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Ninth Lecture – Between Monopoly and Competition

Ninth Lecture – Between Monopoly and Competition

Instructor, Andy Schlafly

Instructor, Andy Schlafly

 

<br>I. Introduction

I. Introduction

==Introduction==

Two weeks ago we studied “competition”.  Last week we examined “monopolies”.  If you own a business, which would you prefer?  Don’t be too hasty in answering.

Two weeks ago we studied “competition”.  Last week we examined “monopolies”.  If you own a business, which would you prefer?  Don’t be too hasty in answering.

This lecture is devoted to all those situations in between perfect competition and true monopoly.  The spectrum looks like this:

This lecture is devoted to all those situations in between perfect competition and true monopoly.  The spectrum looks like this:

1.  Monopoly (MC=MR is how the price is determined)

# Monopoly (MC=MR is how the price is determined)

<br>2.  Cartel

# Cartel

<br>3.  Oligopoly

# Oligopoly

<br>4.  Monopolistic Competition

# Monopolistic Competition

<br>5.  Perfectly Contestable Markets

# Perfectly Contestable Markets

<br>6.  Perfect Competition (P=ATC, average total cost, is how price is determined)

# Perfect Competition (P=ATC, average total cost, is how price is determined)

As a seller, you make more money the higher you are on the list.  As a buyer, you save more money the lower you are the list.  Let’s introduce each term:

As a seller, you make more money the higher you are on the list.  As a buyer, you save more money the lower you are the list.  Let’s introduce each term:

Monopoly - A single seller of a product having no competition or close substitutes.  The seller comprises the entire industry.

===Monopoly===

A single seller of a product having no competition or close substitutes.  The seller comprises the entire industry.

Cartel - A group of producers that band together to raise prices, restrict output, or allocate market share.  OPEC, a group of mostly Arab oil producers attempting to keep profits high, is the most famous cartel.

===Cartel===

A group of producers that band together to raise prices, restrict output, or allocate market share.  OPEC, a group of mostly Arab oil producers attempting to keep profits high, is the most famous cartel.

Oligopoly - A few producers that dominate a market without fixing prices or output.  If the good is identical among the companies, then it is a perfect or pure oligopoly.  Examples include the steel and cement industries.  Cement is cement, period.  If the good is not identical, then it is an imperfect oligopoly.  Examples are the car or soap industries.  Cars are not identical to each other, but the auto industry is an oligopoly.

===Oligopoly===

A few producers that dominate a market without fixing prices or output.  If the good is identical among the companies, then it is a perfect or pure oligopoly.  Examples include the steel and cement industries.  Cement is cement, period.  If the good is not identical, then it is an imperfect oligopoly.  Examples are the car or soap industries.  Cars are not identical to each other, but the auto industry is an oligopoly.

Monopolistic Competition - This has more sellers than an oligopoly and more competition too.  But companies are able to increase their prices without losing all their customers.  Why?  Because in monopolistic competition there are “differentiated products.”  An example is the haircutting or hairdressing  industry.  Cutting hair is a service that is not a perfect substitute for other haircutting services.  One with a loyal customer base can increase her prices without losing her business.

===Monopolistic Competition===

This has more sellers than an oligopoly and more competition too.  But companies are able to increase their prices without losing all their customers.  Why?  Because in monopolistic competition there are “differentiated products.”  An example is the haircutting or hairdressing  industry.  Cutting hair is a service that is not a perfect substitute for other haircutting services.  One with a loyal customer base can increase her prices without losing her business.

Perfectly Contestable Markets - This is where there is no barrier to entry into the market and no start-up costs.  There are only a few sellers, or maybe only one seller, but competition is always threatened.  A newspaper vendor in a shopping mall is an example.  He may be the only one, but it is so easy for another competitor to start selling newspapers that he always keeps his prices as low as he can.

===Perfectly Contestable Markets===

This is where there is no barrier to entry into the market and no start-up costs.  There are only a few sellers, or maybe only one seller, but competition is always threatened.  A newspaper vendor in a shopping mall is an example.  He may be the only one, but it is so easy for another competitor to start selling newspapers that he always keeps his prices as low as he can.

