persaingan monopolistic dan oligopoly (pyndick)

Chapter 12
Monopolistic
Competition and
Oligopoly

Topics to be Discussed


Monopolistic Competition



Oligopoly



Price Competition



Competition Versus Collusion: The

Prisoners’ Dilemma

Chapter 12

Slide 2

Topics to be Discussed


Implications of the Prisoners’ Dilemma
for Oligopolistic Pricing



Cartels

Chapter 12

Slide 3

Monopolistic Competition


Characteristics
1) Many firms
2) Free entry and exit
3) Differentiated product

Chapter 12

Slide 4

Monopolistic Competition


The amount of monopoly power
depends on the degree of differentiation.



Examples of this very common market
structure include:
Toothpaste
Soap
Cold

Chapter 12

remedies

Slide 5

Monopolistic Competition


Toothpaste


Crest and monopoly power


Procter & Gamble is the sole producer of
Crest



Consumers can have a preference for
Crest---taste, reputation, decay preventing
efficacy



The greater the preference (differentiation)
the higher the price.

Chapter 12

Slide 6

Monopolistic Competition



Question
 Does

Procter & Gamble have much monopoly
power in the market for Crest?

Chapter 12

Slide 7

Monopolistic Competition


The Makings of Monopolistic Competition
Two

important characteristics



Differentiated but highly substitutable
products



Free entry and exit

Chapter 12

Slide 8

A Monopolistically Competitive
Firm in the Short and Long Run
$/Q

Short Run

$/Q

MC

Long Run

MC

AC

AC

PSR
PLR
DSR
DLR
MRSR
QSR

Quantity

MRLR
QLR

Quantity

A Monopolistically Competitive
Firm in the Short and Long Run


Observations (short-run)
Downward

sloping demand--differentiated

product
Demand
MR

MC -- some monopoly power
Slide

Comparison of Monopolistically Competitive
Equilibrium and Perfectly Competitive Equilibrium
Monopolistic Competition

Perfect Competition
$/Q

$/Q

MC

Deadweight
loss

AC

MC

AC

P
PC

D = MR
DLR
MRLR
QC

Quantity

QMC

Quantity

Monopolistic Competition


Monopolistic Competition and Economic
Efficiency

The

monopoly power (differentiation) yields
a higher price than perfect competition. If
price was lowered to the point where
MC = D, consumer surplus would increase
by the yellow triangle.

Chapter 12

Slide

Monopolistic Competition


Monopolistic Competition and Economic
Efficiency
With

no economic profits in the long run,
the firm is still not producing at minimum
AC and excess capacity exists.

Chapter 12

Slide

Monopolistic Competition


Questions
1) If the market became competitive,
what would happen to output
and price?
2) Should monopolistic competition be
regulated?

Chapter 12

Slide

Monopolistic Competition


Questions
3) What is the degree of monopoly
power?
4) What is the benefit of product
diversity?

Chapter 12

Slide

Monopolistic Competition
in the Market for Colas and Coffee


The markets for soft drinks and coffee
illustrate the characteristics of
monopolistic competition.

Chapter 12

Slide

Elasticities of Demand for
Brands of Colas and Coffee
Brand

Colas:
Ground Coffee:

Chapter 12

Elasticity of Demand

Royal Crown
Coke
Hills Brothers
Maxwell House
Chase and Sanborn

-2.4
-5.2 to -5.7
-7.1
-8.9
-5.6

Slide

Elasticities of Demand for
Brands of Colas and Coffee


Questions
1) Why is the demand for Royal Crown
more price inelastic than for Coke?
2) Is there much monopoly power in
these two markets?
3) Define the relationship between
elasticity and monopoly power.

Chapter 12

Slide

Oligopoly


Characteristics
Small

number of firms

Product

differentiation may or may not exist

Barriers

to entry

Chapter 12

Slide

Oligopoly


Examples
Automobiles
Steel
Aluminum
Petrochemicals
Electrical

equipment

Computers

Chapter 12

Slide

Oligopoly


The barriers to entry are:
Natural


Scale economies



Patents



Technology



Name recognition

Chapter 12

Slide

Oligopoly


The barriers to entry are:
Strategic

action



Flooding the market



Controlling an essential input

Chapter 12

Slide

Oligopoly


Management Challenges
Strategic
Rival



actions

behavior

Question
What

are the possible rival responses to a
10% price cut by Ford?

