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In general,

the market structure can be classified


into 4 main types:
PERFECT COMPETITION

MONOPOLY

MONOPOLISTIC COMPETITION

OLIGOPOLY
4 main characteristics that differentiate
the market structure of one firm to
another :
Number and size of sellers
Number and size of buyers
Degree of product differentiation:
homogeneous or heterogeneous.
Conditions of entry and exit of
firms into the market.

Characteristics of PCF
i. Many small sellers and buyers they are the
price-takers - cannot influence the market.
Thus P is constant and DD is perfectly elastic.
ii. Products are homogeneous &
undifferentiated. Decisions to buy are made
solely on the basis of price.
iii. Free entry and exit from the market.
iv. Perfect knowledge among buyers and sellers
in the market
v. Perfect mobility of resources among
industries in the market.
DD schedule
of a perfect competitive firm
Qty Price
(P)
TR MR AR
0 5 0 - -
10 5 50 5 5
20 5 100 5 5
30 5 150 5 5
40 5 200 5 5
What can you conclude from the table?
(P = MR = AR = 5)
and are constant in value.
O
RM
(b) Firm
Q (thousands)
O
(a) Industry
P
Q (millions)
S
D
P
e
P=5
Q
e
DD curve for a firm under perfect
competition
DD =AR=MR
is a horizontal straight line: at the
price as fixed by the market.
it indicates that the firm can sell as
much as it can produce at the given
fixed price.
DD curve is perfectly elastic:
infinite elasticity (PED = ).

The shape of DD curve for a PCF
P
DD
Price
quantity
Profit Maximization: 2 approaches to
determine maximum profit in SR
TOTAL APPROACH: TR TC =

MARGINAL APPROACH:
at equilibrium MR = MC
Note: Both approaches will
definitely give the same results.
A = AR AC
ECONOMIC PROFITS
PROFIT is TR minus TC.

What is Economic Profit?


Economic Profit
Economic Profit
= TR TC
= TR (Explicit + Implicit Costs)
Types of PROFIT-
MAXIMISATION
(at Equilibrium in SR)
In SR:
a perfect competitive firm
can attain 3 types of possible profits:
o Supernormal profit / Positive Economic
Profit.
o Normal profit / minimum profit /
Zero Economic Profit.
o Subnormal profit / Negative Economic Profit/
Loss.
DD schedule
of a perfect competitive firm
Qty Price TR TC
Profit ( )
0 5 0 20 -20
10 5 50 50 0 Break-even
20 5 100 70 30
30 5 150 150 0 Break-even
40 5 200 220 -20
Total Revenue for a PCF
TR
RM
Q
- is a constant
straight line.
Total Approach
TC TC
TR TR
RM RM
Q Q
TR TR- -TC Approach TC Approach
Maximum Maximum
Profit Profit
Q1
Break-
even point
Break-
even point
Total Approach
TC
TR
RM
Q
TR-TC Approach
Maximum
Profit
= RM30
Break-
even point
Break-
even point
30
MC P
Qty
P
e
e2
DD=MR=AR
0

Q2

At maximising profit
equilibrium, MR=MC
Using the Marginal Approach
e1
Q1
e2 is chosen as the
maximising profit
equilibrium.
Supernormal Profit /
Positive Profit
AC
MC
P
Qty
P
e
AC
e
D
DD=MR=AR
0

Q
e
At maximising
profit
equilibrium, e;
MR=MC
AR > AC, TR>TC
Using the Marginal Approach
Supernormal Profit /
Positive Profit
AC
MC
P
Qty
4
2
e
D
DD=MR=AR
0

80

Example;
= TR TC
= (P x Q) (AC x Q)
= (4 x 80) (2 x 80)
= 320 160
= 140 (supernormal profit)
Normal Profit /
Zero Profit
AC
MC
P
Qty
P
e
=AC
min
e
DD=MR=AR
0
Q
e
At least a
Normal profit
is required in
order for a
firm to stay in
the market.
when the
firms price
line is
equivalent to
minimum AC
At eqm. MC=MR;
AR=AC; and
TR=TC, = 0.
P=AR=MR=MC=AC
Subnormal profit /
Loss / Negative Profit
AC
MC
P
Qty
P
e
e
DD=MR=AR
0
Q
e
F
AC

