Economics and Statistics

Definition of Oligopoly: An oligopoly is a market structure where there is a limited number of firms that are allowed to enter in the market. New firms face barriers to entry to access an oligopoly market: Economies of scale give the already existing firms a low cost advantage over smaller entrants into the market. Existing firms may work together to prevent new firms from accessing the market. Older firms have name recognition that newer firms do not have. A firm's best choices are influenced by one another's decisions. Thus, each firm needs to have strategy in order to make the best decision possible. In an oligopoly market, firms can change their production and prices in reaction to a competitor's production (or pricing) decision. Firms may be of unequal size, thus, one firm may be seen as the price leader, and the other firms set their prices in response to the leading firm. Collusion and Cartels: Oligopolistic firms have an incentive to collude, to set prices and produ...

Monopolistic Competition: It is a market structure that has similarities with both perfect competition and monopoly. Similarities with perfect competition: There are multiple firms competing against each other. One common example is fast food chain restaurants. Low barriers to entry. Therefore a firm can easily enter a monopolistic competitive market.    In the short run, firms can earn an economic profit. In the long run, the economic profit attracts other firms up until the economic profit disappear.  Similarities with monopoly: Monopolistic competitive firms have the ability to set a price for their products, though changing prices affects quantity sold proportionally more than for a monopolist. Each firm faces a downward-sloping demand curve due to their pricing power, but it is more elastic (i.e flatter) than for a monopolist. Since each firm faces a downward-sloping demand, the marginal revenue is less than demand.   Unique features: In order to earn an ec...

You have the following information about a monopoly: Derive the MR, find the profit maximizing price and quantity. Find profit, consumer surplus, and dead-weight loss using the price and quantity from the previous question. Now that we have derived the MR function, set MR=MC and solve for Q. Choose Q1 (it does not make sense to have a negative quantity in our model),then plug this number into the demand function to obtain its price. Consumer surplus: Dead-Weight Loss: Profit: The government wants to intervene in order to increase consumer surplus, while keeping the monopoly from making a loss.At what price should the firm be forced to sell its goods? Although the DWL is completely eliminated when the the price is equal to the intersection between the MC and demand curve, the consumer surplus can be further expended by setting the firm's price equal to the intersection between the ATC and demand curve. This is due to the fact that the point at which the ATC intersects...

Notes on natural monopolies: Recall that natural monopolies arise because they have economies of scale so large, their size prevents competition from smaller firms. You can see the large area of the dead-weight loss that typically occurs in a natural monopoly. However, unlike other monopolies which can be broken up into smaller parts (see trust-busting ), breaking up a natural monopoly would be less productively efficient as the ATC and MC curves would be higher.  Government regulation of the firm's prices for its goods. The government allows the monopoly to exist, since its economies of scale is so large, it produces at a much lower average total cost (ATC) than multiple smaller firms producing the same amount of goods. The government's goal is to reduce the DWL. The graphs below show the differences between a productively and allocatively efficient prices, using the graph of an unregulated natural monopoly used at the beginning of this lesson. Productively ef...