names cause consumers to perceive differences that do not really exist.</li></ul><ul id="cb175e94-9556-49a8-9f36-73bde1a327be" class="bulleted-list"><li style="list-style-type:disc">Consumers’ willingness to pay more for brand names is irrational, fostered by advertising.</li></ul><ul id="1383a018-084c-48c4-b13a-253da855cd66" class="bulleted-list"><li style="list-style-type:disc">Eliminating govt protection of trademarks would reduce influence of brand names, result in lower prices.</li></ul><h3 id="36b61044-4a99-4d41-a9ab-7bafa07cd8d2" class="">Defense of Brand Names</h3><ul id="771c8685-acf0-4a58-9e16-352813b9c471" class="bulleted-list"><li style="list-style-type:disc">Brand names provide information about quality to consumers.</li></ul><ul id="31662cd4-f5b1-4308-971c-1680bee8dfbc" class="bulleted-list"><li style="list-style-type:disc">Companies with brand names have incentive to maintain quality, to protect the reputation of their brand names.</li></ul><h1 id="9f71112b-5968-42b4-8ddb-0756fccd9fe7" class="">4.5 - Oligopoly and Game Theory</h1><h2 id="7a8e209a-77e3-42e3-8d8f-3962d50cf2d2" class="">Measuring Market Concentration</h2><ul id="0922ec43-7458-4318-8459-1621104c6d66" class="bulleted-list"><li style="list-style-type:disc"><strong>Concentration ratio:</strong> the percentage of the market’s total output supplied by its four largest firms.</li></ul><ul id="115a9102-5156-4509-a2b3-dbef7fe364db" class="bulleted-list"><li style="list-style-type:disc">The higher the concentration ratio, the less competition.</li></ul><ul id="f5005449-5c00-429a-9c09-d1ddc8ab9656" class="bulleted-list"><li style="list-style-type:disc">This chapter focuses on oligopoly, a market structure with high concentration ratios.</li></ul><h2 id="842e373c-0e63-4607-939c-b8b2fb186c1d" class="">Oligopoly</h2><ul id="c57cdf23-2e5a-41dc-bbd9-802ffbb94ef1" class="bulleted-list"><li style="list-style-type:disc"><strong>Oligopoly: </strong>a market structure in which only a few sellers offer similar or identical products.</li></ul><ul id="d23e0af7-7f35-4bb9-9461-08cfc331dbea" class="bulleted-list"><li style="list-style-type:disc">Strategic behavior in oligopoly:
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A firm’s decisions about <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi></mrow><annotation encoding="application/x-tex">P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span> or <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>Q</mi></mrow><annotation encoding="application/x-tex">Q</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.8777699999999999em;vertical-align:-0.19444em;"></span><span class="mord mathnormal">Q</span></span></span></span></span><span></span></span> can affect other firms and cause them to react. The firm will consider these reactions when making decisions.</li></ul><ul id="5332bf1f-57ed-4098-8a55-3ce5094d2968" class="bulleted-list"><li style="list-style-type:disc"><strong>Game theory: </strong>the study of how people behave in strategic situations.</li></ul><ul id="47f44a5b-3a69-4de0-b089-7c870ca204ac" class="bulleted-list"><li style="list-style-type:disc"><strong>Collusion:</strong> an agreement among firms in a market about quantities to produce or prices to charge</li></ul><ul id="7eea15e8-dabc-49d6-9045-9b136cec375a" class="bulleted-list"><li style="list-style-type:disc"><strong>Cartel:</strong> a group of firms acting in unison</li></ul><h2 id="21c832ef-63bd-4843-aa25-cefdc4aa4417" class="">Collusion vs. Self-Interest</h2><ul id="22607d04-727e-4b32-8bc0-1db4f452361b" class="bulleted-list"><li style="list-style-type:disc">In a duopoly, both firms would be better off if both stick to the cartel agreement.</li></ul><ul id="6f568e2e-c113-43f4-b445-a9e0ae7b6bd9" class="bulleted-list"><li style="list-style-type:disc">But each firm has an incentive to renege on the agreement.</li></ul><ul id="cda83c43-a581-4c6c-868e-70cb20c79cfa" class="bulleted-list"><li style="list-style-type:disc">Lesson: It is difficult for oligopoly firms to form cartels and honor their agreements.