At eqm. e,
MR=MC=Price;
AC > AR,
TC>TR, Loss
whether the
firm will have
to leave the
market or not
will depend
on its ability
to cover its
total variable
cost.
Example;
AC
MC
P
Qty
1

e
DD=MR=AR
0
40
F
2
Subnormal profit /
Loss / Negative Profit
= TR TC
= (P x Q) (AC x Q)
= (1 x 40) (2 x 40)
= 40 80
= 40 (subnormal profit)
LOSSES AND SHUTDOWN DECISION
The best output level of a firm in SR is
achieved when MR = MC.
This is the point where the firm is said to
either maximizes profit or minimizes loss.
It will be better if a firm were to enjoy a
supernormal profit,
however what action will be taken
if a firm have to earn a
subnormal profit or loss?
Will the firm immediately
close or shut-down its
operation in SR? and in LR?

Shutdown Point
In SR, a firm will still continues its operation
although under the loss.
- hoping for something miracles to happen,
especially towards a price change;
- with the hope that it will recover and get a
positive profit again in the future.
Shutdown Point
In SR, whether to leave or not,
will depend on its ability
to cover all its total variable cost;
this is to consider whether
the price (AR) is equal;
greater or than AVC.
lower



P = AVC
P > AVC or
P < AVC
A Shutdown Point
AVC
AC
MC
D = P = MR =AR
Qty
Price
e
When minimum
AVC is equal or
tangent to the
price line (AR) ,
this is known as
the shutdown
point (at point e).
P

P = min AVC
Q
At shut down point;
TR = TVC
= 0PeQ
0
loss
= loss in SR
Shutdown decision criterion

AVC
AC
MC
D = P = MR = AR
Qty
Price
e
P

i) If P > AVC; that is AR > AC,
it pays for the firm to continue production because
revenue generated will be sufficient to cover at
least all the variable cost and part of the fixed cost.

AVC
= loss in SR
VC
FC
When P > AVC
Q
Shutdown decision criterion

AVC
AC
MC
D = P = MR =AR
Qty
Price
e
P

ii) If P < AVC;
the firm minimises loss by shutting down, as it will
only be able to cover part of variable cost without
manage to cover the fixed cost.

AVC
=loss in SR
VC
FC
When P < AVC
Q
Shutdown decision criterion

AVC
AC
MC
D = P = MR =AR
Qty
Price
e
P
= AVC
iii) If P = AVC; the shutdown decision signalises the
shut down point. However, this is not the sole
qualification for the firms shut down decision.

Cont...

=loss in SR
VC
FC
Q
So, what are other
circumstances in which a
perfect competitive firm may
stop production in the short-
run?
Other shutdown decision
criterions:
other factors need to be considered in the
decision to shut down such as:
companys goodwill,
loosing of customers to competitors,
maybe its just a temporary measure
where DD falls due to a temporary
economic
down-turn.
The possibility of incurring higher
reopening
cost if shutdown decision is made.

c) Based on (a), will the company continue its
operation? Why?

AVC = 29.6 and P = MR = 42
Since P > AVC; therefore, continue
production.
Perfect competition
Long-run equilibrium

Long-run decision:
Firms who are under the loss in LR
would have to shut down and
cannot continue to produce.

Under Perfect Competition;
only firms who manage to produce
with normal profit were able to
continue to produce in LR.
RM
Q O
MC
LRAC
D = AR = MR
P = LRAC = MC = MR = AR
Equilibrium in LR with normal
profit.
P
Break-even point
This is a point where the quantity at which the
firm neither earns profits or suffers losses,
TR = TC : earns zero economic profit.
TC
TR
Break-even
point, TR=TC,
Profit=0.
e
Q
RM
LR equilibrium (profit-maximizing)
of a perfect competitive firm
As firms can easily enter and exit an industry as well as
can also changes the size of production in LR, the firm
will be earning just a normal profit and not a positive
economic profit in LR.
2 reasons contributing towards that:
a) if in SR, a firm enjoys supernormal profit
will encourage them to expand production as
well as attracts new firms to join the market.
Economic profit is forced to go down to normal
profit in LR.
b) if in SR, a firm enjoys subnormal profit
this will force them to reduce production as well
as forcing some badly hit firms to leave the
market.
The loss of the firms will be covered and the
firms will enjoy normal profit in LR.
How the industry
supply curve is derived ?
O O
(a) Industry/market
P
RM
P
1
Q (millions)
S
D
1
(b) Firm
D
1
= MR
1
MC
P
2
D
2
= MR
2
D
2
P
3
D
3
= MR
3
D
3
Q (thousands)
Deriving the short-run supply curve for
a firm.
a
b
c
= SS
In the case where firms enjoy
supernormal profit in SR, will only
enjoy normal profit in LR.
AR= MR
AR
1
= MR
1
P
P
1
Q
0
Q
1
Q