Chapter 12

Slide

Oligopoly


Equilibrium in an Oligopolistic Market
In

perfect competition, monopoly, and
monopolistic competition the producers did
not have to consider a rival’s response
when choosing output and price.

In

oligopoly the producers must consider
the response of competitors when
choosing output and price.

Chapter 12

Slide

Oligopoly


Equilibrium in an Oligopolistic Market
Defining

Equilibrium



Firms doing the best they can and have
no incentive to change their output or
price



All firms assume competitors are taking
rival decisions into account.

Chapter 12

Slide

Oligopoly


Nash Equilibrium
Each

firm is doing the best it can given
what its competitors are doing.

Chapter 12

Slide

Oligopoly


The Cournot Model
Duopoly


Two firms competing with each other



Homogenous good



The output of the other firm is assumed
to be fixed

Chapter 12

Slide

Firm 1’s Output Decision
If Firm 1 thinks Firm 2 will
produce nothing, its demand
curve, D1(0), is the market
demand curve.

P1
D1(0)

If Firm 1 thinks Firm 2 will produce
50 units, its demand curve is
shifted to the left by this amount.

MR1(0)

D1(75)

If Firm 1 thinks Firm 2 will produce
75 units, its demand curve is
shifted to the left by this amount.

MR1(75)

MC1
MR1(50)
12.5 25

Chapter 12

D1(50)
50

What is the output of Firm 1
if Firm 2 produces 100 units?

Q1

Slide

Oligopoly


The Reaction Curve
A firm’s

profit-maximizing output is a
decreasing schedule of the expected
output of Firm 2.

Chapter 12

Slide

Reaction Curves
and Cournot Equilibrium
Q1
100

Firm 1’s reaction curve shows how much it
will produce as a function of how much
it thinks Firm 2 will produce. The x’s
correspond to the previous model.
Firm 2’s reaction curve shows how much it
will produce as a function of how much
it thinks Firm 1 will produce.

75

Firm 2’s Reaction
Curve Q*2(Q2)

50 x

25

Cournot
Equilibrium

Firm 1’s Reaction
Curve Q*1(Q2)

25

Chapter 12

In Cournot equilibrium, each
firm correctly assumes how
much its competitors will
produce and thereby
maximize its own profits.

x

50

x
75

x

100

Q2

Slide

Oligopoly


Questions
1) If the firms are not producing at the
Cournot equilibrium, will they adjust
until the Cournot equilibrium is
reached?
2) When is it rational to assume that its
competitor’s output is fixed?

Chapter 12

Slide

Oligopoly
The
The Linear
Linear Demand
Demand Curve
Curve


An Example of the Cournot Equilibrium
Duopoly


Market demand is P = 30 - Q where Q =
Q1 + Q2



MC1 = MC2 = 0

Chapter 12

Slide

Oligopoly
The
The Linear
Linear Demand
Demand Curve
Curve


An Example of the Cournot Equilibrium
Firm

1’s Reaction Curve

Total Revenue, R1  PQ1 (30  Q )Q1
30Q1  (Q1  Q2 )Q1

30Q1  Q12  Q2Q1

Chapter 12

Slide

Oligopoly
The
The Linear
Linear Demand
Demand Curve
Curve


An Example of the Cournot Equilibrium
MR1 R1 Q1 30  2Q1  Q2
MR1 0 MC1
Firm 1' s Reaction Curve
Q1 15  1 2 Q2
Firm 2' s Reaction Curve
Q2 15  1 2 Q1

Chapter 12

Slide

Oligopoly
The
The Linear
Linear Demand
Demand Curve
Curve


An Example of the Cournot Equilibrium

Cournot Equilibriu m : Q1 Q2
15  1 2(15  1 2Q1 ) 10
Q Q1  Q2 20
P 30  Q 10
Chapter 12

Slide

Duopoly Example
Q1
30
Firm 2’s
Reaction Curve

The demand curve is P = 30 - Q and
both firms have 0 marginal cost.

