Lecture On Monopoli and Oligopoli

Kuliah 10
Monopoly and
Oligopoly
Topik yg akan Dibicarakan
Monopoly
Monopoly Power
Sources of Monopoly Power
The Social Costs of Monopoly Power
Chapter 10
Slide 2
Topik yg akan Dibicarakan
Monopsony
Monopsony Power
Limiting Market Power: The Antitrust

Laws (UU Anti Monopoli)
Chapter 10
Slide 3
Ingat: Perfect Competition
Review of Perfect Competition
P = LMC = LRAC
Normal profits or zero economic profits in

the long run
Large number of buyers and sellers
Homogenous product
Perfect information
Firm is a price taker
Chapter 10
Slide 4
Ingat: Perfect Competition

Market
P
D
P
S
Individual Firm
LMC
P0
LRAC
P0
D = MR = P
Q0
q0
Ciri-Ciri Struktur Pasar Monopoli
Monopoly
1) One seller - many buyers
2) One product (no good substitutes)
3) Barriers to entry
4) Price maker (price control and
product)
Chapter 10
Slide 6
Monopoly
The monopolist is the supply-side of the

market and has complete control over
the amount offered for sale.
Profits will be maximized at the level of

output where marginal revenue equals
marginal cost.
Chapter 10
Slide 7
Monopoly
Finding Marginal Revenue
As the sole producer, the monopolist works

with the market demand to determine
output and price.
Assume a firm with demand:
Chapter 10
P = 6 Q or Qd= 6 - P
Slide 8
Total, Marginal, and Average Revenue

Price
P
Quantity
Q
$6
5
4
3
2
1
0
1
2
3
4
5
Chapter 10
Total
Revenue
(TR=P.Q)
$0
5
8
9
8
5
Marginal
Revenue
MR
--$5
3
1
-1
-3
Average
Revenue
AR
--$5
4
3
2
1
Slide 9
Average and Marginal Revenue

$ per
unit of
output
7
6
5
Average Revenue (Demand)
4
3
2
Chapter 10
Marginal
Revenue
7 Output
Slide 10
Monopoly
Observations
1) To increase sales the price must fall
2) MR < P
3) Compared to perfect competition
Chapter 10
No change in price to change sales
MR = P
Slide 11
Monopoly
Monopolists Output Decision

1) Profits maximized at the output level
where MR = MC
2) Cost functions are the same
(Q) R (Q) C (Q)
/ Q R / Q C / Q 0 MC MR
or MC MR
Chapter 10
Slide 12
Maximizing Profit When Marginal

Revenue Equals Marginal Cost
The
The Monopolists
Monopolists Output
Output Decision
Decision
At output levels below MR = MC the

decrease in revenue is greater than the
decrease in cost (MR > MC).
At output levels above MR = MC the

increase in cost is greater than the
decrease in revenue (MR < MC)
Chapter 10
Slide 13
Maximizing Profit When Marginal

Revenue Equals Marginal Cost
$ per
unit of
output
MC
P1
P*
AC
P2
Lost
profit
D = AR
MR
Q1
Chapter 10
Q*
Q2
Lost
profit
Quantity
Slide 14
Monopoly
The
The Monopolists
Monopolists Output
Output Decision
Decision
An Example
Cost C (Q ) 50 Q
C
MC
2Q
Q
Chapter 10
Slide 15
Monopoly
The
The Monopolists
Monopolists Output
Output Decision
Decision
An Example
Demand P (Q) 40 Q
R (Q) P(Q )Q 40Q Q
R
MR
40 2Q
Q
Chapter 10
Slide 16
Monopoly
The
The Monopolists
Monopolists Output
Output Decision
Decision
An Example
MR MC or 40 2Q 2Q
Q 10
When Q 10, P 30
Chapter 10
Slide 17
Monopoly
The
The Monopolists
Monopolists Output
Output Decision
Decision
An Example
By setting marginal revenue equal to

marginal cost, it can be verified that profit is
maximized at P = $30 and Q = 10.
This can be seen graphically:
Chapter 10
Slide 18
Example of Profit Maximization

