Chapter 12
Monopolistic
Competition and
Oligopoly
Chapter 12 Slide 2
Topics to be Discussed
? Monopolistic Competition
? Oligopoly
? Price Competition
? Competition Versus Collusion,The
Prisoners’ Dilemma
Chapter 12 Slide 3
Topics to be Discussed
? Implications of the Prisoners’ Dilemma
for Oligopolistic Pricing
? Cartels
Chapter 12 Slide 4
Monopolistic Competition
? Characteristics
1) Many firms
2) Free entry and exit
3) Differentiated product
Chapter 12 Slide 5
Monopolistic Competition
? The amount of monopoly power
depends on the degree of
differentiation,
? Examples of this very common market
structure include,
? Toothpaste
? Soap
? Cold remedies
Chapter 12 Slide 6
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 7
Monopolistic Competition
? Question
? Does Procter & Gamble have much monopoly
power in the market for Crest?
Chapter 12 Slide 8
Monopolistic Competition
? The Makings of Monopolistic Competition
?Two important characteristics
?Differentiated but highly substitutable
products
?Free entry and exit
A Monopolistically Competitive
Firm in the Short and Long Run
Quantity
$/Q
Quantity
$/Q MC
AC
MC
AC
DSR
MRSR
DLR
MRLR
QSR
PSR
QLR
PLR
Short Run Long Run
Chapter 12 Slide 10
? Observations (short-run)
? Downward sloping demand--differentiated
product
? Demand is relatively elastic--good
substitutes
? MR < P
? Profits are maximized when MR = MC
? This firm is making economic profits
A Monopolistically Competitive
Firm in the Short and Long Run
Chapter 12 Slide 11
? Observations (long-run)
? Profits will attract new firms to the industry
(no barriers to entry)
? The old firm’s demand will decrease to DLR
? Firm’s output and price will fall
? Industry output will rise
? No economic profit (P = AC)
? P > MC -- some monopoly power
A Monopolistically Competitive
Firm in the Short and Long Run
Deadweight
loss MC AC
Comparison of Monopolistically Competitive
Equilibrium and Perfectly Competitive Equilibrium
$/Q
Quantity
$/Q
D = MR
QC
PC
MC AC
DLR
MRLR
QMC
P
Quantity
Perfect Competition Monopolistic Competition
Chapter 12 Slide 13
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 14
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 15
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 16
Monopolistic Competition
? Questions
3) What is the degree of monopoly
power?
4) What is the benefit of product
diversity?
Chapter 12 Slide 17
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 18
Elasticities of Demand for
Brands of Colas and Coffee
Colas,Royal Crown -2.4
Coke -5.2 to -5.7
Ground Coffee,Hills Brothers -7.1
Maxwell House -8.9
Chase and Sanborn -5.6
Brand Elasticity of Demand
Chapter 12 Slide 19
? 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,
Elasticities of Demand for
Brands of Colas and Coffee
Chapter 12 Slide 20
Oligopoly
? Characteristics
? Small number of firms
? Product differentiation may or may not
exist
? Barriers to entry
Chapter 12 Slide 21
Oligopoly
? Examples
? Automobiles
? Steel
? Aluminum
? Petrochemicals
? Electrical equipment
? Computers
Chapter 12 Slide 22
Oligopoly
? The barriers to entry are,
? Natural
?Scale economies
?Patents
?Technology
?Name recognition
Chapter 12 Slide 23
Oligopoly
? The barriers to entry are,
? Strategic action
?Flooding the market
?Controlling an essential input
Chapter 12 Slide 24
Oligopoly
? Management Challenges
? Strategic actions
? Rival behavior
? Question
? What are the possible rival responses to a
10% price cut by Ford?
Chapter 12 Slide 25
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 26
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 27
Oligopoly
? Nash Equilibrium
? Each firm is doing the best it can given
what its competitors are doing,
Chapter 12 Slide 28
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 29
MC1
50
MR1(75)
D1(75)
12.5
If Firm 1 thinks Firm 2 will produce
75 units,its demand curve is
shifted to the left by this amount,
Firm 1’s Output Decision
Q1
P1
What is the output of Firm 1
if Firm 2 produces 100 units?