</li></ul><h2 id="e96b8998-431b-4698-8db6-0fa3c3148afc" class="">The Equilibrium for an Oligopoly</h2><ul id="b80bdc4b-f80e-424a-ab23-3c13c1737242" class="bulleted-list"><li style="list-style-type:disc"><strong>Nash equilibrium: </strong>a situation in which economic participants interacting with one another each choose their best strategy given the strategies that all the others have chosen.</li></ul><h2 id="40e1de53-cffa-4107-9889-a5067477ed42" class="">A Comparison of Market Outcomes</h2><p id="d88b18e5-c6e4-4dc2-9715-2d1b76042ced" class="">When firms in an oligopoly individually choose production to maximize profit,</p><ul id="e0acae5b-8c90-4f2e-8684-2424d0af6a8b" class="bulleted-list"><li style="list-style-type:disc">Oligopoly <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>Q</mi></mrow><annotation encoding="application/x-tex">Q</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.8777699999999999em;vertical-align:-0.19444em;"></span><span class="mord mathnormal">Q</span></span></span></span></span><span></span></span> is greater than monopoly <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>Q</mi></mrow><annotation encoding="application/x-tex">Q</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.8777699999999999em;vertical-align:-0.19444em;"></span><span class="mord mathnormal">Q</span></span></span></span></span><span></span></span> but smaller than competitive <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>Q</mi></mrow><annotation encoding="application/x-tex">Q</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.8777699999999999em;vertical-align:-0.19444em;"></span><span class="mord mathnormal">Q</span></span></span></span></span><span></span></span>.</li></ul><ul id="ea5360a5-82f3-4e7f-b51e-4d1323e94772" class="bulleted-list"><li style="list-style-type:disc">Oligopoly <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi></mrow><annotation encoding="application/x-tex">P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span> is greater than competitive <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi></mrow><annotation encoding="application/x-tex">P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span> but less than monopoly <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi></mrow><annotation encoding="application/x-tex">P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span>.</li></ul><h2 id="873608d8-9aee-4e43-831f-48f1021618ae" class="">The Output and Price Effects</h2><ul id="19e6999e-7d7b-43d2-b9c9-716253141a0d" class="bulleted-list"><li style="list-style-type:disc">Increasing output has two effects on a firm’s profits:<ul id="223349d3-aed5-46e4-8b27-0b809c6767c6" class="bulleted-list"><li style="list-style-type:circle"><strong>Output effect:</strong>
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If <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi><mo>></mo><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">P > \textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.72243em;vertical-align:-0.0391em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span><span class="mspace" style="margin-right:0.2777777777777778em;"></span><span class="mrel">></span><span class="mspace" style="margin-right:0.2777777777777778em;"></span></span><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span></span></span></span></span><span></span></span>, increasing output raises profits.</li></ul><ul id="90966929-868b-4791-b6ea-b7eeaed2eafb" class="bulleted-list"><li style="list-style-type:circle"><strong>Price effect:
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</strong>Raising output increases market quantity, which reduces price and reduces profit on all units sold.</li></ul></li></ul><ul id="50c5d7ef-20a1-462a-a8ae-791313ebed14" class="bulleted-list"><li style="list-style-type:disc">If output effect > price effect, then the firm increases production.</li></ul><ul id="802d994e-184f-4eee-9b48-6a7707df361b" class="bulleted-list"><li style="list-style-type:disc">If price effect > output effect, then the firm reduces production.