SS
0
SS
1
DD
0
AC

MC
1
Q
1
A Firm A Market
From supernormal
to normal profit in LR.
Many new firms were attracted to the
supernormal profit earns by the industry.
After more firms enter the market, SS will
increase and price falls.
Thus, as the firm in Perfect Competition is
a price taker; with the lower price in the
market, its supernormal profit is
eliminated and will reach normal profit
only in LR.
In the case where firms enjoy
subnormal profit in SR, will enjoy
normal profit in LR.
AR
0
= MR
0
P
1
P
0
Q
1
Q
0
Q
1
SS
1
SS
0
DD
0 AC
1
MC
1
AR
1
= MR
1
P


Q
From subnormal
to normal profit in LR.
After more firms leave the market, SS falls
and price increases. Thus, as the firm is a
price taker, with the higher price, its
subnormal profit is eliminated and will
reach normal profit in LR.
PCF will always enjoy
normal profit in LR.
AC
LR
MC
LR
AR= MR

P


Q
MR = AR = MC =AC = P
Only PCF will reach both the efficiencies of:
Productive efficiency &
Allocative efficiency
Characteristics of a Monopoly
Only one seller and many buyers
Seller has influence on the market
price (price-maker)
Unique products - consumers
perceived the product is not having
any close substitute or competitors.
Barriers to entry and exit
Imperfect dissemination of
knowledge or information
Perfect mobility of resources among
industries
Important Note To Remember:
An important assumption is that the
monopolist can only control price or
quantity but not both, i.e. price may
increase or decrease but quantity is
constant. This is an important
theoretical assumption.

Type of Barriers To Entry & Exit
Cut throat competition - the monopolist will
undercut price so that the rival firm will not be
able to compete at all.
Legal restrictions such as existence of patent
and copyright.
Product differentiation In the minds of
consumers, the product of a monopoly is very
much different and cannot be substitute by
other products.
Control of resources potential entrants faced
difficulties in obtaining the required resources
to produce.
Economies of scale a monopolist enjoys
economies of scale and able to produce output
at lower cost.
The high initial cost - made more difficult for
new entrants.
The DD curve of a monopolist
firm
Let us observe the following DD schedule
Qty Price TR MR AR
1 10 10 10 10
2 9 18 8 9
3 8 24 6 8
4 7 28 4 7
5 6 30 2 6
What can you conclude from the table?
Downward sloping DD curve
A monopoly has a downward sloping DD
curve. Price must decrease in order to
increase sales or outputs and vise-versa.
The effect of output changes on TR
depends on the MR curve:
a) When MR is +ve , an increase in
output will increase TR
b) When MR is ve , an increase in
output will reduce TR.
Is shown as a downward sloping
curve from left to right.
Here DD = P = AR but is not the same
with MR .
In other words , DD = P = AR = MR
The shape of Firms DD curve
AR and MR curves of a
monopolist
P = AR =DD
MR
Q
P
Note: AR and MR curves have the same intercept
but the slope of MR is 2 times greater than the
slope of the AR curve.
PROFIT-MAXIMIZING
(EQUILIBRIUM)IN THE SR
Profit is maximized in SR when MR = MC
(the same standard profit maximizing
criterion used as in the case of Perfect
Competition)
In SR, a monopoly firm can also attain 3
possible profits:
o Supernormal profit / Economic Profit
o Normal profit / minimum profit
/zero economic profit
o Subnormal profit / negative economic
profit
Supernormal profit
AR
MR
Q
AC
MC
P
0
Pe
C
D
B
Qe
Profit maximization
occurs when MR = MC.
Supernormal profit
area = TR TC
and is shown by
CBDPe.
Normal profit
AR
MR
Q
AC
MC
P
0
Pe = C
D
Qe
AR=AC or
TR = TC ;
normal profit
(zero profit)
is attained
Profit maximization
conditions is when
MR = MC.
Subnormal profit
AR
MR
Q
AC
MC
P
0
Pe
D
Qe
C
F
Profit maximization
conditions is when MR = MC.
TC > TR ; a
subnormal profit
(negative profit) is
attained,
represented by the
area DFCPe
A monopolists Equilibrium in LR
The monopolist will be earning only
supernormal profit in LR because:
there is no competition that the firm has to
face.
So, it has the power to control price (as a
price maker).
Produces unique products and might have
pattern right.