Cournot Equilibrium

15
10

Firm 1’s
Reaction Curve
10

Chapter 12

15

30

Q2

Slide

Oligopoly
Profit
Profit Maximization
Maximization with
with Collusion
Collusion

2

R PQ (30  Q)Q 30Q  Q
MR R Q 30  2Q
MR 0 when Q 15 and MR MC

Chapter 12

Slide

Oligopoly
Profit
Profit Maximization
Maximization with
with Collusion
Collusion


Contract Curve
 Q1


+ Q2 = 15
Shows all pairs of output Q1 and Q2 that
maximizes total profits

 Q1 =


Chapter 12

Q2 = 7.5

Less output and higher profits than the
Cournot equilibrium
Slide

Duopoly Example
Q1
30
Firm 2’s
Reaction Curve

For the firm, collusion is the best
outcome followed by the Cournot
Equilibrium and then the
competitive equilibrium

Competitive Equilibrium (P = MC; Profit = 0)

15

Cournot Equilibrium
Collusive Equilibrium

10
7.5
Collusion
Curve

Chapter 12

Firm 1’s
Reaction Curve
7.5 10

15

30

Q2

Slide

First Mover Advantage-The Stackelberg Model


Assumptions
One
MC

firm can set output first

=0

Market

demand is P = 30 - Q where Q =
total output

Firm

1 sets output first and Firm 2 then
makes an output decision

Chapter 12

Slide

First Mover Advantage-The Stackelberg Model


Firm 1
Must



consider the reaction of Firm 2

Firm 2
Takes

Firm 1’s output as fixed and
therefore determines output with the
Cournot reaction curve: Q2 = 15 - 1/2Q1

Chapter 12

Slide

First Mover Advantage-The Stackelberg Model


Firm 1
Choose

Q1 so that:

MR  MC, MC  0 therefore MR 0
R1  PQ1  30Q1 - Q12 - Q2Q1

Chapter 12

Slide

First Mover Advantage-The Stackelberg Model


Substituting Firm 2’s Reaction Curve
for Q2:
R1 30Q1  Q12  Q1 (15  1 2Q1 )
15Q1  1 2 Q12

MR1 R1 Q1 15  Q1
MR 0 : Q1 15 and Q2 7.5

Chapter 12

Slide

First Mover Advantage-The Stackelberg Model




Conclusion
Firm

1’s output is twice as large as firm 2’s

Firm

1’s profit is twice as large as firm 2’s

Questions
Why

is it more profitable to be the first
mover?

Which

model (Cournot or Shackelberg) is
more appropriate?

Chapter 12

Slide

Price Competition


Competition in an oligopolistic industry
may occur with price instead of output.



The Bertrand Model is used to illustrate
price competition in an oligopolistic
industry with homogenous goods.

Chapter 12

Slide

Price Competition
Bertrand
Bertrand Model
Model


Assumptions
Homogenous

good

Market

demand is P = 30 - Q where
Q = Q1 + Q2

MC

Chapter 12

= $3 for both firms and MC1 = MC2 = $3

Slide

Price Competition
Bertrand
Bertrand Model
Model


Assumptions
The


Cournot equilibrium:

P $12

 for both firms $81
Assume

quantity.

Chapter 12

the firms compete with price, not

Slide

Price Competition
Bertrand
Bertrand Model
Model


How will consumers respond to a
price differential? (Hint: Consider
homogeneity)
The

Nash equilibrium:
 P = MC; P = P = $3
1
2



Chapter 12

Q = 27; Q1 & Q2 = 13.5

 0

Slide

Price Competition
Bertrand
Bertrand Model
Model


Why not charge a higher price to raise
profits?



How does the Bertrand outcome compare to
the Cournot outcome?



The Bertrand model demonstrates the
importance of the strategic variable (price
versus output).

Chapter 12

Slide

Price Competition
Bertrand
Bertrand Model
Model


Criticisms
When

firms produce a homogenous good, it
is more natural to compete by setting
quantities rather than prices.

Even

if the firms do set prices and choose
the same price, what share of total sales will
go to each one?


Chapter 12

It may not be equally divided.
Slide

Price Competition


Price Competition with Differentiated
Products
Market

shares are now determined not just
by prices, but by differences in the design,
performance, and durability of each firm’s
product.