C = 50+Q2
t'
400
R = 40Q-Q2
300
c
200
t
Profits () =-2Q2+40Q-50
150
100
50
0
Chapter 10
c
5
10
15
20 Quantity
Slide 19
Observations
Slope of rr = slope cc
and they are parallel at
10 units
400
Profits are maximized at

10 units
300
P = $30, Q = 10,
TR = P x Q = $300
AC = $15, Q = 10,
TC = AC x Q = 150
Profit = TR - TC
$150 = $300 - $150
t'
c
200
150
Profits
100
50
10
15
20
Quantity
Chapter 10
Slide 20

$/Q
40
MC
30
AC
Profit
20
AR
15
10
MR
0
Chapter 10
10
15
20
Quantity
Slide 21
Observations
$/Q
AC = $15, Q = 10,
TC = AC x Q = 150
40
Profit = TR = TC = $300
- $150 = $150 or
30
Profit = (P - AC) x Q =
($30 - $15)(10) = $150
MC
AC
Profit
20
AR
15
MR
10
10
15
20
Quantity
Chapter 10
Slide 22
Monopoly
A Rule of Thumb for Pricing
We want to translate the condition that

marginal revenue should equal marginal
cost into a rule of thumb that can be more
easily applied in practice.
This can be demonstrated using the

following steps:
Chapter 10
Slide 23

R ( PQ)
1. MR
Q
Q
P
Q P
2. MR P Q
P P
Q
P Q
P
3. E d
P
Q
Chapter 10
Slide 24

1
Q
P
4.
Q E
P
d
1
5 . MR P P
Ed
Chapter 10
Slide 25

6 . is maximized @ MR MC
1
1
P P
ED
ED
MC
P
1 1 E D
Chapter 10
Slide 26

1
= the markup over MC as a
7.
Ed
percentage of price (P-MC)/P
8. The markup should equal the

inverse of the elasticity of demand.
Chapter 10
Slide 27

MC
9. P
1 1
E
d
Assume
Ed 4
MC 9
9
P
1 1
Chapter 10
$ 12
. 75
Slide 28
Monopoly
Monopoly pricing compared to perfect

competition pricing:
Monopoly
P > MC
Perfect Competition
P = MC
Chapter 10
Slide 29
Monopoly
Monopoly pricing compared to perfect

competition pricing:
The more elastic the demand the closer

price is to marginal cost.
If Ed is a large negative number, price is

close to marginal cost and vice versa.
Chapter 10
Slide 30
Monopoly
Shifts in Demand
In perfect competition, the market supply

curve is determined by marginal cost.
For a monopoly, output is determined by

marginal cost and the shape of the
demand curve.
Chapter 10
Slide 31
Shift in Demand Leads to

Change in Price but Same Output
$/Q
MC
P1
P2
D2
D1
MR2
MR1
Q1= Q2
Chapter 10
Quantity
Slide 32
Shift in Demand Leads to

Change in Output but Same Price
$/Q
MC
P1 = P2
D2
MR2
D1
MR1
Q1
Chapter 10
Q2
Quantity
Slide 33
Monopoly
Observations
Shifts
in demand usually cause a change

in both price and quantity.
monopolistic market has no supply

curve.
Chapter 10
Slide 34
Monopoly
Observations
Monopolist
may supply many different

quantities at the same price.
Monopolist
may supply the same quantity

at different prices.
Chapter 10
Slide 35
Monopoly
The Effect of a Tax
Under monopoly price can sometimes rise

by more than the amount of the tax.
To determine the impact of a tax:
t = specific tax
MC = MC + t
MR = MC + t : optimal production decision
Chapter 10
Slide 36
Effect of Excise Tax on Monopolist