</li></ul><h2 id="5cdd8512-889f-4059-a61c-401d3070267a" class="">The Size of the Oligopoly</h2><p id="8138a076-2264-41ce-bf40-35700a10378f" class="">As the number of firms in the market increases,</p><ul id="4bae7bfe-ce66-410b-9c69-1ab82a07ac94" class="bulleted-list"><li style="list-style-type:disc">the price effect becomes smaller</li></ul><ul id="ef74f06d-d821-4dde-b531-d8fd31e1ae3d" class="bulleted-list"><li style="list-style-type:disc">the oligopoly looks more and more like a competitive market</li></ul><ul id="f44c6c88-65bf-4ac5-9f04-614836108c20" class="bulleted-list"><li style="list-style-type:disc"><style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi></mrow><annotation encoding="application/x-tex">P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span> approaches <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">\textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span></span></span></span></span><span></span></span></li></ul><ul id="8c99f5e3-5b14-495e-80d1-a2f270e8339c" class="bulleted-list"><li style="list-style-type:disc">the market quantity approaches the socially efficient quantity</li></ul><h2 id="a42816be-e631-4f20-858d-2eaad92464cc" class="">Game Theory</h2><ul id="15a2381c-5a11-4e4c-ad93-8122c1fe1f90" class="bulleted-list"><li style="list-style-type:disc"><strong>Game theory</strong> helps us understand oligopoly and other situations where “players” interact and behave strategically.</li></ul><ul id="ca0fb57b-5c93-4a11-a357-c46ad690a53e" class="bulleted-list"><li style="list-style-type:disc"><strong>Dominant strategy: </strong>a strategy that is best for a player in a game regardless of the strategies chosen by the other players.</li></ul><ul id="2ae9369f-0e29-4a13-af34-2d634446a615" class="bulleted-list"><li style="list-style-type:disc"><strong>Prisoners’ dilemma:</strong> a “game” between two captured criminals that illustrates why cooperation is difficult even when it is mutually beneficial.</li></ul><h2 id="6542e54f-d390-4105-9f7e-b302d7ce3ed0" class="">Oligopolies as a Prisoners’ Dilemma</h2><ul id="73e62def-73f5-4929-a2b7-3961583fc3de" class="bulleted-list"><li style="list-style-type:disc">When oligopolies form a cartel in hopes of reaching the monopoly outcome, they become players in a prisoners’ dilemma.</li></ul><ul id="01c7cb68-8c7a-49a2-a5a1-26bb2bfd489d" class="bulleted-list"><li style="list-style-type:disc">Our earlier example:<ul id="e546533c-752e-4fcc-9a23-d6f2643bb608" class="bulleted-list"><li style="list-style-type:circle">T-Mobile and Verizon are duopolists in Smalltown.</li></ul><ul id="0363a6e2-77a6-4830-8ad0-28530eae35ff" class="bulleted-list"><li style="list-style-type:circle">The cartel outcome maximizes profits: Each firm agrees to serve Q = 30 customers.</li></ul></li></ul><ul id="1990a3b3-b897-4fb7-8775-6d0fd8176920" class="bulleted-list"><li style="list-style-type:disc">Both firms will end up choosing their dominant strategy, causing a loss for both.</li></ul><figure id="7c8f9a3a-8ed6-45df-8669-03ed42540c7b" class="image"><a href="Unit%204%20Imperfect%20Competition%201253df7788d6403d8022c5ef0d1b1dd7/Untitled%205.png"><img style="width:528px" src="Unit%204%20Imperfect%20Competition%201253df7788d6403d8022c5ef0d1b1dd7/Untitled%205.png"/></a></figure><h2 id="c788b03d-dcae-47fd-b78b-2028d08e80ff" class="">Other Examples of the Prisoners’ Dilemma</h2><h3 id="1489d6bc-0255-4683-bcc4-52d4cb273cef" class="">Ad Wars</h3><p id="d32dffaf-0e02-471d-bb07-46250b38c9c2" class="">Two firms spend millions on TV ads to steal business from each other. Each firm’s ad cancels out the effects of the other, and both firms’ profits fall by the cost of the ads.</p><h3 id="8d8475b1-f050-40c7-90cd-f35c19c927a9" class="">Organization of Petroleum Exporting Countries (OPEC)</h3><p id="0f5c5a3f-df54-41c3-84a4-4f45f5bca105" class="">Member countries try to act like a cartel, agree to limit oil production to boost prices & profits. But agreements sometimes break down when individual countries renege.</p><h3 id="489cf16f-046b-498a-86ee-feb9bb48017c" class="">Arms Race between Military Superpowers</h3><p id="a8a98b5e-40ac-4279-8f22-961d4e7835a6" class="">Each country would be better off if both disarm, but each has a dominant strategy of arming.