Chapter 12

Slide

Price Competition
Differentiated
Differentiated Products
Products


Assumptions
Duopoly
FC

= $20

VC

=0

Chapter 12

Slide

Price Competition
Differentiated
Differentiated Products
Products


Assumptions
Firm

1’s demand is Q1 = 12 - 2P1 + P2

Firm

2’s demand is Q2 = 12 - 2P1 + P1



P1 and P2 are prices firms 1 and 2
charge respectively



Q1 and Q2 are the resulting quantities
they sell

Chapter 12

Slide

Price Competition
Differentiated
Differentiated Products
Products


Determining Prices and Output
Set

prices at the same time

Firm 1 :  1 P1Q1  $20
P1 (12  2 P1  P2 )  20
2
1

12 P1 - 2 P  P1 P2  20
Chapter 12

Slide

Price Competition
Differentiated
Differentiated Products
Products


Determining Prices and Output
Firm

1: If P2 is fixed:

Firm 1' s profit maximizing price 
 1 P1 12  4 P1  P2 0
Firm 1' s reaction curve 
P1 3  1 4 P2
Firm 2' s reaction curve 
P2 3  1 4 P1
Chapter 12

Slide

Nash Equilibrium in Prices
P1

Firm 2’s Reaction Curve
Collusive Equilibrium

$6

$4
Firm 1’s Reaction Curve

Nash Equilibrium
$4

Chapter 12

$6

P2

Slide

Nash Equilibrium in Prices


Does the Stackelberg model prediction
for first mover hold when price is the
variable instead of quantity?
Hint:

Chapter 12

Would you want to set price first?

Slide

A Pricing Problem
for Procter & Gamble
Differentiated
Differentiated Products
Products


Scenario
1) Procter & Gamble, Kao Soap, Ltd.,
and Unilever, Ltd were entering the
market for Gypsy Moth Tape.
2) All three would be choosing their
prices at the same time.

Chapter 12

Slide

A Pricing Problem
for Procter & Gamble
Differentiated
Differentiated Products
Products


Scenario
3) Procter & Gamble had to
consider competitors prices when
setting their price.
4) FC = $480,000/month and
VC = $1/unit for all firms

Chapter 12

Slide

A Pricing Problem
for Procter & Gamble
Differentiated
Differentiated Products
Products


Scenario
5) P&G’s demand curve was:
Q = 3,375P-3.5(PU).25(PK).25


Chapter 12

Where P, PU , PK are P&G’s, Unilever’s,
and Kao’s prices respectively

Slide

A Pricing Problem
for Procter & Gamble
Differentiated
Differentiated Products
Products


Problem
What

price should P&G choose and what is
the expected profit?

Chapter 12

Slide

P&G’s Profit (in thousands of $ per month)
Competitor’s (Equal) Prices ($)
P&G’s
Price ($) 1.10 1.20 1.30 1.40 1.50 1.60 1.70 1.80
1.10

-226-215-204

-194-183-174

1.20

-106-89 -73-58 -43-28 -15-2

1.30

-56-37 -192

1531

4762

1.40

-44-25

2946

6278

1.50

-52-32 -153

2036

5268

1.60

-70-51 -34-18

-114

3044

1.70

-93-76 -59-44 -28-13

1.80

-612

115

-118-102 -87-72 -57-44 -30-17

-165-155

A Pricing Problem
for Procter & Gamble


What Do You Think?
1) Why would each firm choose a
price of $1.40? Hint: Think Nash
Equilibrium
2) What is the profit maximizing price
with collusion?

Chapter 12

Slide

Competition Versus Collusion:
The Prisoners’ Dilemma


Why wouldn’t each firm set the
collusion price independently and
earn the higher profits that occur
with explicit collusion?

