Comparative analysis of profit maximization under perfect competition and under pure monopoly.
Perfect competition is characterized by: 1) great number of firms in an industry; 2) no price control by means of supply of an individual firm; all firms are price takers; 3) no barriers to entry; 4) product is homogeneous, no trademarks; 5) the demand curve for the product of a firm is horizontal at the equilibrium market level: a producer can sell as much as he wants at the market price.
Monopoly criteria: 1) Only one firm in an industry. 2) Full and absolute price control. Firm is a price maker. 3) No free entry to the industry. 4) The product is unique; no close substitutes. 5) D curve of the firm is the same as for the industry and is down sloping.
General rule for equilibrium: MR=MC
Models of oligopoly.
CHARACTERISTICS:
l. Few sellers and many buyers
2. Closes substitutes or differentiated products
3. Imperfect information; price maker
4. Barriers to entry are strong but not as strong as a monopoly. Economies of scale make entry of new firms very costly.
O
ligopoly
models:
l. Pure Oligopoly:
a. Kinked demand curve
b. Competitors follow price cuts but not price increases
c. Gives rise to stable prices.
2. Collusion:
a. firms collude to behave as a monopolist
b. implicit – price leadership, when a firm charges a price and all other firms follow suite;
c. explicit collusions (may be demonstrated by cartels – an agreement between firms on price and output level) OPEC for example
3. Stakelberg model / Price leadership: one dominant firm with few smaller firms called "fringe" firms. Firms allow one firm to exercise leadership to end uncertainty.
4. Contestable markets: oligopoly with low barriers to entry, so there is always danger of new rivals to come. This danger forces the firms to behave as if they were competitive.
Alternative theories of the firm.
Theories of the firm based on the assumption that firms have aims other than profit maximization. There are two major types of criticism of the traditional profit-maximising theory: (1) firms may not have the information to maximise profits; (2) they may not even want to maximise profits.
Alternative maximizing theories include:
Long-run profit maximization: shift cost and revenue curves so as to maximise profits over some longer time period.
Managerial utility maximization
Sales revenue maximization: maximise the firm’s short-run total revenue.
Growth maximization: maximise growth in sales revenue (or capital value of the firm) over time.
Growth by internal expansion
Growth by merger
Growth through strategic alliances
Growth through going global
Producer’s equilibrium in the inputs markets.
Price determination in the monopsonic labour market.
W
hen
a firm is the only employer of a certain type of labour, this
situation is called a monopsony. To employ more workers the wage rate
should be raised to all the workers. Monopsony under employs and
underpays to workers. Firms may exercise discrimination (by race,
sex, age, etc.). If a firm is a monopsony employer, it will employ
workers to the point where MRPL
= MCL