$/Q
Increase in P: P0P1 > increase in tax
P1
P
P0
MC + tax
D = AR
MC
MR
Q1
Chapter 10
Q0
Quantity
Slide 37
Question
Suppose: Ed = -2
How much would the price change?
Chapter 10
Slide 38
Answer
MC
P
1 1
Ed
If Ed 2 P 2 MC
If MC increases to MC t
P 2( MC t ) 2 MC 2t
Price increases by twice the tax.
What would happen to profits?
Chapter 10
Slide 39
Monopoly Power
Scenario:
Chapter 10
Four firms with equal share (5,000) of a

market for 20,000 toothbrushes at a price
of $1.50.
Slide 40
The Demand for Toothbrushes

$/Q
$/Q
At a market price
of $1.50, elasticity of
demand is -1.5.
2.00
2.00
The demand curve for Firm A

depends on how much
their product differs, and
how the firms compete.
1.60
1.50
1.50
1.40
Market
Demand
1.00
1.00
10,000
20,000
30,000
Quantity
3,000
5,000
7,000
QA
The Demand for Toothbrushes

$/Q
$/Q
At a market price
of $1.50, elasticity of
demand is -1.5.
2.00
2.00
Firm A sees a much more

elastic demand curve due to
competition--Ed = -.6. Still
Firm A has some monopoly
power and charges a price
which exceeds MC.
1.60
1.50
MCA
1.50
1.40
DA
Market
Demand
1.00
MRA
1.00
10,000
20,000
30,000
Quantity
3,000
5,000
7,000
QA
Monopoly Power
Measuring Monopoly Power
In perfect competition: P = MR = MC
Monopoly power: P > MC
Chapter 10
Slide 43
Monopoly Power
Lerners Index of Monopoly Power
L = (P - MC)/P
Chapter 10
The larger the value of L (between 0 and

1) the greater the monopoly power.
L is expressed in terms of Ed
L = (P - MC)/P = -1/Ed
Ed is elasticity of demand for a firm, not

the market
Slide 44
Monopoly Power
Monopoly power does not guarantee

profits.
Profit depends on average cost relative

to price.
Question:
Chapter 10
Can you identify any difficulties in using the

Lerner Index (L) for public policy?
Slide 45
Monopoly Power
The Rule of Thumb for Pricing
MC
P
1 1 Ed
Chapter 10
Pricing for any firm with monopoly power
If Ed is large, markup is small
If Ed is small, markup is large
Slide 46
Elasticity of Demand and Price Markup

$/Q
$/Q
The more elastic is

demand, the less the
markup.
P*
MC
MC
P*
AR
P*-MC
MR
AR
MR
Q*
Quantity
Q*
Quantity
Markup Pricing:
Supermarkets to Designer Jeans
Supermarkets
1. Several firms
2. Similar product
3. E d 10 for individual stores
MC
MC
4 .P
1.11( MC )
1 1 .1 0.9
5. Prices set about 10 - 11% above MC.
Chapter 10
Slide 48
Markup Pricing:
Convenience Stores
1. Higher prices than supermarkets
2. Convenience differentiates them
3. Ed 5
MC
MC
4.P
1.25( MC )
1 1 5 0.8
5. Prices set about 25% above MC.
Chapter 10
Slide 49
Markup Pricing:
Convenience
Convenience Stores
Stores
Convenience stores have more

monopoly power.
Question:
Chapter 10
Do convenience stores have higher profits

than supermarkets?
Slide 50
Markup Pricing:
Designer
Designer Jeans
Jeans
Designer jeans
Ed = -3 to -4
Chapter 10
Price 33 - 50% > MC
MC = $12 - $18/pair
Wholesale price = $18 - $27
Slide 51
The Pricing of
Prerecorded Videocassettes
1985
Title
1999
Retail Price($)
Purple Rain
Raiders of the Lost Ark
Jane Fonda Workout
Title
Retail Price($)
$29.98 Austin Powers

24.95 A Bugs Life
59.95 Theres Something
about Mary
The Empire Strikes Back
79.98 Tae-Bo Workout
An Officer and a Gentleman 24.95 Lethal Weapon 4
Star Trek: The Motion Picture 24.95 Men in Black
Star Wars
39.98 Armageddon
$10.49
17.99
13.99
24.47
16.99
12.99
15.86
The Pricing of
Prerecorded Videocassettes
What Do You Think?

