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Imperfect Competition

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					Imperfect Competition

      A short Intro
      Peter Berck
       April 2006
         Marginal Revenue
• When a monopolist makes one more unit
  of a good he receives MR
• And it costs her MC

• Let‘s look at MR again….
         Marginal Revenue
             By adding 1 unit a monopolist gains
             The area is 1 wide by P high = P
 P(Q)             The monopolist looses

P(Q+1)            This area is the decrease in
                  price, which is the slope of
                  demand times Q.

         Q     Q+1              So MR is the sum of
                                the two areas
                                MR= P + Q (slope
                                demand)
           MR and Competition
                  Let Q = nq. Competitor loses just q
                  times slope and gains P whilst
                  monopolist looses Q times slope (n
                  times as much) and gains P. So
P(Q)
                  when n is big,
                  MR = Q/n slope+ P
                  is approx P.



       q    Q   Q+1
                For n large

•   MR = Q/n slope+ P
•   So for large n
•   MR just collapses to P
•   And that is why in competition p=mc.
             Strange Case of CA El.   Figure 2.1. Instate Supply Curve for Fossil Fueled Electricity


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                                                                    Capacity (MW)
                 Oligopoly
• N isn‘t one and it isn‘t large
• There are ―few‖ sellers
• The ‗few‘ sellers have a large incentive (a
  share of monopoly profits) to collude.
• Each individual seller also has a large
  incentive to cheat on the cartel
  – Gets more than his share.
  – Hopefully the others won‘t find out.
     Major types of Organization
•   Competition
•   Monopolistic Competition
•   Oligopoly
•   Monopoly

• (from Perloff‘s Microeconomics p 425)
              Competition
•   p= mc
•   Profits = 0
•   Free entry
•   Many firms
•   Price taker (mr = p)
•   Undifferentiated product
•   Ag commodities are example
      Monopolistic Competition
•   mr = mc
•   Sets price
•   Free entry and so zero profits
•   Many firms
•   Probably differentiated product
•   Firms don‘t act together!
•   Possibly many consumer goods (cereal)
    and maybe services like hair stylists
        Zero Profit Monopoly
• Exercise: draw the standard monopoly
  diagram so that the monopoly has zero
  profits.
• Verify that p > mc
• Story: as more firms enter the demand
  curve is shifted inward until there are no
  profits and no more firm‘s enter.
                 Oligopoly
•   mr = mc ; sets price
•   Hard to enter
•   Few firms
•   P > mc
•   Could be differentiated
•   Automobiles in the 1950‘s and 60‘s. Steel
    at the turn of the century. OPEC,
    sometimes.
               Monopoly
• Just one seller; no entry
• P > mc
• For a while de beers in diamonds, owners
  of patents and copyrights
                  OPEC
• OPEC is a cartel. It is an organization
  whose job is to increase price over the
  competitive level.
• Sometimes they can do it.
• Sometimes they can‘t.
                     $ per barrel




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                                                   Oil Price




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                                                        Oil Prices




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 1In
    The oil diagram explained
• In the aftermath of the Arab-Israel Yom
  Kippur War in 1973, OPEC attempted an
  embargo on oil sales to the US and other
  supporters of Israel. At the same time,
  Saudia Arabia cut its production by 35%.
  The Saudi reduction in output is what is
  responsible for the 1973 price increase.
                Now to 1978
• In 1978 OPEC again began production controls
  which were aided by the turmoil in Iran and the
  Iran-Iraq war. Both Iran and Iraq were major oil
  producers. Prices increased until 1981 when
  they peaked at $31.77 a barrel.
• During this period there was an increase in
  output by non OPEC nations and a slow but
  steady decrease in quantity demanded. Prices
  then slid all the way to $12.51 in 1986.
           Three Problems
• Countries start to buy less oil. For
  instance, Sweden has shifted out of oil for
  heating.
• New oil is found and produced.
• Members of the cartel cheat—sell more
  than they pledged to sell.
         More recent history
• With the first Gulf war and the end of sales
  by Iraq and Kuwait prices again increased
  and subsided to $10.87.
• From there prices have increased to close
  to $60 per barrel.
• The 2005 price spike is believed to be
  from an increase in demand from India
  and China.
                 Airlines
• Again source is Perloff, this time from a
  study by Brander and Zhang.
• Quantity setting game. Two airlines that
  share a city pair.
• Since two, called duopoly.
• Decide how many seats to make available
• Seats are thousand per quarter and profits
  are in millions of $
    Quantity Game
        qAm = 64    qAM = 48
qU = 64 4.1         5.1
              4.1         3.8
qU = 48 3.8         4.6
              5.1         4.6
Not the Outcome the Airlines Want
• They could collude. Many allegations that
  they do exactly that.
      Reduced commissions
• For instance, all the airlines together
  reduced the commissions to travel agents
  – ? Collusion
    • Lets do lunch and screw the customer
  – ? Competition
    • Too many travel agents (was true)
  – ? Conscious parallelism plus
    • E.g. one signaled that they were going to do it and
      let the rest prepare.
               Current case
• EU alleges that airlines have fixed cargo
  rates over the Atlantic.
  – Is p > mc?
  – Are there few airlines
  – Is entry difficult?
  – Do they have a tape recording of the lunch…
     • (smoking gun.)
     Can you detect cheating
• How would american know united had sold
  a lot of extra seats?
  – Could they distinguish it from a change in
    traffic from bad economic conditions
  – Suppose that they both subscribed to a data
    service that independently tracked seats
  – Suppose that a large number of united seats
    got sold through sabre owned by AA

				
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posted:10/13/2011
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