D1(0)
MR1(0)
If Firm 1 thinks Firm 2 will
produce nothing,its demand
curve,D1(0),is the market
demand curve,
D1(50) MR1(50)
25
If Firm 1 thinks Firm 2 will produce
50 units,its demand curve is
shifted to the left by this amount,
Chapter 12 Slide 30
Oligopoly
? The Reaction Curve
? A firm’s profit-maximizing output is a
decreasing schedule of the expected
output of Firm 2,
Chapter 12 Slide 31
Firm 2’s Reaction
Curve Q*2(Q2)
Firm 2’s reaction curve shows how much it
will produce as a function of how much
it thinks Firm 1 will produce,
Reaction Curves
and Cournot Equilibrium
Q2
Q1
25 50 75 100
25
50
75
100
Firm 1’s Reaction
Curve Q*1(Q2)
x
x
x
x
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,
In Cournot equilibrium,each
firm correctly assumes how
much its competitors will
produce and thereby
maximize its own profits,
Cournot
Equilibrium
Chapter 12 Slide 32
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 33
Oligopoly
? An Example of the Cournot Equilibrium
? Duopoly
?Market demand is P = 30 - Q where Q =
Q1 + Q2
?MC1 = MC2 = 0
The Linear Demand Curve
Chapter 12 Slide 34
Oligopoly
? An Example of the Cournot Equilibrium
? Firm 1’s Reaction Curve
111 )30( R e v e n u e,T o t a l QQPQR ???
12
2
11
1211
30
)(30
QQQQ
QQQQ
???
???
The Linear Demand Curve
Chapter 12 Slide 35
Oligopoly
? An Example of the Cournot Equilibrium
12
21
11
21111
2115
2115
0
230
QQ
QQ
MCMR
QQQRMR
??
??
??
??????
C u r v e R e a c t i o n s2' F i r m
C u r v e R e a c t i o n s1' F i r m
The Linear Demand Curve
Chapter 12 Slide 36
Oligopoly
? An Example of the Cournot Equilibrium
1030
20
10)2115(2115
21
1
1
???
???
???
?
QP
QQQ
Q
QQ
2
:mE q u i l i b r i u C o u r n o t
The Linear Demand Curve
Chapter 12 Slide 37
Duopoly Example
Q1
Q2
Firm 2’s
Reaction Curve
30
15
Firm 1’s
Reaction Curve
15
30
10
10
Cournot Equilibrium
The demand curve is P = 30 - Q and
both firms have 0 marginal cost,
Chapter 12 Slide 38
Oligopoly
MCMRMR
QQRMR
QQQQPQR
???
?????
?????
a n d 15 Q w h e n 0
230
30)30(
2
Profit Maximization with Collusion
Chapter 12 Slide 39
Oligopoly
? Contract Curve
? Q1 + Q2 = 15
?Shows all pairs of output Q1 and Q2 that
maximizes total profits
? Q1 = Q2 = 7.5
?Less output and higher profits than the
Cournot equilibrium
Profit Maximization with Collusion
Chapter 12 Slide 40
Firm 1’s
Reaction Curve
Firm 2’s
Reaction Curve
Duopoly Example
Q1
Q2
30
30
10
10
Cournot Equilibrium 15
15
Competitive Equilibrium (P = MC; Profit = 0)
Collusion
Curve
7.5
7.5
Collusive Equilibrium
For the firm,collusion is the best
outcome followed by the Cournot
Equilibrium and then the
competitive equilibrium
Chapter 12 Slide 41
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 12 Slide 42
? 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
First Mover Advantage--
The Stackelberg Model
Chapter 12 Slide 43
? Firm 1
?Choose Q1 so that,
12
2
1111 30
0
Q - Q - QQ P Q R
M C,M C M R
??
??? 0 MR t h e r e f o r e
First Mover Advantage--
The Stackelberg Model
Chapter 12 Slide 44
? Substituting Firm 2’s Reaction Curve
for Q2,
5.7 a nd 15:0
15
21
1111
???
?????
QQMR
QQRMR
2
11
11
2
111
2115
)2115(30
QQ
QQQQR
??
????
First Mover Advantage--
The Stackelberg Model
Chapter 12 Slide 45
? 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?
First Mover Advantage--
The Stackelberg Model
Chapter 12 Slide 46
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 47
Price Competition
? Assumptions
? Homogenous good
? Market demand is P = 30 - Q where
Q = Q1 + Q2
? MC = $3 for both firms and MC1 = MC2 =
$3
Bertrand Model
Chapter 12 Slide 48
Price Competition
? Assumptions
? The Cournot equilibrium,
?
? Assume the firms compete with price,not
quantity,
Bertrand Model
$81 f ir m s bot h f or ?
?
?
12$P
Chapter 12 Slide 49
Price Competition
? 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
?
Bertrand Model
0??
Chapter 12 Slide 50
Price Competition
? 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),
Bertrand Model
Chapter 12 Slide 51
Price Competition
? 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?
