Post on 02-Apr-2015
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Chapter 13
Oligopoly and Monopolistic Competition
Key issues
1. market structure
2.game theory
3.cooperative oligopoly models (cartels)
4.Cournot model of noncooperative oligopoly
5. Stackelberg model of noncooperative oligopoly
6.monopolistic competition
7.Bertrand model of noncooperative oligopoly
Market structures
markets differ according to
• number of firms in market
• ease of entry and exit
• ability of firms to differentiate their products
Oligopoly
• small group of firms in a market with substantial barriers to entry
• because relatively few firms compete in such a market, • each firm faces a downward-sloping demand curve• each firm can set its price: p > MC• market failure: inefficient (too little) consumption• each affects rival firms
• typical oligopolists differentiate their products
Monopolistic competition
• small or moderate number of firms
• free entry = 0• p = AC
• usually products differentiated
Strategies and games
• oligopolistic or monopolistically competitive firm use a • strategy:• battle plan of actions (such as setting a price or
quantity) it will take to compete with other firms
• oligopolies engage in a • game:• any competition between players (such as firms) in
which strategic behavior plays a major role
Game theory
• set of tools used by economists, political scientists, military analysts, and others to analyze decision making by players (such as firms) who use strategies
• these analytic tools can be used to analyze • oligopolistic games• poker• coin-matching games• tic-tac-toe• elections• nuclear war
Firm's objective
• obtain largest possible profit (or payoff) at game’s end
• typically, one firm's gain comes at expense of other firms
• each firm's profit depends on actions taken by all firms
Nash equilibrium
• set of strategies is a Nash equilibrium if, • holding strategies of all other players (firms) constant, • no player (firm) can obtain a higher payoff (profit) by
choosing a different strategy
• in a Nash equilibrium, no firm wants to change its strategy because each firm is using its • best response:• strategy that maximizes its profit given its beliefs about
its rivals' strategies
Duopoly
• consider single-period, duopoly, quantity-setting game
• duopoly: an oligopoly with two ("duo") firms
Airlines Example
• American Airlines and United Airlines
• compete for customers on flights between Chicago and Los Angeles
Notation
• Q = total number of passengers flown by both firms; sum of:
• qA = passengers on American Airlines
• qU = passengers on United Airlines
Firms act simultaneously
• each firm selects a strategy that• maximizes its profit • given what it believes other firm will do
• firms are playing • a noncooperative game of imperfect
information:• each firm must choose an action before
observing rivals’ simultaneous actions
Dominant strategy
• a strategy that strictly dominates all other strategies regardless of which actions rivals’ chose
• in this Table 13.2 game, each firm has a dominant strategy
• firm chooses its dominant strategy• where a firm has a dominant strategy, its
belief about its rival's behavior is irrelevant
Noncooperative game
• firms do not cooperate in a single-period game
• In Nash equilibrium (qA = qU = 64), each firm earns $4.1 million (< $4.6 million it would make if firms restricted their outputs to qA = qU = 48)
• sum of firms' profits is not maximized in this simultaneous choice, one-period game
Why don't firms cooperate?
• don't cooperate due to a lack of trust:
• each firm can profitably use low-output strategy only if it trusts other firm!
