Chapter 13, Problem 1QFR

To determine

The comparison of the price and output under oligopoly, monopoly and monopolistic competition.

Answer to Problem 1QFR

Oligopoly:

P>MR

A price decrease is followed by the competitor but a price increase is not followed.

Equilibrium price corresponds to the kink in the demand curve.

Monopoly:

At equilibrium, P>MR (=MC)

Monopolistic Competition:

At equilibrium, Price, P=AC and P>MR (=MC)

Explanation of Solution

We shall first discuss certain features for the market structures:

Oligopoly:

1. Few sellers exist.
2. Products may be differentiated or homogeneous.
3. industry output is by a few firms.
4. advertisement and selling costs.
5. strategic interdependence of firms.
6. natural or technical barriers to entry.
7. Kinked demand curve due to interdependence among firms.
8. A price decrease is followed by the competitor, but a price increase is not followed.
9. Supernormal profits

Monopoly:

1. only a single seller exists
2. product is differentiated.
3. low price elastic of demand for own good i.e. inelastic demand for own good
4. very low cross-price elasticity of demand i.e. no close substitutes exist
5. strong barriers to entry (natural or technical)
6. supernormal profits in the long run

Monopolist Competition:

1. existence of large number of sellers.
2. free entry and exit of firms.
3. products are differentiated.
4. existence of selling costs.
5. cross-price elasticity of demand is high but not very high
6. only normal profits in the long run.

Now, let's define the output and price determination conditions for each market.

Oligopoly:

Equilibrium condition:

MR=MC

P>MR

A price decrease is followed by the competitor but a price increase is not followed.

Equilibrium price corresponds to the kink in the demand curve.

Monopoly:

Equilibrium condition:

-MR=MC

-Slope of MC > slope of MR

At equilibrium, P>MR (=MC)

Monopolistic Competition:

Equilibrium condition:

-MR=MC

-Slope of MC > slope of MR

At equilibrium, Price, P=AC and P>MR (=MC)

Economics Concept Introduction

Oligopoly: Oligopoly is a market structure where only a few sellers exist and products may be differentiated or homogeneous.

Monopoly: Monopoly is a market structure where only one seller exists, and product is differentiated.

Monopolist Competition: Monopolistic competition is a market structure where large number of sellers exist and products are differentiated.

Total Revenue (TR): Total revenue is the total proceeds from the sale of a given level of output.

Total Cost (TC): Total cost is the total outlay in the production of a given level of output.

Marginal Revenue (MR): Marginal revenue is the additional revenue generated by the sale of an additional unit of output.

Marginal Cost (MC): Marginal cost is the addition to total cost when an extra unit of output is produced.

Average Cost (AC): Average cost is defined as total cost divided by the corresponding level of output.