?It may not be equally divided,
Bertrand Model
Chapter 12 Slide 52
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 53
Price Competition
? Assumptions
? Duopoly
? FC = $20
? VC = 0
Differentiated Products
Chapter 12 Slide 54
Price Competition
? Assumptions
? Firm 1’s demand is Q1 = 12 - 2P1 + P2
? Firm 2’s demand is Q2 = 12 - 2P1 + P1
?P1 and P2 are prices firms 1 and 2
charge respectively
?Q1 and Q2 are the resulting quantities
they sell
Differentiated Products
Chapter 12 Slide 55
Price Competition
? Determining Prices and Output
? Set prices at the same time
202-12
20)212(
20$,1 Fi r m
21
2
11
211
111
???
????
??
PPPP
PPP
QP?Differentiated Products
Chapter 12 Slide 56
Price Competition
? Determining Prices and Output
? Firm 1,If P2 is fixed,
12
21
2111
413
413
0412
'
PP
PP
PPP
??
?
??
?
??????
?
c u r v e r e a c t i o n s2' F i r m
c u r v e r e a c t i o n s1' F i r m
p r i c e m a x i m i z i n g p r o f i t s1 F i r m
?
Differentiated Products
Chapter 12 Slide 57
Firm 1’s Reaction Curve
Nash Equilibrium in Prices
P1
P2
Firm 2’s Reaction Curve
$4
$4
Nash Equilibrium
$6
$6
Collusive Equilibrium
Chapter 12 Slide 58
Nash Equilibrium in Prices
? Does the Stackelberg model prediction
for first mover hold when price is the
variable instead of quantity?
?Hint,Would you want to set price first?
Chapter 12 Slide 59
A Pricing Problem
for Procter & Gamble
? 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,
Differentiated Products
Chapter 12 Slide 60
? 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
Differentiated Products
A Pricing Problem
for Procter & Gamble
Chapter 12 Slide 61
? Scenario
5) P&G’s demand curve was,
Q = 3,375P-3.5(PU).25(PK).25
?Where P,PU,PK are P&G’s,Unilever’s,
and Kao’s prices respectively
Differentiated Products
A Pricing Problem
for Procter & Gamble
Chapter 12 Slide 62
? Problem
? What price should P&G choose and what is
the expected profit?
Differentiated Products
A Pricing Problem
for Procter & Gamble
P&G’s Profit (in thousands of $ per month)
1.10 -226 -215 -204 -194 -183 -174 -165 -155
1.20 -106 -89 -73 -58 -43 -28 -15 -2
1.30 -56 -37 -19 2 15 31 47 62
1.40 -44 -25 -6 12 29 46 62 78
1.50 -52 -32 -15 3 20 36 52 68
1.60 -70 -51 -34 -18 -1 14 30 44
1.70 -93 -76 -59 -44 -28 -13 1 15
1.80 -118 -102 -87 -72 -57 -44 -30 -17
Competitor’s (Equal) Prices ($) P&G’s
Price ($) 1.10 1.20 1.30 1.40 1.50 1.60 1.70 1.80
Chapter 12 Slide 64
? What Do You Think?
1) Why would each firm choose a
price of $1.40? Hint,Think Nash
Equilibrium
2) What is the profit maximizing price
with collusion?
A Pricing Problem
for Procter & Gamble
Chapter 12 Slide 65
Competition Versus Collusion,
The Prisoners’ Dilemma
? Why wouldn’t each firm set the
collusion price independently and
earn the higher profits that occur
with explicit collusion?
Chapter 12 Slide 66
? Assume,
16$ 6$,C o l l u s i o n
12$ 4$,mEq u i l i b r i uN a s h
212,d e m a n d s2' F i r m
212,d e m a n d s1' F i r m
0$ a n d 20$
12
21
??
??
???
???
??
?
?
P
P
PPQ
PPQ
VCFC
Competition Versus Collusion,
The Prisoners’ Dilemma
Chapter 12 Slide 67
? Possible Pricing Outcomes,
? ?
? ? 4$204)6)(2(12)6(
20
20$206)4)(2(12)4(
20
4$ 6$
$ 1 6 6$,2 F i r m 6$,1 F i r m
111
222
?????
??
?????
??
??
???
QP
QP
PP
PP
?
?
?
Competition Versus Collusion,
The Prisoners’ Dilemma
Chapter 12 Slide 68
Payoff Matrix for Pricing Game
Firm 2
Firm 1
Charge $4 Charge $6
Charge $4
Charge $6
$12,$12 $20,$4
$16,$16 $4,$20
Chapter 12 Slide 69
? 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?
