Monopoly(2) (2)explore the questions of information, advertising, and quali Search goods-products whose quality consumers can judge through prior knowledge or by inspection at the time of purchase. Experience good-the quality of experience good can only be ascertained by consumers ex post There are 2 possibilities (1)when the monopolist can adjust quality over time the monopolist has an incentive to claim high quality and sell low quality-this gives rise to a problem of moral hazard. the introduction of warranties provides a commitment device for the manufacturer against this activity to the extent that warranties are not effective then repeat purchase by consumers may also create an incentive for the provision of high quality. There may also be a role for independent firms to perform quality tests and inform consumers of the results 2)when the quality of a product is fixed but only the monopolist knows the quality of its product before purchase. This leads to the problem of adverse selection. Monopolists whose products are of lov quality will claim the opposite and as a consequence consumers will be appropriately skeptical of all high-quality claims. The strategies that a high-quality manufacturer can follow is that it can credibl communicate its quality to consumers, particularly via the role of advertising
Monopoly (2) • (2)explore the questions of information, advertising, and quality. Search goods-products whose quality consumers can judge through prior knowledge or by inspection at the time of purchase. Experience good-the quality of experience good can only be ascertained by consumers ex post. • There are 2 possibilities. • (1)when the monopolist can adjust quality over time, the monopolist has an incentive to claim high quality and sell low quality-this gives rise to a problem of moral hazard. The introduction of warranties provides a commitment device for the manufacturer against this activity. To the extent that warranties are not effective, then repeat purchase by consumers may also create an incentive for the provision of high quality. There may also be a role for independent firms to perform quality tests and inform consumers of the results. • (2)when the quality of a product is fixed, but only the monopolist knows the quality of its product before purchase. This leads to the problem of adverse selection. Monopolists whose products are of low quality will claim the opposite and as a consequence consumers will be appropriately skeptical of all high-quality claims. The strategies that a high-quality manufacturer can follow is that it can credibly communicate its quality to consumers, particularly via the role of advertising
Oligopoly pricing (1) An overview of the theory of oligopoly pricing 1)reviews the classic models of oligopoly pricing when products are homogeneous-static models of oligopoly pricing-competition is limited to a single period (a the cournot model assumes that firms compete over quantities We consider the derivation of equilibrium, comparative static results and welfare implications when the number of firms is fixed and when there is free ent (b the Bertrand model assumes that firms compete over prices. This gives rise to the Bertrand paradox: when products are homogeneous and firms have constant and equal marginal costs, the competitive result that price equals marginal cost arises even if there are only two firms in the industry. This result is not robust to the introduction of capacity constraints and differentiated products. The relative merits and usefulness of the cournot and bertrand models one of the main results of both static models of imperfect competition is that the equilibrium outcome is not a collusive outcome: oligopoly prices and aggregate profits are lower than those of a monopolist
Oligopoly pricing(1) • An overview of the theory of oligopoly pricing: • (1)reviews the classic models of oligopoly pricing when products are homogeneous-static models of oligopoly pricing-competition is limited to a single period. • (a) the Cournot model assumes that firms compete over quantities. We consider the derivation of equilibrium, comparative static results, and welfare implications when the number of firms is fixed and when there is free entry. • (b) the Bertrand model assumes that firms compete over prices. This gives rise to the Bertrand paradox: when products are homogeneous and firms have constant and equal marginal costs, the competitive result that price equals marginal cost arises even if there are only two firms in the industry. This result is not robust to the introduction of capacity constraints and differentiated products. The relative merits and usefulness of the Cournot and Bertrand models. One of the main results of both static models of imperfect competition is that the equilibrium outcome is not a collusive outcome: oligopoly prices and aggregate profits are lower than those of a monopolist
Oligopoly pricing(2) (2 dynamic models of oligopoly-how dynamic competition(more than one period) makes it possible for oligopolists to sustain collusion or maintain a cartel and share in monopoly profits. The factors make collusion more or less sustainable The idea of facilitating practices Facilitating practices are a response by firms within an industry that increase the likelihood that collusion can be sustained
Oligopoly pricing(2) • (2) dynamic models of oligopoly-how dynamic competition (more than one period) makes it possible for oligopolists to sustain collusion or maintain a cartel and share in monopoly profits. The factors make collusion more or less sustainable. The idea of facilitating practices. Facilitating practices are a response by firms within an industry that increase the likelihood that collusion can be sustained
Oligopoly pricing 3) (3 oligopoly pricing in differentiated products markets the 2 types of models used to analyze competition in differentiated products markets are monopolistic competition and address models Models of monopolistic competition are used to determine whether market outcomes are characterized by the socially optimal number of differentiated products are there too many brands of some product? Given that production is characterized by economies of scale, there is an implicit trade-off between costs of production and the benefits of more variety. Introducing another variet ety increases average costs of production, but It this must be compared to the gain associated with an increase in variel y
Oligopoly pricing(3) • (3) oligopoly pricing in differentiated products marketsthe 2 types of models used to analyze competition in differentiated products markets are monopolistic competition and address models. • Models of monopolistic competition are used to determine whether market outcomes are characterized by the socially optimal number of differentiated products: are there too many brands of some product? Given that production is characterized by economies of scale, there is an implicit trade-off between costs of production and the benefits of more variety. Introducing another variety increases average costs of production, but this must be compared to the gain associated with an increase in variety
Oligopoly pricing(4 Address models of product differentiation begin with the assumption that each product can be described completely by its location in product space The distribution of the preferences of consumers is also in product space where their address represents their most preferred product. These types of models have been used to analyze whether or not the best set of products is produced. Adding another product means a closer match between available products and the most preferred variety of some consumers However, increasing the number of products decreases the output of each and if there are economies of scale, average production costs will be increasing in the number of products. Three types of strategic behavior are associated with product differentiation this behavior involves the use of product differentiation by incumbent firms to profitably deter the entry of competitors. (a)brand proliferation; (b brand specification; and(c)brand preemption. Vertical product differentiation-competition over quality. In these address models, ceteris paribus, all consumers agree on which products are preferred-are of higher quality. However, consumers differ in their abili lity to pay(incomes )and hence the most preferred product for any individual depends on the set of available products, prices, and her income. These models are used to determine the range of quality available in the market and how the strategic choice of quality can relax price competition and deter enti
Oligopoly pricing(4) • Address models of product differentiation begin with the assumption that each product can be described completely by its location in product space. The distribution of the preferences of consumers is also in product space, where their address represents their most preferred product. These types of models have been used to analyze whether or not the best set of products is produced. Adding another product means a closer match between available products and the most preferred variety of some consumers. However, increasing the number of products decreases the output of each, and if there are economies of scale, average production costs will be increasing in the number of products. Three types of strategic behavior are associated with product differentiation. This behavior involves the use of product differentiation by incumbent firms to profitably deter the entry of competitors. (a) brand proliferation; (b) brand specification; and (c) brand preemption. Vertical product differentiation-competition over quality. In these address models, ceteris paribus, all consumers agree on which products are preferred-are of higher quality. However, consumers differ in their ability to pay (incomes) and hence the most preferred product for any individual depends on the set of available products, prices, and her income. These models are used to determine the range of quality available in the market and how the strategic choice of quality can relax price competition and deter entry