Chapter 12

Slide

Competition Versus Collusion:
The Prisoners’ Dilemma


Assume:

FC $20 and VC $0
Firm 1' s demand : Q 12  2 P1  P2
Firm 2' s demand : Q 12  2 P2  P1
Nash Equilibrium : P $4
Collusion :
P $6
Chapter 12

 $12
 $16
Slide

Competition Versus Collusion:
The Prisoners’ Dilemma


Possible Pricing Outcomes:
Firm 1 : P $6

Firm 2 : P $6

P $6
 2 P2Q2  20

 $16

P $4

(4)12  (2)(4)  6  20 $20

 1 P1Q1  20
(6)12  (2)(6)  4  20 $4
Chapter 12

Slide

Payoff Matrix for Pricing Game
Firm 2

Charge $4

Charge $4

Charge $6

$12, $12

$20, $4

$4, $20

$16, $16

Firm 1
Charge $6

Chapter 12

Slide

Competition Versus Collusion:
The Prisoners’ Dilemma


These two firms are playing a
noncooperative game.
Each

firm independently does the best it
can taking its competitor into account.



Question
Why

will both firms both choose $4 when
$6 will yield higher profits?

Chapter 12

Slide

Competition Versus Collusion:
The Prisoners’ Dilemma


An example in game theory, called the
Prisoners’ Dilemma, illustrates the
problem oligopolistic firms face.

Chapter 12

Slide

Competition Versus Collusion:
The Prisoners’ Dilemma


Scenario
Two

prisoners have been accused of
collaborating in a crime.

They

are in separate jail cells and cannot
communicate.

Each

has been asked to confess to the
crime.

Chapter 12

Slide

Payoff Matrix for Prisoners’ Dilemma
Prisoner B
Confess

Confess
Prisoner A
Don’t
confess

Chapter 12

-5, -5

Don’t confess

-1, -10

Would you choose to confess?

-10, -1

-2, -2

Slide

Payoff Matrix for
the P & G Prisoners’ Dilemma


Conclusions: Oligipolistic Markets
1) Collusion will lead to greater profits
2) Explicit and implicit collusion is
possible
3) Once collusion exists, the profit
motive to break and lower price is
significant

Chapter 12

Slide

Payoff Matrix for the P&G Pricing
Problem
Unilever and Kao
Charge $1.40

Charge
$1.40
P&G

$12, $12

Charge $1.50

$29, $11

What price should P & G choose?
Charge
$1.50

Chapter 12

$3, $21

$20, $20

Slide

Implications of the Prisoners’
Dilemma for Oligipolistic Pricing


Observations of Oligopoly Behavior
1) In some oligopoly markets, pricing
behavior in time can create a
predictable pricing environment and
implied collusion may occur.

Chapter 12

Slide

Implications of the Prisoners’
Dilemma for Oligipolistic Pricing


Observations of Oligopoly Behavior
2) In other oligopoly markets, the firms
are very aggressive and collusion is not
possible.


Firms are reluctant to change price
because of the likely response of their
competitors.



In this case prices tend to be relatively rigid.

Chapter 12

Slide

The Kinked Demand Curve
$/Q

If the producer raises price the
competitors will not and the
demand will be elastic.
If the producer lowers price the
competitors will follow and the
demand will be inelastic.

D

Quantity

Chapter 12

MR

Slide

The Kinked Demand Curve
$/Q

So long as marginal cost is in the
vertical region of the marginal
revenue curve, price and output
will remain constant.

MC’
P*

MC

D

Quantity

Q*

Chapter 12

MR

Slide

Implications of the Prisoners’
Dilemma for Oligopolistic Pricing
Price
Price Signaling
Signaling &
& Price
Price Leadership
Leadership


Price Signaling
Implicit

collusion in which a firm announces
a price increase in the hope that other
firms will follow suit

Chapter 12

Slide

Implications of the Prisoners’
Dilemma for Oligopolistic Pricing
Price
Price Signaling
Signaling &
& Price
Price Leadership
Leadership


Price Leadership
Pattern

of pricing in which one firm
regularly announces price changes that
other firms then match

Chapter 12

Slide

Implications of the Prisoners’
Dilemma for Oligopolistic Pricing


The Dominant Firm Model
In

some oligopolistic markets, one large
firm has a major share of total sales, and a
group of smaller firms supplies the
remainder of the market.

The

large firm might then act as the
dominant firm, setting a price that
maximized its own profits.

Chapter 12

Slide

Price Setting by a Dominant Firm
Price

SF

D

The dominant firm’s demand
curve is the difference between
market demand (D) and the supply
of the fringe firms (SF).