Competition Versus Collusion,
The Prisoners’ Dilemma
Chapter 12 Slide 70
? An example in game theory,called the
Prisoners’ Dilemma,illustrates the
problem oligopolistic firms face,
Competition Versus Collusion,
The Prisoners’ Dilemma
Chapter 12 Slide 71
? 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,
Competition Versus Collusion,
The Prisoners’ Dilemma
Chapter 12 Slide 72
-5,-5 -1,-10
-2,-2 -10,-1
Payoff Matrix for Prisoners’ Dilemma
Prisoner A
Confess Don’t confess
Confess
Don’t
confess
Prisoner B
Would you choose to confess?
Chapter 12 Slide 73
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 74
Charge $1.40 Charge $1.50
Charge
$1.40
Unilever and Kao
Charge
$1.50
P&G
$12,$12 $29,$11
$3,$21 $20,$20
Payoff Matrix for the P&G Pricing
Problem
What price should P & G choose?
Chapter 12 Slide 75
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 76
? 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,
Implications of the Prisoners’
Dilemma for Oligipolistic Pricing
Chapter 12 Slide 77
The Kinked Demand Curve
$/Q
Quantity
MR
D
If the producer lowers price the
competitors will follow and the
demand will be inelastic,
If the producer raises price the
competitors will not and the
demand will be elastic,
Chapter 12 Slide 78
The Kinked Demand Curve
$/Q
D
P*
Q*
MC
MC’
So long as marginal cost is in the
vertical region of the marginal
revenue curve,price and output
will remain constant,
MR
Quantity
Chapter 12 Slide 79
Implications of the Prisoners’
Dilemma for Oligopolistic Pricing
? Price Signaling
?Implicit collusion in which a firm announces
a price increase in the hope that other
firms will follow suit
Price Signaling & Price Leadership
Chapter 12 Slide 80
Implications of the Prisoners’
Dilemma for Oligopolistic Pricing
? Price Leadership
?Pattern of pricing in which one firm
regularly announces price changes that
other firms then match
Price Signaling & Price Leadership
Chapter 12 Slide 81
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 82
Price Setting by a Dominant Firm
Price
Quantity
D
DD
QD
P*
At this price,fringe firms
sell QF,so that total
sales are QT,
P1
QF QT
P2
MCD
MRD
SF The dominant firm’s demand
curve is the difference between
market demand (D) and the supply
of the fringe firms (SF),
Chapter 12 Slide 83
Cartels
? Characteristics
1) Explicit agreements to set output and
price
2) May not include all firms
Chapter 12 Slide 84
Cartels
? Examples of
successful cartels
? OPEC
? International
Bauxite
Association
? Mercurio Europeo
? Examples of
unsuccessful cartels
? Copper
? Tin
? Coffee
? Tea
? Cocoa
? Characteristics
3) Most often international
Chapter 12 Slide 85
Cartels
? Characteristics
4) Conditions for success
?Competitive alternative sufficiently
deters cheating
?Potential of monopoly power--inelastic
demand
Chapter 12 Slide 86
Cartels
? Comparing OPEC to CIPEC
? Most cartels involve a portion of the market
which then behaves as the dominant firm
Chapter 12 Slide 87
The OPEC Oil Cartel
Price
Quantity
MROPEC
DOPEC
TD SC
MCOPEC
TD is the total world demand
curve for oil,and SC is the
competitive supply,OPEC’s
demand is the difference
between the two,
QOPEC
P*
OPEC’s profits maximizing
quantity is found at the
intersection of its MR and
MC curves,At this quantity
OPEC charges price P*,
Chapter 12 Slide 88
Cartels
? About OPEC
? Very low MC
? TD is inelastic
? Non-OPEC supply is inelastic
? DOPEC is relatively inelastic
Chapter 12 Slide 89
The OPEC Oil Cartel
Price
Quantity
MROPEC
DOPEC
TD SC
MCOPEC
QOPEC
P*
The price without the cartel,
?Competitive price (PC) where
DOPEC = MCOPEC
QC QT
Pc
Chapter 12 Slide 90
The CIPEC Copper Cartel
Price
Quantity
MRCIPEC
TD
DCIPEC
SC
MCCIPEC
QCIPEC
P*
PC
QC QT
?TD and SC are relatively elastic
?DCIPEC is elastic
?CIPEC has little monopoly power
?P* is closer to PC
Chapter 12 Slide 91
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 92
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 93
? Question
? How can we explain high profits in a
competitive market? (Hint,Think cartel and
the NCAA)
The Cartelization
of Intercollegiate Athletics
Chapter 12 Slide 94
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 95
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 96
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 97
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 98
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 99
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,
End of Chapter 12
Monopolistic
Competition and
Oligopoly
Monopolistic
Competition and
Oligopoly
Chapter 12 Slide 2
Topics to be Discussed
? Monopolistic Competition
? Oligopoly
? Price Competition
? Competition Versus Collusion,The
Prisoners’ Dilemma
Chapter 12 Slide 3
Topics to be Discussed
? Implications of the Prisoners’ Dilemma
for Oligopolistic Pricing
? Cartels
Chapter 12 Slide 4
Monopolistic Competition
? Characteristics
1) Many firms
2) Free entry and exit
3) Differentiated product
Chapter 12 Slide 5
Monopolistic Competition
? The amount of monopoly power
depends on the degree of
differentiation,
? Examples of this very common market
structure include,
? Toothpaste
? Soap
? Cold remedies
Chapter 12 Slide 6
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 7
Monopolistic Competition
? Question
? Does Procter & Gamble have much monopoly
power in the market for Crest?