Equilibrium in LR
AR
MR
Q
LRAC
MC
P
0
Pe
C
D
B
Qe
A monopolist will enjoys a supernormal profit
Comparing the LR equilibrium bet.
Perfect Competition and Monopoly
ARm
MRm
Q
LRAC
MC
P
0
Pm
C
D
B
Qm
1. In LR, a monopolist may enjoys
supernormal profit but PCF only
enjoys normal profit.
2. A monopolist
price is higher
than PCF :
Pm > Pc
(price maker vs.
price taker)
Pc
Qc
3. A monopolist
produces less
output than
PCF:
Qm < Qc
(Qm is produced at
AC which is still
falling or less
than full
capacity, but Qc
is at optimum,
i.e. AC
minimum)
ARc
Optimum Output
Always remember that the optimum point
(minimum of Average Cost) is not the same
as the equilibrium point (MC = MR).
A monopoly firm is producing at a point of
excess capacity i.e. less than optimum level.
This means that the firm is not utilizing its
resources to capacity.
This is different from a perfect competition
firm where the optimum output is equals to
the equilibrium output.

PRICE DISCRIMINATION
Can be defined as:
the practice where the seller charges different prices
to different customers in different markets for similar
goods and services.

Examples of price discrimination exists such as:
electricity and water consumption rate charge
differently
telephone services
some professional services such as doctors and
lawyers

3 types of Price Discrimination
First degree Price discrimination
- practice of charging each unit sold at a different price.
Second degree Price discrimination
- occurs when the same consumer pays a certain price for
some units of a commodity and a different price for
further units of the same commodity.
- Here, different price charged for different blocks.
Third degree Price discrimination
- The same product is sold to different consumers at
different prices.
- This is probably the most common form of price
discrimination. Customers are separated based on the
different in their price elasticity of demand.
- High price charged for inelastic market and vice-versa.
3 Conditions/ Assumptions
for 3rd degree Price Discriminations
The firm must have control of price
(a monopolist).
Market can be separated/segmented and
resale is impossible.
Different degree of elasticity of demand
(PED) in different markets.

3
rd
Degree Price Discrimination

Market A Market B Combined Market (Market C)
MC


P
A
P
C
AC
P
B



MC=MR

AR
C

AR
A
AR
B

MR
C

Q
A
MR
A
Q

Q
B
MR
B
Q Q
C
Q

Equilibrium is achieved when MR = MC
3
rd
Degree Price Discrimination

Market A Market B Combined Market (Market C)
MC


10 6

AC
5


MC=MR= 4

AR
C

AR
A
AR
B

MR
C

30 MR
A
Q

50 MR
B
Q 80 Q

Equilibrium is achieved when MR = MC
( assume that AC=MC here)
TR =10x30
=300
TR=50x5
=250
TR=80x6
=480
Characteristics of
A Monopolistic Firm:
There are a large number of sellers
Consumers perceived the product produced by each
firm are different i.e. differentiated product, can be in
the form of packaging, labeling, after-sales services,
etc.
Firms have the freedom of entry and exit.
All buyer and sellers have perfect dissemination of
knowledge and information, in terms of its cost, price,
quality, taste, etc.
Important notes to remember:
There is a large number of firms, but not as many as in
perfect competition
Because the consumers have many close substitutes
that they can choose from, the firm in monopolistic
competition must ensure that the price offered is
competitive i.e. not too high or not too low which will
results in a loss.
Each firm has a relatively small market share of the total
market. Thus, it has only a very small amount of control
over the market-clearing price.
It is very difficult for all of them to get together to
collude, that is to set a pure monopoly price (and
output).
Each firm acts independently of the others. Rivals
reactions to output and price changes are largely
ignored.
The same as in the case of monopolist.
Is shown as a downward sloping curve
from left to right.
The only difference that distinguish a
monopolist and a monopolistic
competition firm is the DD curve of the
later firm is more elastic as compared to
the monopolist.
Here DD = P = AR but is not the same
with MR .
AR and MR curves for a
monopolistic firm
P = AR =DD
MR
Q
P
Note: AR and MR curves for a monopolistic competition
firm is more elastic as compared to a monopolist
PROFIT-MAXIMIZING
(EQUILIBRIUM) IN THE SR
Profit is maximized in SR:
when MR = MC (the same standard
profit maximizing criterion used as in
the case of Monopoly and Perfect
Competition)
In SR, a monopolistic competition firm can
also attain 3 possible profits:
o Supernormal profit / Positive Economic
Profit.
o Normal profit / minimum profit
/zero economic profit.
o Subnormal profit / negative economic
profit
Supernormal profit
AR
MR
Q
AC
MC
P
0
Pe
C
D
B
Qe
Profit maximization
occurs when MR = MC.
Supernormal profit
= TR TC
and is shown by the
area CBDPe.
Normal profit
AR
MR
Q
AC
MC
P
0
Pe = C
d
Qe
Profit maximization
conditions is when
MR = MC.
Here, total area of
TR = total area of
TC.
Thus, earn normal
profit (zero profit).
Subnormal profit
AR
MR
Q
AC
MC
P
0
Pe
D
Qe
C
F
At profit
maximization
conditions
MR = MC,
TC > TR ; a
subnormal profit
(negative profit) is
attained as shown
by area DFCPe.
A monopolists Equilibrium in LR
In the long run, since there are so many firms
competing and substituting the firms product, any
economic profits will be competed away alas, get
normal profit only in LR.