Should
producers lower the price of

videocassettes to increase sales and
revenue?
Why do some firms have considerable

monopoly power, and others have little
or none?
A firms monopoly power is determined

by the firms elasticity of demand.
Chapter 10
Slide 54
The firms elasticity of demand is

determined by:
1) Elasticity of market demand
2) Number of firms
3) The interaction among firms
Chapter 10
Slide 55
Monopoly power results in higher prices

and lower quantities.
However, does monopoly power make

consumers and producers in the
aggregate better or worse off?
Chapter 10
Slide 56
Deadweight Loss from Monopoly Power

$/Q
Lost Consumer Surplus
Because of the higher

price, consumers lose
A+B and producer
gains A-C.
MC
Deadweight
Loss
A
PC
Pm
B
C
AR
MR
Qm
Chapter 10
QC
Quantity
Slide 57
Rent Seeking
Chapter 10
Firms may spend to gain monopoly power
Lobbying
Advertising
Building excess capacity
Slide 58
The incentive to engage in monopoly

practices is determined by the profit to
be gained.
The larger the transfer from consumers

to the firm, the larger the social cost of
monopoly.
Chapter 10
Slide 59
Example
1996 Archer Daniels Midland (ADM)

successfully lobbied for regulations
requiring ethanol be produced from corn
Question
Chapter 10
Why only corn?
Slide 60
Price Regulation
Recall that in competitive markets, price

regulation created a deadweight loss.
Question:
Chapter 10
What about a monopoly?
Slide 61
Price Regulation
$/Q
Marginal revenue curve

when price is regulated
to be no higher that P1.
MR
MC
Pm
P1
P2 = PC
AC
P3
P4
AR
Forprice
output
levels
above Q1 ,
below
P
results
If Any
price
is
lowered
to
PC output
4
Ifthe
leftoriginal
alone, a
monopolist
average
and
inIfthe
firm
incurring
a to
loss.
price
is
lowered
P
increases
to
its
maximum
3Qoutput
produces
Q
and
charges
Pm.
C and
m
marginal
revenue
curves
apply.
decreases
a shortage
exists.
there is noand
deadweight
loss.
Qm Q1
Chapter 10
Q3
Qc
Q3
Quantity
Slide 62
Natural Monopoly
A
firm that can produce the entire output of

an industry at a cost lower than what it
would be if there were several firms.
Chapter 10
Slide 63
Regulating the Price

of a Natural Monopoly
$/Q
Natural monopolies occur

because of extensive
economies of scale
Quantity
Chapter 10
Slide 64
Regulating the Price

of a Natural Monopoly
$/Q
Unregulated, the monopolist

would produce Qm and
charge Pm.
If the price were regulate to be PC,
the firm would lose money
and go out of business.
Pm
Setting the price at Pr

yields the largest possible
output;excess profit is zero.
AC
Pr
MC
PC
AR
MR
Qm
Chapter 10
Qr
QC
Quantity
Slide 65
Regulation in Practice
Chapter 10
It is very difficult to estimate the firm's cost

and demand functions because they
change with evolving market conditions
Slide 66
An alternative pricing technique---rate-ofreturn regulation allows the firms to set a

maximum price based on the expected rate
or return that the firm will earn.
P = AVC + (D + T + sK)/Q, where

P
= price, AVC = average variable cost

D = depreciation, T = taxes
s = allowed rate of return, K = firms capital
stock
Chapter 10
Slide 67
Using this technique requires hearings to

arrive at the respective figures.
The hearing process creates a regulatory

lag that may benefit producers (1950s &
60s) or consumers (1970s & 80s).
Question
Chapter 10
Who is benefiting in the 1990s?