Chapter 12 Slide 8
Monopolistic Competition
? The Makings of Monopolistic Competition
?Two important characteristics
?Differentiated but highly substitutable
products
?Free entry and exit
A Monopolistically Competitive
Firm in the Short and Long Run
Quantity
$/Q
Quantity
$/Q MC
AC
MC
AC
DSR
MRSR
DLR
MRLR
QSR
PSR
QLR
PLR
Short Run Long Run
Chapter 12 Slide 10
? Observations (short-run)
? Downward sloping demand--differentiated
product
? Demand is relatively elastic--good
substitutes
? MR < P
? Profits are maximized when MR = MC
? This firm is making economic profits
A Monopolistically Competitive
Firm in the Short and Long Run
Chapter 12 Slide 11
? Observations (long-run)
? Profits will attract new firms to the industry
(no barriers to entry)
? The old firm’s demand will decrease to DLR
? Firm’s output and price will fall
? Industry output will rise
? No economic profit (P = AC)
? P > MC -- some monopoly power
A Monopolistically Competitive
Firm in the Short and Long Run
Deadweight
loss MC AC
Comparison of Monopolistically Competitive
Equilibrium and Perfectly Competitive Equilibrium
$/Q
Quantity
$/Q
D = MR
QC
PC
MC AC
DLR
MRLR
QMC
P
Quantity
Perfect Competition Monopolistic Competition
Chapter 12 Slide 13
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 14
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 15
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 16
Monopolistic Competition
? Questions
3) What is the degree of monopoly
power?
4) What is the benefit of product
diversity?
Chapter 12 Slide 17
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 18
Elasticities of Demand for
Brands of Colas and Coffee
Colas,Royal Crown -2.4
Coke -5.2 to -5.7
Ground Coffee,Hills Brothers -7.1
Maxwell House -8.9
Chase and Sanborn -5.6
Brand Elasticity of Demand
Chapter 12 Slide 19
? 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,
Elasticities of Demand for
Brands of Colas and Coffee
Chapter 12 Slide 20
Oligopoly
? Characteristics
? Small number of firms
? Product differentiation may or may not
exist
? Barriers to entry
Chapter 12 Slide 21
Oligopoly
? Examples
? Automobiles
? Steel
? Aluminum
? Petrochemicals
? Electrical equipment
? Computers
Chapter 12 Slide 22
Oligopoly
? The barriers to entry are,
? Natural
?Scale economies
?Patents
?Technology
?Name recognition
Chapter 12 Slide 23
Oligopoly
? The barriers to entry are,
? Strategic action
?Flooding the market
?Controlling an essential input
Chapter 12 Slide 24
Oligopoly
? Management Challenges
? Strategic actions
? Rival behavior
? Question
? What are the possible rival responses to a
10% price cut by Ford?
Chapter 12 Slide 25
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 26
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 27
Oligopoly
? Nash Equilibrium
? Each firm is doing the best it can given
what its competitors are doing,
Chapter 12 Slide 28
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 29
MC1
50
MR1(75)
D1(75)
12.5
If Firm 1 thinks Firm 2 will produce
75 units,its demand curve is
shifted to the left by this amount,
Firm 1’s Output Decision
Q1
P1
What is the output of Firm 1
if Firm 2 produces 100 units?