They will be competed away either through entry by
new firms seeing a chance to make a higher rate of
return than elsewhere, or by changes in product
quality and advertising outlays by existing firms in the
industry.

As for economic loses in the SR, they will disappear in
the LR because those firms that suffer the losses will
leave the industry. They will go into another business
where the expected rate of return is at least normal to
them.
Equilibrium in LR
AR
MR
Q
LRAC
MC
P
0
Pe = C
d
Qe
A monopolistic competition will enjoys a normal profit in LR
Comparing the LR equilibrium bet.
Perfect Competition and Monopolistic
ARm
MRm
Q
LRAC
MC
P
0
Pm=C

D
Qm
1. In LR, both monopolistic firm and
PCF enjoys normal profit.
2. A monopolistic
price is higher than
PCF :
Pm > Pc
(price maker vs.
price taker)
Pc
Qc
3. A monopolistic
firm produces
less output than
PCF:
Qm < Qc
(Qm is produced at
AC which is still
falling or less
than full
capacity, but Qc
is at optimum,
i.e. AC
minimum)
ARc
Oligopoly
Oligopoly market structure
market is dominated by only
few sellers that are
interdependent among them.
Characteristics
of an
Oligopoly:
Only few
firms
Mutual
interdependence
Products are
homogeneous or
differentiated
Large
Barrier
to Entry
Characteristics of an Oligopoly:
1. Only few firms dominating the market. These
several big firms in the market are able to set
the price.
Only few
firms
Characteristics of an Oligopoly:
2. Their behaviour is said to be mutual
interdependence each firm will react to what
the other firms is doing,
could be in terms of output and price,
as well as to changes in quality
and product differentiation.
Mutual
interdependence

Characteristics of an Oligopoly:
3. Theres 2 types of Oligopoly: - where the product is :
- `homogeneous example: egg and chicken
producers are identical.
- `differentiated products example: cars (Proton
and Perodua), telecommunication
services (Celcom, Digi, Hotlink),
air flight (MAS and Air Asia).
Products are
homogeneous or
differentiated

Characteristics of an Oligopoly:
4.Largebarriertoentry:
had reached Economies of Scale (Lower cost)
e.g. those big firm who manage to reduce cost
and be competitive in price, such as electronic
companies, garment and textiles companies.
with High Initial Fixed Cost to set-up firm.
e.g. transportation companies such as express
bus, shipping co., cargo transportation etc.
Large
Barrier to
Entry

Models of Oligopoly
There are many models:
because oligopolists are
interdependent,
no one general theory of
oligopoly explains their
behaviour, so many theories
have been developed.
1. Oligopoly by Merger
It can happen when merging between two or
more firms occurred under a single ownership or
control
There are three types of merger:
Horizontal Mergers - Involves firms selling a
similar product, e.g. two shoes manufacturing
firms merged.
Vertical Mergers - Occurs when one firm
merges with either a firm from which it
purchases an input or a firm to which it sells
its output
Conglomerate Mergers - Involve the joining
together of two firms which have unrelated
activities