</p><h3 id="e9248ec5-1340-424d-a60d-5d6586d28256" class="">Common Resources</h3><p id="bb4067f3-3d36-4f54-ae36-5dc6e2a8020b" class="">All would be better off if everyone conserved common resources, but each person’s dominant strategy is overusing the resources.</p><h2 id="1249870e-eec3-4c48-bd3c-16c0d9cfaea2" class="">Prisoners’ Dilemma and Society’s Welfare</h2><ul id="08beefd2-57da-4e50-9eda-f359279a9ecb" class="bulleted-list"><li style="list-style-type:disc">The noncooperative oligopoly equilibrium:<ul id="acb65a84-b957-4c3f-b3d4-2e58905ba573" class="bulleted-list"><li style="list-style-type:circle">Is bad for oligopoly firms, preventing them from achieving monopoly profits</li></ul><ul id="e843b065-541b-48ce-885f-b5f08e9c6da2" class="bulleted-list"><li style="list-style-type:circle">Is good for society:<ul id="cb1defa2-d1ad-474c-97e6-0ec68ec47e22" class="bulleted-list"><li style="list-style-type:square"><style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>Q</mi></mrow><annotation encoding="application/x-tex">Q</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.8777699999999999em;vertical-align:-0.19444em;"></span><span class="mord mathnormal">Q</span></span></span></span></span><span></span></span> is closer to the socially efficient output</li></ul><ul id="322970cc-0cb8-4648-a176-48ef9a063359" class="bulleted-list"><li style="list-style-type:square"><style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mi>P</mi></mrow><annotation encoding="application/x-tex">P</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord mathnormal" style="margin-right:0.13889em;">P</span></span></span></span></span><span></span></span> is closer to <style>@import url('https://cdnjs.cloudflare.com/ajax/libs/KaTeX/0.13.2/katex.min.css')</style><span data-token-index="0" contenteditable="false" class="notion-text-equation-token" style="user-select:all;-webkit-user-select:all;-moz-user-select:all"><span></span><span><span class="katex"><span class="katex-mathml"><math xmlns="http://www.w3.org/1998/Math/MathML"><semantics><mrow><mtext>MC</mtext></mrow><annotation encoding="application/x-tex">\textrm{MC}</annotation></semantics></math></span><span class="katex-html" aria-hidden="true"><span class="base"><span class="strut" style="height:0.68333em;vertical-align:0em;"></span><span class="mord text"><span class="mord textrm">MC</span></span></span></span></span></span><span></span></span></li></ul></li></ul></li></ul><ul id="8fd485c0-c258-4488-98d3-a948172be8bb" class="bulleted-list"><li style="list-style-type:disc">In other prisoners’ dilemmas, the inability to cooperate may reduce social welfare.<ul id="8749ed5e-5f84-4e0f-8295-81750ccfdf19" class="bulleted-list"><li style="list-style-type:circle">e.g. arms race, overuse of common resources</li></ul></li></ul><h2 id="10b77c33-9cd4-4f7a-928e-aaff3cd75bb2" class="">Why People Sometimes Cooperate</h2><ul id="5e5f17b4-c2b8-40f0-8b1d-ac53f15cd6cc" class="bulleted-list"><li style="list-style-type:disc">When the game is repeated many times, cooperation may be possible.</li></ul><ul id="258ba51d-6323-4d07-a617-c0dd16279e39" class="bulleted-list"><li style="list-style-type:disc">These strategies may lead to cooperation:<ul id="2c7152a8-0a2e-4b21-9893-a5ac318fcc8c" class="bulleted-list"><li style="list-style-type:circle">If your rival reneges in one round, you renege in all subsequent rounds.</li></ul><ul id="93d3379f-4e28-4ae8-8173-738324adf602" class="bulleted-list"><li style="list-style-type:circle"><strong>“Tit-for-tat”</strong>: Whatever your rival does in one round (whether renege or cooperate), you do in the following round.</li></ul></li></ul><h2 id="acb0eeea-add9-4a4b-839d-54123b47c1a0" class="">Public Policy Toward Oligopolies</h2><ul id="d490ee3f-9136-46c9-a345-126d3b8aa309" class="bulleted-list"><li style="list-style-type:disc">In oligopolies, production is too low and prices are too high, relative to the social optimum.</li></ul><ul id="93662895-0a04-4573-b423-44e081b4fef3" class="bulleted-list"><li style="list-style-type:disc"><strong>Role for policymakers: </strong>