Slide 68
Struktur Pasar Oligopoli
OLIGOPOLY ?
Chapter 10
Slide 69
Ciri-Ciri Pasar Oligopoli
Characteristics
Small number of firms
Product differentiation may or may not exist
Barriers to entry
Price Setter/Price Leadership
Chapter 10
Slide 70
Contoh Oligopoly
Contoh di AS
Automobiles
Steel
Aluminum
Petrochemicals
Electrical equipment
Computers
Chapter 10
Contoh di
Indonesia
Industri Semen
Industri Otomotif
Industri Kaca
lembaran
Industri Rokok
Industri CPO
Slide 71
Oligopoly
The barriers to entry are:
Chapter 10
Natural
Scale economies
Patents
Technology
Name recognition
Slide 72
Oligopoly
The barriers to entry are:
Chapter 10
Strategic action
Flooding the market
Controlling an essential input
Slide 73
Oligopoly
Management Challenges
Strategic actions
Rival behavior
Question
Chapter 10
What are the possible rival responses to a

10% price cut by Ford?
Slide 74
Oligopoly
Equilibrium in an Oligopolistic Market
In perfect competition, monopoly, and

monopolistic competition the producers did
not have to consider a rivals response
when choosing output and price.
In oligopoly the producers must consider

the response of competitors when
choosing output and price.
Chapter 10
Slide 75
Oligopoly
Equilibrium in an Oligopolistic Market
Chapter 10
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.
Slide 76
Oligopoly
Nash Equilibrium
Chapter 10
Each firm is doing the best it can given

what its competitors are doing.
Slide 77
Oligopoly
The Cournot Model
Chapter 10
Duopoly
Two firms competing with each other
Homogenous good
The output of the other firm is assumed

to be fixed
Slide 78
Firm 1s 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 10
D1(50)
50
What is the output of Firm 1

if Firm 2 produces 100 units?
Q1
Slide 79
Oligopoly
The Reaction Curve
Chapter 10
A firms profit-maximizing output is a

decreasing schedule of the expected
output of Firm 2.
Slide 80
Reaction Curves
and Cournot Equilibrium
Q1
100
Firm 1s reaction curve shows how much it

will produce as a function of how much
it thinks Firm 2 will produce. The xs
correspond to the previous model.
Firm 2s reaction curve shows how much it
will produce as a function of how much
it thinks Firm 1 will produce.
75
Firm 2s Reaction
Curve Q*2(Q2)
50 x
25
Cournot
Equilibrium
x
Firm 1s Reaction
Curve Q*1(Q2)
25
Chapter 10
In Cournot equilibrium, each

firm correctly assumes how
much its competitors will
produce and thereby
maximize its own profits.
50
x
75
100
Q2
Slide 81
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
competitors output is fixed?
Chapter 10
Slide 82
Oligopoly
The
The Linear
Linear Demand
Demand Curve
Curve
An Example of the Cournot Equilibrium
Chapter 10
Duopoly
Market demand is P = 30 - Q where Q =

Q1 + Q2
MC1 = MC2 = 0
Slide 83
Oligopoly
The
The Linear
Linear Demand
Demand Curve
Curve
Firm 1s Reaction Curve
Total Revenue, R1 PQ1 (30 Q )Q1

30Q1 (Q1 Q2 )Q1
30Q1 Q12 Q2Q1
Chapter 10
Slide 84
Oligopoly
The
The Linear
Linear Demand
Demand Curve
Curve

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 10
Slide 85
Oligopoly
The
The Linear
Linear Demand
Demand Curve
Curve
Cournot Equilibrium : Q1 Q2
15 1 2(15 1 2Q1 ) 10
Q Q1 Q2 20
P 30 Q 10
Chapter 10
Slide 86
Duopoly Example
Q1
30
Firm 2s
Reaction Curve
The demand curve is P = 30 - Q and

both firms have 0 marginal cost.
Cournot Equilibrium
15
10
Firm 1s
Reaction Curve
10
Chapter 10
15
30
Q2
Slide 87
Oligopoly
Profit
Profit Maximization
Maximization with
with Collusion
Collusion
R PQ (30 Q)Q 30Q Q