D1(0)
MR1(0)
If Firm 1 thinks Firm 2 will
produce nothing,its demand
curve,D1(0),is the market
demand curve,
D1(50) MR1(50)
25
If Firm 1 thinks Firm 2 will produce
50 units,its demand curve is
shifted to the left by this amount,
Chapter 12 Slide 30
Oligopoly
? The Reaction Curve
? A firm’s profit-maximizing output is a
decreasing schedule of the expected
output of Firm 2,
Chapter 12 Slide 31
Firm 2’s Reaction
Curve Q*2(Q2)
Firm 2’s reaction curve shows how much it
will produce as a function of how much
it thinks Firm 1 will produce,
Reaction Curves
and Cournot Equilibrium
Q2
Q1
25 50 75 100
25
50
75
100
Firm 1’s Reaction
Curve Q*1(Q2)
x
x
x
x
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,
In Cournot equilibrium,each
firm correctly assumes how
much its competitors will
produce and thereby
maximize its own profits,
Cournot
Equilibrium
Chapter 12 Slide 32
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 33
Oligopoly
? An Example of the Cournot Equilibrium
? Duopoly
?Market demand is P = 30 - Q where Q =
Q1 + Q2
?MC1 = MC2 = 0
The Linear Demand Curve
Chapter 12 Slide 34
Oligopoly
? An Example of the Cournot Equilibrium
? Firm 1’s Reaction Curve
111 )30( R e v e n u e,T o t a l QQPQR ???
12
2
11
1211
30
)(30
QQQQ
QQQQ
???
???
The Linear Demand Curve
Chapter 12 Slide 35
Oligopoly
? An Example of the Cournot Equilibrium
12
21
11
21111
2115
2115
0
230
MCMR
QQQRMR
??
??
??
??????
C u r v e R e a c t i o n s2' F i r m
C u r v e R e a c t i o n s1' F i r m
The Linear Demand Curve
Chapter 12 Slide 36
Oligopoly
? An Example of the Cournot Equilibrium
1030
20
10)2115(2115
21
1
1
???
???
???
?
QP
QQQ
Q
2
:mE q u i l i b r i u C o u r n o t
The Linear Demand Curve
Chapter 12 Slide 37
Duopoly Example
Q1
Q2
Firm 2’s
Reaction Curve
30
15
Firm 1’s
Reaction Curve
15
30
10
10
Cournot Equilibrium
The demand curve is P = 30 - Q and
both firms have 0 marginal cost,
Chapter 12 Slide 38
Oligopoly
MCMRMR
QQRMR
QQQQPQR
???
?????
?????
a n d 15 Q w h e n 0
230
30)30(
2
Profit Maximization with Collusion
Chapter 12 Slide 39
Oligopoly
? Contract Curve
? Q1 + Q2 = 15
?Shows all pairs of output Q1 and Q2 that
maximizes total profits
? Q1 = Q2 = 7.5
?Less output and higher profits than the
Cournot equilibrium
Profit Maximization with Collusion
Chapter 12 Slide 40
Firm 1’s
Reaction Curve
Firm 2’s
Reaction Curve
Duopoly Example
Q1
Q2
30
30
10
10
Cournot Equilibrium 15
15
Competitive Equilibrium (P = MC; Profit = 0)
Collusion
Curve
7.5
7.5
Collusive Equilibrium
For the firm,collusion is the best
outcome followed by the Cournot
Equilibrium and then the
competitive equilibrium
Chapter 12 Slide 41
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 12 Slide 42
? 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
First Mover Advantage--
The Stackelberg Model
Chapter 12 Slide 43
? Firm 1
?Choose Q1 so that,
12
2
1111 30
0
Q - Q - QQ P Q R
M C,M C M R
??
??? 0 MR t h e r e f o r e
First Mover Advantage--
The Stackelberg Model
Chapter 12 Slide 44
? Substituting Firm 2’s Reaction Curve
for Q2,
5.7 a nd 15:0
15
21
1111
???
?????
QQMR
QQRMR
2
11
11
2
111
2115
)2115(30
QQQQR
??
????
First Mover Advantage--
The Stackelberg Model
Chapter 12 Slide 45
? 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?
First Mover Advantage--
The Stackelberg Model
Chapter 12 Slide 46
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 47
Price Competition
? Assumptions
? Homogenous good
? Market demand is P = 30 - Q where
Q = Q1 + Q2
? MC = $3 for both firms and MC1 = MC2 =
$3
Bertrand Model
Chapter 12 Slide 48
Price Competition
? Assumptions
? The Cournot equilibrium,
?
? Assume the firms compete with price,not
quantity,
Bertrand Model
$81 f ir m s bot h f or ?
?
?
12$P
Chapter 12 Slide 49
Price Competition
? 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
?
Bertrand Model
0??
Chapter 12 Slide 50
Price Competition
? 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),
Bertrand Model
Chapter 12 Slide 51
Price Competition
? 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?
