Question

Step 1 Read the following scenario.

Imagine a firm in monopolistic competition. A firm in monopolistic competition produces a product that you are familiar with, such as clothing and food. A monopolistic competition is a market in which:

• many firms compete
• each firm produces a product that is slightly different from products of other competing firms
• each firm competes on product quality, price, and marketing
• each firm is free to enter and exit the market

Step 2 Use the scenario to answer questions.

In a two-page (500-word) document, answer the following questions using the information provided in the scenario in Step 1:

• Use the cost and revenue curves for your market with monopolistic competition to determine price, economic profit, and output.
• Explain the decisions you will make to maximize profit.
• Compare oligopoly (when there are only two firms) outcomes to the outcome in a true monopoly industry. What are the differences? What are the similarities?
• How does applying game theory to decisions faced by oligopolists change profit in the long and short run?
• Using game theory, analyze decisions and choices that oligopolists must make to ensure success.

Answer 1

Sol:-

Step 1-

A monopolistic competition is which there are many sellers selling differentiated products i.e. each firm producing a product that is slightly different from the other one.

Step 2-

To maximize revenue, monopolists sells products when price is low and that happens when demand curve slopes downward. As monopolist has to sell at lesser prices the marginal revenue from extra unit will always be less than the price of the unit. Therefore, except for the first unit, marginal revenue is always less than the price. As monopolist increase its production the marginal revenue declines till the time it becomes negative. So this is the point of maximum total revenue and after this point the total revenue will decline.

Price determination

When marginal cost is equal to marginal revenue that point is the price. Producing when marginal revenue is more than MC will lead to more profits. And at this point where MR=MC the profit is maximized.

The monopolist finds the profit maximizing output when quantity is shows MR=MC , this quantity is showed on the market demand curve to see what market price comes to that output.

Marginal profit= total revenue- total cost

Decisions-

Monopoly’s profit π=p(q)q−c(q), where revenue = pq and cost = c.

it also involves the first derivative.

Deadweight loss – an economic loss when the condition is not showing pareto optimality.

supply equals marginal cost under competitive conditions, competitive outcome is shown by the intersection of marginal cost and demand

some units are value more heavily than their cost creating a deadweight loss.due to taxes.

MONOPOLY AND OLIGOPOLY-

Monopoly where only one seller dominates, while in oligopoly, there are many sellers in one small market.

Monopoly may charge higher prices as dominant, while oligopoly charge moderate price but higher than perfect competition

A single firm controls the industry in monopoly while many small number of firms control the industry.

In monopoly the barriers to exit are quite high, while in oligopoly there are more barriers to exit in industry aseconomies of scale.

Oligopoly can influence the setting of prices in market demand.

Example of monopoly- Microsoft, google tec

Oligopoly- health insurers, media, wireless carriers.

Game theory-

Oligopoly takes into consideration when the firms are affected by the production function of other firms. Also game theory looks that when an actor takes decision must also consider others that are going to respond to that decision. If one firm lowers its price, then the competing firm will lower the priceOne firm lowers its price, prompting a competing firm to lower its price. . if one firm launches a new advertising campaign then other will also set up the advertising of its own firm. In this way game theory changes profit of oligopoly in short and long run according to the payoffs and decision making strategies.

Game theory analyzes that when decisions regarding pricing levels of firms are taken they also tell how much to invest in R and D spending.

The dominant strategy for oligopoly is to with RAND D but if does not then the market share and profits decline.

A strategic action would be a non coperaive action that raise the firm’s profit with its rival’s also. Creation of artificial barriers to entry and price and non pricecompetition.
(sorry the word