MR R Q 30 2Q
MR 0 when Q 15 and MR MC
Chapter 10
Slide 88
Oligopoly
Profit
Profit Maximization
Maximization with
with Collusion
Collusion
Contract Curve
Q1 + Q2 = 15
Q1 = Q2 = 7.5
Chapter 10
Shows all pairs of output Q1 and Q2 that

maximizes total profits
Less output and higher profits than the
Cournot equilibrium
Slide 89
Duopoly Example
Q1
30
Firm 2s
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
Firm 1s
Reaction Curve
Collusion
Curve
7.5 10
Chapter 10
15
30
Q2
Slide 90
First Mover Advantage-The Stackelberg Model
Assumptions
One firm can set output first
MC = 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 10
Slide 91
Firm 1
Must consider the reaction of Firm 2
Firm 2
Chapter 10
Takes Firm 1s output as fixed and

therefore determines output with the
Cournot reaction curve: Q2 = 15 - 1/2Q1
Slide 92
Firm 1
Choose
Q1 so that:
MR MC, MC 0 therefore MR 0
R1 PQ1 30Q1 - Q - Q2Q1
2
1
Chapter 10
Slide 93
Substituting Firm 2s Reaction Curve

for Q2:
R1 30Q1 Q12 Q1 (15 1 2Q1 )
15Q1 1 2 Q
2
1
MR1 R1 Q1 15 Q1
MR 0 : Q1 15 and Q2 7.5
Chapter 10
Slide 94
Conclusion
Firm 1s output is twice as large as firm 2s
Firm 1s profit is twice as large as firm 2s
Questions
Why is it more profitable to be the first

mover?
Which model (Cournot or Shackelberg) is

more appropriate?
Chapter 10
Slide 95
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 10
Slide 96
Price Competition
Bertrand
Bertrand Model
Model
Assumptions
Homogenous good
Market demand is P = 30 - Q where

Q = Q1 + Q2
MC = $3 for both firms and MC1 = MC2 =

$3
Chapter 10
Slide 97
Price Competition
Bertrand
Bertrand Model
Model
Assumptions
The Cournot equilibrium:
P $12
for both firms $81
Chapter 10
Assume the firms compete with price, not

quantity.
Slide 98
Price Competition
Bertrand
Bertrand Model
Model
How will consumers respond to a

price differential? (Hint: Consider
homogeneity)
The
Nash equilibrium:
P = MC; P1 = P2 = $3
Q = 27; Q1 & Q2 = 13.5
Chapter 10
Slide 99
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 10
Slide 100
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 10
It may not be equally divided.

Slide 101
Price Competition
Price Competition with Differentiated

Products
Chapter 10
Market shares are now determined not just

by prices, but by differences in the design,
performance, and durability of each firms
product.
Slide 102
Price Competition
Differentiated
Differentiated Products
Products
Assumptions
Duopoly
FC = $20
VC = 0
Chapter 10
Slide 103
Price Competition
Differentiated
Products
Assumptions
Firm 1s demand is Q1 = 12 - 2P1 + P2
Firm 2s demand is Q2 = 12 - 2P1 + P1
Chapter 10
P1 and P2 are prices firms 1 and 2

charge respectively
Q1 and Q2 are the resulting quantities

they sell
Slide 104
Price Competition
Differentiated
Products
Determining Prices and Output
Set prices at the same time
Firm 1 : 1 P1Q1 $20

P1 (12 2 P1 P2 ) 20
12 P1 - 2 P P1 P2 20
2
1
Chapter 10
Slide 105
Price Competition
Differentiated
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 10
Slide 106
Nash Equilibrium in Prices

P1

Collusive Equilibrium
$6
$4
Nash Equilibrium
$4
Chapter 10
$6
P2
Slide 107
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.
Quantity
Chapter 10
MR
Slide 108
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
Quantity
Q*
Chapter 10
MR
Slide 109
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 10
Slide 110

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 10
Slide 111

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 10
Slide 112
Price Setting by a Dominant Firm