Collusion and Cartels:
Collusion is an agreement among firms to
divide the market or to fix the market
price.
A cartel is a group of firms that agree to
coordinate production and pricing
decisions thus behaving like a monopolist.
More about Cartel
Cartels are very formal arrangements
either openly or secretly conspire to
coorporate and behave like a monopolist.
Thus, members of the cartel agree in
output quotas to maintain agreed prices
for their products.
The motive for cartel formation is to reduce
the uncertainty in oligopolistic markets by
reducing the unpredictability of rivals
reactions to changes in price;
it thus increases the profits of the group
as a whole.
Controlling price and output
through Cartel

The best example of a well-known cartel is by
the world members of crude oil producers,
OPEC (Organisation of Petroleum Exporting
Countries).
Its objective is to set oil production quotas for
its members and tend to influence world price.
RM
Q
O
Industry DD = AR
Profit-maximising by Cartel
RM
Q O
Industry D = AR
Industry MC
Industry MR
Q
1
P
1
Profit-maximising by Cartel
But then,
a cartel member might has an incentive
to cheat.
A firm now act as a price taker and was limited by
the agreed qouta.
P1
$
MR1
LRAC
MC
MR2

P2
(Cartel price)
Q2 (Cartel quota)
Higher profit earn
after cartel
More profit
after cheating
Q3(supply at MC to cheat)
Q1
Oligopoly
2. Price leadership
(assumption of fixed market share)
More about Price leadership
Price leadership occurs when a large dominant
firm sets a price which is then accepted as the
market price by other firms.
No formal agreement is needed to do this, it is
sufficient for other firms to believes that this is
the best way of protecting or increasing their
profits. Its just a pricing strategy to follow the
leaders price and increase their price at the same
amount.
In general, price leadership in oligopoly market
can be divided into two types:
a) Price leadership by low-cost firm
b) Price leadership by big firm
RM
Q O
MR
leader
AR = D
leader
AR = D
market

Price leader aiming to maximise profits for a
given market share
Assume constant
market share
for leader

Q O
AR = D
market

MC
MR
leader
P
L
Q
T
AR = D
leader
Q
L
l
t
Price leader aiming to maximise profits for a
given market share
Oligopoly
3. Kinked demand curve theory
(Sweezys Model)
More about Kinked DD curve
Model
Paul M. Sweezy originally proposed this
model in 1939.
This model has since become perhaps the
most famous of all theories of oligopoly.
This theory explains:

based on two (2) assumptions :

i) If an oligopolist cuts its price, its rivals will
feel forced to follow suit and cut theirs to
prevent losing customers to the first firm.
The individual firm therefore perceives
demand for its product to be relatively
inelastic if it lowers price.

RM
Q O
P
1
Q
1
D2 (inelastic)
D 1 (elastic)
Kinked demand for a firm under oligopoly
If he tries to make a price
falls, DD of his product
increases only few.
He perceive as he is facing
an inelastic demand curve
(D2).Since his rival will
follow suit.
ii) If an oligopolist raises its price, however,
its rivals will not follow suit, since by
keeping their prices the same, they will
thereby gain customers from the first firm.
Because of this, the individual firm
perceives demand for its product is to be
relatively elastic if it raises price.

RM
Q O
P
1
Q
1
D2 (inelastic)
D 1 (elastic)
Kinked demand for a firm under oligopoly
If he tries to make a price
rise, DD of his product
falls largely.
He perceive as he is
facing an elastic demand
curve (D1). Since his rival
does not follow suit.
RM
Q O
P
1
Q
1
D
D
Kinked demand for a firm under oligopoly
Rival does not
follow suit
Rival does
follow suit
Kinked demand for a firm under oligopoly
RM
Q O
P
1
Q
1
Current price
and quantity
give one point
on the demand
curve
e
RM
Q O
P
1
Q
1
MC
2
MC
1
MR
a
b
D = AR
Stable price under conditions of a
kinked demand curve
e
Argument here is that:
changes might not occur after knowing
the rivals reaction towards the price
change.
thus, forced them to sell at one stable
price, at the kink ( point e).
The weaknesses of the
Sweezys model
It cannot explain how price (P) was
originally determined
There is little empirical evidence to
support the assumption that there is a
price cut, but not a price rise, that will
matched by competitors.
Comparison of Oligopoly and
Perfect Competition
There is no single model of the oligopoly.
Price is usually higher under Oligopoly:
Price is higher but output lower.
Higher profits under Oligopoly: Profit in
the long run should be higher under
oligopolies than under perfect competition
because with few firms in the market they
have more control over price.