?It may not be equally divided,
Bertrand Model
Chapter 12 Slide 52
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 53
Price Competition
? Assumptions
? Duopoly
? FC = $20
? VC = 0
Differentiated Products
Chapter 12 Slide 54
Price Competition
? Assumptions
? Firm 1’s demand is Q1 = 12 - 2P1 + P2
? Firm 2’s demand is Q2 = 12 - 2P1 + P1
?P1 and P2 are prices firms 1 and 2
charge respectively
?Q1 and Q2 are the resulting quantities
they sell
Differentiated Products
Chapter 12 Slide 55
Price Competition
? Determining Prices and Output
? Set prices at the same time
202-12
20)212(
20$,1 Fi r m
21
2
11
211
111
???
????
??
PPPP
PPP
QP?Differentiated Products
Chapter 12 Slide 56
Price Competition
? Determining Prices and Output
? Firm 1,If P2 is fixed,
12
21
2111
413
413
0412
'
PP
PP
PPP
??
?
??
?
??????
?
c u r v e r e a c t i o n s2' F i r m
c u r v e r e a c t i o n s1' F i r m
p r i c e m a x i m i z i n g p r o f i t s1 F i r m
?
Differentiated Products
Chapter 12 Slide 57
Firm 1’s Reaction Curve
Nash Equilibrium in Prices
P1
P2
Firm 2’s Reaction Curve
$4
$4
Nash Equilibrium
$6
$6
Collusive Equilibrium
Chapter 12 Slide 58
Nash Equilibrium in Prices
? Does the Stackelberg model prediction
for first mover hold when price is the
variable instead of quantity?
?Hint,Would you want to set price first?
Chapter 12 Slide 59
A Pricing Problem
for Procter & Gamble
? 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,
Differentiated Products
Chapter 12 Slide 60
? 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
Differentiated Products
A Pricing Problem
for Procter & Gamble
Chapter 12 Slide 61
? Scenario
5) P&G’s demand curve was,
Q = 3,375P-3.5(PU).25(PK).25
?Where P,PU,PK are P&G’s,Unilever’s,
and Kao’s prices respectively
Differentiated Products
A Pricing Problem
for Procter & Gamble
Chapter 12 Slide 62
? Problem
? What price should P&G choose and what is
the expected profit?
Differentiated Products
A Pricing Problem
for Procter & Gamble
P&G’s Profit (in thousands of $ per month)
1.10 -226 -215 -204 -194 -183 -174 -165 -155
1.20 -106 -89 -73 -58 -43 -28 -15 -2
1.30 -56 -37 -19 2 15 31 47 62
1.40 -44 -25 -6 12 29 46 62 78
1.50 -52 -32 -15 3 20 36 52 68
1.60 -70 -51 -34 -18 -1 14 30 44
1.70 -93 -76 -59 -44 -28 -13 1 15
1.80 -118 -102 -87 -72 -57 -44 -30 -17
Competitor’s (Equal) Prices ($) P&G’s
Price ($) 1.10 1.20 1.30 1.40 1.50 1.60 1.70 1.80
Chapter 12 Slide 64
? What Do You Think?
1) Why would each firm choose a
price of $1.40? Hint,Think Nash
Equilibrium
2) What is the profit maximizing price
with collusion?
A Pricing Problem
for Procter & Gamble
Chapter 12 Slide 65
Competition Versus Collusion,
The Prisoners’ Dilemma
? Why wouldn’t each firm set the
collusion price independently and
earn the higher profits that occur
with explicit collusion?
Chapter 12 Slide 66
? Assume,
16$ 6$,C o l l u s i o n
12$ 4$,mEq u i l i b r i uN a s h
212,d e m a n d s2' F i r m
212,d e m a n d s1' F i r m
0$ a n d 20$
12
21
??
??
???
???
??
?
?
P
P
PPQ
PPQ
VCFC
Competition Versus Collusion,
The Prisoners’ Dilemma
Chapter 12 Slide 67
? Possible Pricing Outcomes,
? ?
? ? 4$204)6)(2(12)6(
20
20$206)4)(2(12)4(
20
4$ 6$
$ 1 6 6$,2 F i r m 6$,1 F i r m
111
222
?????
??
?????
??
??
???
QP
QP
PP
PP
?
?
?
Competition Versus Collusion,
The Prisoners’ Dilemma
Chapter 12 Slide 68
Payoff Matrix for Pricing Game
Firm 2
Firm 1
Charge $4 Charge $6
Charge $4
Charge $6
$12,$12 $20,$4
$16,$16 $4,$20
Chapter 12 Slide 69
? 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?