Price
SF
The dominant firms 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 10
QT
MRD
At this price, fringe firms

sell QF, so that total
sales are QT.
Quantity
Slide 113
Cartels
Characteristics
1) Explicit agreements to set output and
price
2) May not include all firms
Chapter 10
Slide 114
Cartels
Characteristics
3) Most often international
Chapter 10
Examples of
successful cartels
OPEC
International
Bauxite
Association
Mercurio Europeo
Examples of
unsuccessful cartels
Copper
Tin
Coffee
Tea
Cocoa
Slide 115
Cartels
Characteristics
4) Conditions for success
Chapter 10
Competitive alternative sufficiently

deters cheating
Potential of monopoly power--inelastic

demand
Slide 116
Cartels
Comparing OPEC to CIPEC
Chapter 10
Most cartels involve a portion of the market

which then behaves as the dominant firm
Slide 117
The OPEC Oil Cartel

Price
TD
SC
TD is the total world demand
curve for oil, and SC is the
competitive supply. OPECs
demand is the difference
between the two.
OPECs 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 10
Quantity
Slide 118
Cartels
About OPEC
Very low MC
TD is inelastic
Non-OPEC supply is inelastic
DOPEC is relatively inelastic
Chapter 10
Slide 119
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 10
QOPEC
QT
Quantity
Slide 120
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 10
QC
QT
Quantity
Slide 121
Cartels
Observations
Chapter 10
To be successful:
Total demand must not be very price

elastic
Either the cartel must control nearly all

of the worlds supply or the supply of
noncartel producers must not be price
elastic
Slide 122
The Cartelization
of Intercollegiate Athletics
Observations
1) Large number of firms (colleges)
2) Large number of consumers (fans)
3) Very high profits
Chapter 10
Slide 123
The Cartelization
of Intercollegiate Athletics
Question
Chapter 10
How can we explain high profits in a

competitive market? (Hint: Think cartel and
the NCAA)
Slide 124
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 10
Slide 125
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 10
Slide 126
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 10
Slide 127
Summary
In the Cournot model of oligopoly, firms

make their output decisions at the same
time, each taking the others output as
fixed.
In the Stackelberg model, one firm sets

its output first.
Chapter 10
Slide 128
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 10
Slide 129
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 10
Slide 130

Lecture On Monopoli and Oligopoli

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Kuliah 10

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Sources of Monopoly Power

The Social Costs of Monopoly Power

Topik yg akan Dibicarakan

Limiting Market Power: The Antitrust

Ingat: Perfect Competition

Review of Perfect Competition

Normal profits or zero economic profits in

Large number of buyers and sellers

Firm is a price taker

Ingat: Perfect Competition

Ciri-Ciri Struktur Pasar Monopoli

The monopolist is the supply-side of the

Profits will be maximized at the level of

Finding Marginal Revenue

As the sole producer, the monopolist works

Assume a firm with demand:

Total, Marginal, and Average Revenue

Average and Marginal Revenue

No change in price to change sales

Monopolists Output Decision

Maximizing Profit When Marginal

At output levels below MR = MC the

At output levels above MR = MC the

Maximizing Profit When Marginal

By setting marginal revenue equal to

This can be seen graphically:

Example of Profit Maximization

Example of Profit Maximization

Profits are maximized at

Example of Profit Maximization

Example of Profit Maximization

A Rule of Thumb for Pricing

We want to translate the condition that

This can be demonstrated using the

A Rule of Thumb for Pricing

A Rule of Thumb for Pricing

A Rule of Thumb for Pricing

A Rule of Thumb for Pricing

8. The markup should equal the

A Rule of Thumb for Pricing

Monopoly pricing compared to perfect

Monopoly pricing compared to perfect

The more elastic the demand the closer

If Ed is a large negative number, price is

In perfect competition, the market supply

For a monopoly, output is determined by

Shift in Demand Leads to

Shift in Demand Leads to

in demand usually cause a change

monopolistic market has no supply

may supply many different

may supply the same quantity

The Effect of a Tax

Under monopoly price can sometimes rise

To determine the impact of a tax:

MR = MC + t : optimal production decision

Effect of Excise Tax on Monopolist

Increase in P: P0P1 > increase in tax

Effect of Excise Tax on Monopolist

How much would the price change?