Perfect Competition - A large number of sellers and buyers have full knowledge and perfect mobility of resources.  The good or service is homogeneous.  Competition is ruthless in keeping prices down.  Price (P) equals Marginal Cost (MC) equals Average Total Cost (ATC).  This is what happens when Wal-Mart moves in next door!

===Perfect Competition===

A large number of sellers and buyers have full knowledge and perfect mobility of resources.  The good or service is homogeneous.  Competition is ruthless in keeping prices down.  Price (P) equals Marginal Cost (MC) equals Average Total Cost (ATC).  This is what happens when Wal-Mart moves in next door!

There are other terms worth knowing in this area.  “Monopsony” is a “buyer’s monopoly.”  It consists of a single buyer of a good or service.  In a one-company isolated town, where one company employs most of the people, the company is nearly a monopsony with respect to labor in that town.  Note that the more it hires, the greater its wage costs will become.  But perfect monopsonies are difficult to imagine.  Can you think of another one?

There are other terms worth knowing in this area.  “Monopsony” is a “buyer’s monopoly.”  It consists of a single buyer of a good or service.  In a one-company isolated town, where one company employs most of the people, the company is nearly a monopsony with respect to labor in that town.  Note that the more it hires, the greater its wage costs will become.  But perfect monopsonies are difficult to imagine.  Can you think of another one?

II. Oligopoly.

==Oligopoly==

There are only a few firms in oligopoly.  There are also high barriers to entry so that new companies cannot enter the industry and compete with existing firms.  Each firm produces similar products.

There are only a few firms in oligopoly.  There are also high barriers to entry so that new companies cannot enter the industry and compete with existing firms.  Each firm produces similar products.

III. Cartel.

==Cartel==

A cartel takes an oligopoly one step further.  In a cartel, the companies have an actual agreement among each other to raise prices, reduce supply, or otherwise reduce competition.  This is illegal.  Agreements by companies to reduce competition are prohibited by federal law.  The federal government can prosecute and convict anyone who agrees or conspires to reduce competition.   

A cartel takes an oligopoly one step further.  In a cartel, the companies have an actual agreement among each other to raise prices, reduce supply, or otherwise reduce competition.  This is illegal.  Agreements by companies to reduce competition are prohibited by federal law.  The federal government can prosecute and convict anyone who agrees or conspires to reduce competition.   

IV. Monopolistic Competition

==Monopolistic Competition==

Finally, we need to explore the concept of “monopolistic competition.”  It has four conditions: (1) many buyers and sellers, (2) goods that have differences among each other, (3) sufficient knowledge about the market, and (4) free entry into the industry by new companies.

Finally, we need to explore the concept of “monopolistic competition.”  It has four conditions: (1) many buyers and sellers, (2) goods that have differences among each other, (3) sufficient knowledge about the market, and (4) free entry into the industry by new companies.

V. Nash Equilibrium

==Nash Equilibrium==

Here is the insight that won John Nash a Nobel prize in economics and led to a popular, Academy-Award winning movie called “A Beautiful Mind.”  This is called the [[Nash equilibrium]].  It applies in particular to oligopolies.

Here is the insight that won John Nash a Nobel prize in economics and led to a popular, Academy-Award winning movie called “A Beautiful Mind.”  This is called the [[Nash equilibrium]].  It applies in particular to oligopolies.

The Nash equilibrium predicts both will confess, which is not their overall optimal result.

The Nash equilibrium predicts both will confess, which is not their overall optimal result.

VI. Questions

==Questions==

Read and, if necessary, reread the above lecture.  NEXT WEEK IS THE MIDTERM EXAM.

Read and, if necessary, reread the above lecture.  NEXT WEEK IS THE MIDTERM EXAM.

Below are review questions that you need not answer to hand in.  You may ask questions and possibly review answers on Conservapedia at “Talk:Economics” and Model Answers for the course to date are being posted at “Economics:Model Answers”.

Below are review questions that you need not answer to hand in.  You may ask questions and possibly review answers on [[Talk:Economics|here]] and Model Answers for the course to date are being posted [[Economics:Model Answers|here]].

1.  An oligopoly that illegally agrees to raise its prices is called a __________.

1.  An oligopoly that illegally agrees to raise its prices is called a __________.