P1

MCD

P*
DD
P2

QF QD

Chapter 12

QT

MRD

At this price, fringe firms
sell QF, so that total
sales are QT.

Quantity

Slide

Cartels


Characteristics
1) Explicit agreements to set output
and
price
2) May not include all firms

Chapter 12

Slide

Cartels


Characteristics
3) Most often international
 Examples

of
successful cartels
 OPEC
 International
Bauxite
Association
 Mercurio Europeo

Chapter 12

 Examples

of
unsuccessful cartels
 Copper
 Tin
 Coffee
 Tea
 Cocoa
Slide

Cartels


Characteristics
4) Conditions for success


Competitive alternative sufficiently
deters cheating



Potential of monopoly power--inelastic
demand

Chapter 12

Slide

Cartels


Comparing OPEC to CIPEC
Most

cartels involve a portion of the market
which then behaves as the dominant firm

Chapter 12

Slide

The OPEC Oil Cartel
Price

TD

SC

TD is the total world demand
curve for oil, and SC is the
competitive supply. OPEC’s
demand is the difference
between the two.
OPEC’s profits maximizing
quantity is found at the
intersection of its MR and
MC curves. At this quantity
OPEC charges price P*.

P*

DOPEC
MCOPEC
MROPEC

QOPEC

Chapter 12

Quantity

Slide

Cartels


About OPEC
Very
TD

low MC

is inelastic

Non-OPEC
DOPEC

Chapter 12

supply is inelastic

is relatively inelastic

Slide

The OPEC Oil Cartel
TD

Price

SC
The price without the cartel:
•Competitive price (PC) where
DOPEC = MCOPEC

P*

DOPEC
MCOPEC

Pc
MROPEC

QC

Chapter 12

QOPEC

QT

Quantity

Slide

The CIPEC Copper Cartel
Price

•TD and SC are relatively elastic
•DCIPEC is elastic
•CIPEC has little monopoly power
•P* is closer to PC

TD

SC
MCCIPEC
DCIPEC

P*
PC

MRCIPEC

QCIPEC

Chapter 12

QC

QT

Quantity

Slide

Cartels


Observations
To

be successful:



Total demand must not be very price
elastic



Either the cartel must control nearly all
of the world’s supply or the supply of
noncartel producers must not be price
elastic

Chapter 12

Slide

The Cartelization
of Intercollegiate Athletics


Observations
1) Large number of firms (colleges)
2) Large number of consumers (fans)
3) Very high profits

Chapter 12

Slide

The Cartelization
of Intercollegiate Athletics


Question
How

can we explain high profits in a
competitive market? (Hint: Think cartel and
the NCAA)

Chapter 12

Slide

The Milk Cartel


1990s with less government support,
the price of milk fluctuated more widely



In response, the government permitted
six New England states to form a milk
cartel (Northeast Interstate Dairy
Compact -- NIDC)

Chapter 12

Slide

The Milk Cartel


1999 legislation allowed dairy farmers in
Northeastern states surrounding NIDC
to join NIDC, 7 in 16 Southern states to
form a new regional cartel.



Soy milk may become more popular.

Chapter 12

Slide

Summary


In a monopolistically competitive
market, firms compete by selling
differentiated products, which are highly
substitutable.



In an oligopolistic market, only a few
firms account for most or all of
production.

Chapter 12

Slide

Summary


In the Cournot model of oligopoly, firms
make their output decisions at the same
time, each taking the other’s output as
fixed.



In the Stackelberg model, one firm sets
its output first.

Chapter 12

Slide

Summary


The Nash equilibrium concept can also
be applied to markets in which firms
produce substitute goods and compete
by setting price.



Firms would earn higher profits by
collusively agreeing to raise prices, but
the antitrust laws usually prohibit this.

Chapter 12

Slide

Summary


The Prisoners’ Dilemma creates price
rigidity in oligopolistic markets.



Price leadership is a form of implicit
collusion that sometimes gets around
the Prisoners Dilemma.



In a cartel, producers explicitly collude in
setting prices and output levels.

Chapter 12

Slide

End of Chapter 12
Monopolistic
Competition and
Oligopoly