Reading 16 The firm and market structures (cont.)
- Kinked demand curve model
Assumption: Firm increase price, others will NOT followed.
Firm decrease price, others will followed decrease.
Q1: maximum profit level of unit
- Cournot model : only 2 firms operating (Duopoly)
Only 2 firms A and B are similar and no change. A know the quantity of B and know total market supply → A can calculate its quantity → calculate its MR, MC.
- Nash equilibrium model (prisoner’s dilemma)
Collusive agreements will be more successful when:
- There are fewer firms.
- Product, cost structures are similar.
- Retaliation for cheating is more certain & more severe.
- There is less actual or potential competition from outside the cartel.
- Dominant firm model
There is a single firm, significantly large in the market (DF) → dicide price
Other competitive firms: take price.
Based on graph above: the line cross the point of (MR ∩ MC) intersect DFdemand at d, from here we have: p* and q*. p* is the price dominant firm search.
- Collusion and perfect competition
MCmarket is the supply curve.
Pcollusion > Pcompitition and Qcollusion < Qcompitition
Figure 1: Single – price monopoly graph
Price discrimination work, sellers:
- Face a downward sloping demand curve
- At least 2 identifiable groups of customer with different price elastiscities of demand.
- Prevent customers reselling.
Example electric utility: initial cost very large, so MC for additional home low → the more provided, the lower the average cost.
The average cost of production for a single firm is falling throughout the relevant range of customers.
Average cost pricing: + increase Q & decrease P
+ increase social welfare
+ ensure the monopolist a normal profit (P = ATC)
Marginal cost pricing
P below ATC → Government subsidy
Concentration ratio, Herfindahl – Hirschman Index (HHI)
Where: Si: market share in percent
N: number of firm in industry