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    Monopolistic and Oligopoly

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    dibyendudas2005
    1. Excess capacity under monopolistic competition occurs when firms produce below the minimum efficient scale of output due to insufficient demand. This leads to higher average costs for firms. 2. Under price leadership, one large dominant firm will set the market price which smaller firms then follow. The dominant firm faces residual demand after smaller firms supply. 3. A low-cost firm may also act as the price leader if it has lower production costs than competitors. Other firms will match the low-cost leader's price while producing at a higher average cost.

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    Monopolistic and Oligopoly

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    dibyendudas2005
    31 views6 pages
    1. Excess capacity under monopolistic competition occurs when firms produce below the minimum efficient scale of output due to insufficient demand. This leads to higher average costs for firms. 2. Under price leadership, one large dominant firm will set the market price which smaller firms then follow. The dominant firm faces residual demand after smaller firms supply. 3. A low-cost firm may also act as the price leader if it has lower production costs than competitors. Other firms will match the low-cost leader's price while producing at a higher average cost.

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    1. Excess capacity under monopolistic competition occurs when firms produce below the minimum efficient scale of output due to insufficient demand. This leads to higher average costs for firms. 2. Under price leadership, one large dominant firm will set the market price which smaller firms then follow. The dominant firm faces residual demand after smaller firms supply. 3. A low-cost firm may also act as the price leader if it has lower production costs than competitors. Other firms will match the low-cost leader's price while producing at a higher average cost.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    31 views6 pages

    Monopolistic and Oligopoly

    Uploaded by

    dibyendudas2005
    1. Excess capacity under monopolistic competition occurs when firms produce below the minimum efficient scale of output due to insufficient demand. This leads to higher average costs for firms. 2. Under price leadership, one large dominant firm will set the market price which smaller firms then follow. The dominant firm faces residual demand after smaller firms supply. 3. A low-cost firm may also act as the price leader if it has lower production costs than competitors. Other firms will match the low-cost leader's price while producing at a higher average cost.

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    Excess Capacity under

    Monopolistic Competition
    LMC LA
    C

    k
    p s
    C
    O
    S e
    T ar

    o m n
    m quantity
    Excess Capacity
    r
    Effect of Selling Cost
    ASC

    d d d d d
    1 2 3 4 5 OUTPUT
    q q q q q M
    1 2 3 4 5 C A
    e C
    p AP l
    C AS
    t r
    C
    b
    AC=APC+AS
    AS d C
    C
    q
    Price and Output under Cartels
    MCc=Mca+M
    d Cb
    MCa AC MCb MC
    a AC c
    f e b L
    p p p
    k
    h D
    g R
    M
    R
    Q Q
    Q
    1 2
    OQ=OQ1+OQ2
    OUTPUT
    Price Leadership
    Types of Price Leadership
    1. Price leadership by a low cost firm
    2. Price leadership of the dominant firm
    Price-Output determination under low cost Price leadership firm:
    Lets take the following assumptions-
    a. There are two firms, A and B. The firm A has a lower cost of production
    than B.
    b. The product produced by the two firms are homogeneous so that the
    consumers have no preference between them.
    c. Each of the two firms has equal share in the market. In other words, DC
    facing each firm will be the same and will be half of the total market
    demand curve of the product.
    Each firm is facing demand curve d which is half of the total market
    demand curve DD for the product. MR is the marginal revenue curve of
    each firm. ACa and MCa are the average and marginal cost curves of firm
    A and ACb and MCb are the average and marginal cost curves of firm B.
    Cost curves of firm A lie below the cost curves of firm B because we are
    assuming that firm A has a lower cost of production than firm B.
    Firm A will be maximizing its profits by AC
    D
    selling output OM and setting price OP, MCb b
    since at OM, MC=MR. MCa
    H
    Firm B’s profits will be maximum when P D

    Price & Cost


    it fixes price OH and sells output ON. Market
    Thus the price OP of firm A is lower Dema
    E nd
    than of B. Therefore, A will dictate the d
    Price. Thus firm B is the follower.
    o N M Q
    MR
    Output
    Price-Output determination under Dominant Price leadership
    Firm: The dominant firm is having a large share of the market
    with a number of small firms as followers each of which has a small
    share of the market. DD is the market demand for the product. At
    each price the leader will be able to sell the part of the market
    demand not fulfilled by the supply from the small firms.
    S
    At price P1, the small firms supply the whole D
    m
    of the quantity of the product demanded
    P
    at
    R
    that price. Therefore, demand for leaders
    1

    Price & Cost


    Product is zero. At price P2, the small firms B S
    P
    supply P2C and therefore, the remaining
    P C T
    part of CT will be supplied by the leader.
    2
    Like wise it goes on. P U
    3 D
    o
    d
    Quantity
    MC
    Kinked Demand Curve
    Price & Cost

    K
    p

    h
    D/ AR

    m output

    MR

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