Competition Versus Collusion,
The Prisoners’ Dilemma
Chapter 12 Slide 70
? An example in game theory,called the
Prisoners’ Dilemma,illustrates the
problem oligopolistic firms face,
Competition Versus Collusion,
The Prisoners’ Dilemma
Chapter 12 Slide 71
? 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,
Competition Versus Collusion,
The Prisoners’ Dilemma
Chapter 12 Slide 72
-5,-5 -1,-10
-2,-2 -10,-1
Payoff Matrix for Prisoners’ Dilemma
Prisoner A
Confess Don’t confess
Confess
Don’t
confess
Prisoner B
Would you choose to confess?
Chapter 12 Slide 73
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 74
Charge $1.40 Charge $1.50
Charge
$1.40
Unilever and Kao
Charge
$1.50
P&G
$12,$12 $29,$11
$3,$21 $20,$20
Payoff Matrix for the P&G Pricing
Problem
What price should P & G choose?
Chapter 12 Slide 75
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 76
? 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,
Implications of the Prisoners’
Dilemma for Oligipolistic Pricing
Chapter 12 Slide 77
The Kinked Demand Curve
$/Q
Quantity
MR
D
If the producer lowers price the
competitors will follow and the
demand will be inelastic,
If the producer raises price the
competitors will not and the
demand will be elastic,
Chapter 12 Slide 78
The Kinked Demand Curve
$/Q
D
P*
Q*
MC
MC’
So long as marginal cost is in the
vertical region of the marginal
revenue curve,price and output
will remain constant,
MR
Quantity
Chapter 12 Slide 79
Implications of the Prisoners’
Dilemma for Oligopolistic Pricing
? Price Signaling
?Implicit collusion in which a firm announces
a price increase in the hope that other
firms will follow suit
Price Signaling & Price Leadership
Chapter 12 Slide 80
Implications of the Prisoners’
Dilemma for Oligopolistic Pricing
? Price Leadership
?Pattern of pricing in which one firm
regularly announces price changes that
other firms then match
Price Signaling & Price Leadership
Chapter 12 Slide 81
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 82
Price Setting by a Dominant Firm
Price
Quantity
D
DD
QD
P*
At this price,fringe firms
sell QF,so that total
sales are QT,
P1
QF QT
P2
MCD
MRD
SF The dominant firm’s demand
curve is the difference between
market demand (D) and the supply
of the fringe firms (SF),
Chapter 12 Slide 83
Cartels
? Characteristics
1) Explicit agreements to set output and
price
2) May not include all firms
Chapter 12 Slide 84
Cartels
? Examples of
successful cartels
? OPEC
? International
Bauxite
Association
? Mercurio Europeo
? Examples of
unsuccessful cartels
? Copper
? Tin
? Coffee
? Tea
? Cocoa
? Characteristics
3) Most often international
Chapter 12 Slide 85
Cartels
? Characteristics
4) Conditions for success
?Competitive alternative sufficiently
deters cheating
?Potential of monopoly power--inelastic
demand
Chapter 12 Slide 86
Cartels
? Comparing OPEC to CIPEC
? Most cartels involve a portion of the market
which then behaves as the dominant firm
Chapter 12 Slide 87
The OPEC Oil Cartel
Price
Quantity
MROPEC
DOPEC
TD SC
MCOPEC
TD is the total world demand
curve for oil,and SC is the
competitive supply,OPEC’s
demand is the difference
between the two,
QOPEC
P*
OPEC’s profits maximizing
quantity is found at the
intersection of its MR and
MC curves,At this quantity
OPEC charges price P*,
Chapter 12 Slide 88
Cartels
? About OPEC
? Very low MC
? TD is inelastic
? Non-OPEC supply is inelastic
? DOPEC is relatively inelastic
Chapter 12 Slide 89
The OPEC Oil Cartel
Price
Quantity
MROPEC
DOPEC
TD SC
MCOPEC
QOPEC
P*
The price without the cartel,
?Competitive price (PC) where
DOPEC = MCOPEC
QC QT
Pc
Chapter 12 Slide 90
The CIPEC Copper Cartel
Price
Quantity
MRCIPEC
TD
DCIPEC
SC
MCCIPEC
QCIPEC
P*
PC
QC QT
?TD and SC are relatively elastic
?DCIPEC is elastic
?CIPEC has little monopoly power
?P* is closer to PC
Chapter 12 Slide 91
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 92
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 93
? Question
? How can we explain high profits in a
competitive market? (Hint,Think cartel and
the NCAA)
The Cartelization
of Intercollegiate Athletics
Chapter 12 Slide 94
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 95
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 96
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 97
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 98
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 99
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,
End of Chapter 12
Monopolistic
Competition and
Oligopoly