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Promote competition, prevent cooperation to move the oligopoly outcome closer to the efficient outcome.</li></ul><h2 id="f68c8d49-1599-4974-8fc3-172858bf0d88" class="">Controversies over Antitrust Policy</h2><ul id="68e433dd-42f8-4d46-b989-0e23072cf6f7" class="bulleted-list"><li style="list-style-type:disc">Most people agree that price-fixing agreements among competitors should be illegal.</li></ul><ul id="c85498c8-68dd-4b66-add4-911c6d9914ef" class="bulleted-list"><li style="list-style-type:disc">Some economists are concerned that policymakers go too far when using antitrust laws to stifle business practices that are not necessarily harmful, and may have legitimate objectives.</li></ul><ul id="c729e417-b511-4c29-9e48-9763eac4867c" class="bulleted-list"><li style="list-style-type:disc">We consider three such practices:<ul id="36b573c5-35b4-4a03-88fc-b33fc2e2dcd4" class="bulleted-list"><li style="list-style-type:circle"><strong>Resale Price Maintenance (“Fair Trade”)</strong><ul id="238aada0-5f0d-4459-8f42-3eff2252fdc3" class="bulleted-list"><li style="list-style-type:square">Occurs when a manufacturer imposes lower limits on the prices retailers can charge.</li></ul><ul id="56eea2fe-1e10-4b23-b8e2-cd6dcd8c7ae6" class="bulleted-list"><li style="list-style-type:square">Is often opposed because it appears to reduce competition at the retail level.</li></ul><ul id="e92faffa-7288-44d8-8530-e779db3fa1dc" class="bulleted-list"><li style="list-style-type:square">Yet, any market power the manufacturer has is at the wholesale level; manufacturers do not gain from restricting competition at the retail level.</li></ul><ul id="3d9c9ff6-18b3-4abb-b0ed-269f1d3b33f9" class="bulleted-list"><li style="list-style-type:square">The practice has a legitimate objective: preventing discount retailers from free-riding on the services provided by full-service retailers.</li></ul></li></ul><ul id="29c48197-6c35-434c-8708-ea520c6681d7" class="bulleted-list"><li style="list-style-type:circle"><strong>Predatory Pricing</strong><ul id="c364645c-f2ee-4532-bccc-a3cd183ceecb" class="bulleted-list"><li style="list-style-type:square">Occurs when a firm cuts prices to prevent entry or drive a competitor out of the market, so that it can charge monopoly prices later.</li></ul><ul id="e57140ab-6a8b-4dab-95f5-ffa5dd0e2de1" class="bulleted-list"><li style="list-style-type:square">Illegal under antitrust laws, but hard for the courts to determine when a price cut is predatory and when it is competitive & beneficial to consumers.</li></ul><ul id="8eb9bf7c-2b17-48e9-acf5-335d5cbe6e53" class="bulleted-list"><li style="list-style-type:square">Many economists doubt that predatory pricing is a rational strategy:<ul id="a5da78da-d221-41b9-b16b-8aece273967a" class="bulleted-list"><li style="list-style-type:disc">It involves selling at a loss, which is extremely costly for the firm.</li></ul><ul id="2001c601-60b5-487a-ae41-57569eee2867" class="bulleted-list"><li style="list-style-type:disc">It can backfire.</li></ul></li></ul></li></ul><ul id="1d9756e3-a023-42b5-ac99-947d98c3970b" class="bulleted-list"><li style="list-style-type:circle"><strong>Tying</strong><ul id="98699b5a-a805-4687-8912-55bb8a0c8878" class="bulleted-list"><li style="list-style-type:square">Occurs when a manufacturer bundles two products together and sells them for one price (e.g., Microsoft including a browser with its operating system)</li></ul><ul id="264705f8-6455-4242-8cd7-912d42ae6709" class="bulleted-list"><li style="list-style-type:square">Critics argue that tying gives firms more market power by connecting weak products to strong ones.</li></ul><ul id="e011a634-06ac-423b-9ce6-f9676363724f" class="bulleted-list"><li style="list-style-type:square">Others counter that tying cannot change market power: Buyers are not willing to pay more for two goods together than for the goods separately.</li></ul><ul id="ecac8d04-b998-47ad-8c46-e2b98bcce88f" class="bulleted-list"><li style="list-style-type:square">Firms may use tying for price discrimination, which is not illegal, and which sometimes increases economic efficiency.</li></ul></li></ul></li></ul><p id="d9266616-57bb-40d7-8898-969bf92f68b4" class="">
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