• each firm has a substantial profit incentive to cheat on a collusive agreement
Prisoners' dilemma game
all players have dominant strategies that lead to a profit (or other payoff) that is inferior to what they could achieve if they cooperated and played alternative strategies
Collusion in repeated games
• in a single-period prisoners' dilemma game, firms produce more than they would if they colluded
• why, then, are cartels frequently observed?• collusion is more likely in a multiperiod
game: single-period game played repeatedly• punishment: not possible in a single-period
game but possible in a multiperiod game
Supergame
• if a single-period game is played repeatedly, firms engage in a• supergame: • players’ strategies in this period may depend on rivals'
actions in previous periods
• in a repeated game, firm can influence its rival's behavior by• signaling• threatening to punish
Threat
• suppose American announces to United that it will use the following two-part strategy:• American produces smaller quantity each
period as long as United does the same• if United produces larger quantity in period t,
then American will produce larger quantity in period t + 1and all subsequent periods
• thus, if firms play same game indefinitely, they should find it easier to collude
Know number of periods
• suppose firms know that they are going to play game for T periods
• period T is like a single-period game, and all firms cheat
• hence T-1 period is last interesting period • by same reasoning, they cheat in that period, etc.• cheating is less likely to occur if end period is
unknown or there is no end
Insurance price wars
• from 1984-1995, life insurance companies' prices were high and unchanging
• in 1995, prices dropped 25% or more
Explanations for price war
1. insurers knew that new “Triple X” regulations were expected to go into effect in 1996• regulations required insurers to raise reserves on term
policies to cover future claims• were expected to boost rates on new policies by as
much as 50%• companies cut rates to attract new customers before
higher rates took effect
2. formal or informal agreement to keep prices high fell apart as end of original game approached
Cooperative oligopoly models
Adam Smith:
"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or some contrivance to raise prices"
Cartels fail
luckily for consumers, cartels often fail because
• each firm in a cartel has an incentive to cheat on the cartel agreement by producing extra output
• governments forbid them
Historic cartels
in late nineteenth century, cartels (trusts) were legal and common in the United States• oil• railroads• sugar• tobacco• steel
J.D. Rockefeller
Laws against cartels
• in response to trusts' high prices, Congress passed • Sherman Antitrust Act in 1890• Federal Trade Commission Act of 1914
• these laws prohibit firms from explicitly agreeing to take actions that reduce competition, such as jointly setting price
• these anti-cartel laws are called • antitrust laws in U.S.• competition policies in most other countries
Europe
• over the last dozen years, the European Commission has been pursuing competition cases under laws that are similar to U.S. antitrust laws
• recently the EC, the DOJ, and the FTC have become increasingly aggressive, prosecuting many more cases
• following the U.S., which uses both civil and criminal penalties, the British government introduced legislation in 2002 to criminalize certain cartel-related conduct
• EU uses only civil penalties, but its fines have increased dramatically, as have U.S. fines
Corporate Leniency Program
• in 1993, DOJ introduced a new Corporate Leniency Program that guarantees that participants in cartels who blow the whistle will receive immunity from federal prosecution
• as a consequence, DOJ has caught, prosecuted, and fined several gigantic cartels (e.g. Vitamins)
• on Valentine’s Day, 2002, EC adopted a similar policy
Sotheby’s and Christie’s
• Sotheby’s (established in 1744) and Christie’s (1776) are the two largest and most prestigious auction houses in the world
• they control 90% of the $4 billion worldwide auction market
• for most of the last two and a half centuries, they thrived
• starting at least by 1993, when faced with poor business conditions, they started to collude, according to the U.S. Department of Justice (DOJ)
Auctions (cont.)
• DOJ started investigating in 1997, but gained the necessary evidence in 2000, when Christie’s approached both DOJ and European Commission with proof that it had conspired with Sotheby’s to fix prices
• Christie’s applied for leniency under the U.S. antitrust laws, effectively “shopping” its rival
Auctions (cont.)
• DOJ charged that the pair • held meetings between top-level executives• exchanged confidential lists of super-rich clients• agreed to limit which customers received lower
commissions• charged identical commission rates (a sliding scale up
to 20%) to other sellers who had little negotiation power
• Sotheby’s paid a $45 million fine• the two auction houses agreed to pay more than
$512 million to former clients to settle lawsuits
Auctions (cont.)
• A. Alfred Taubman, Sotheby’s former chairman and who still held a 21% share of stock and controlled 63% of its voting rights, was sentenced for price fixing to a year in prison and fined $7.5 million in 2002
• Christie’s former chairman, Sir Anthony Tennant, lives in England has refused to come to the United States to face trial
• however, days before Taubman’s conviction, the European Commission brought charges against both auction houses
Why some cartels persist
1. tacit collusion
2. international cartels (OPEC) and cartels within certain countries operate legally
3. illegal cartel believes it can avoid detection or punishment will be small
Why cartels form
members of cartel believe they can raise their profits by coordinating their actions
Why can cartels raise profits?
• if a competitive firm is maximizing its profit, why should joining a cartel increase its profit?• competitive firm is already choosing output to
maximize its profit• however, it ignores effect that changing its
output level has on other firms' profits
• cartel takes into account how changes in one firm's output affect cartel profits
Why cartels fail
• cartels fail if noncartel members can supply consumers with large quantities of goods (example: copper)
• each member of a cartel has an incentive to cheat on cartel agreement
Figure 13.1 Competition Versus Cartel
Price, p,$ per unit
(a) Firm
qc q*qmQuantity, q, Units
per year
S
MR
Market demand
AC
MC
pm
MCm
pc
pm
em
ec
MCm
pc
Price, p,$ per unit
(b) Market
Qm Qc
Quantity, Q, Unitsper year
Solved problem
• initially, all identical firms in a market collude
• if some of these firms leave the cartel and act like price takers, how are consumers affected?
Maintaining cartels
to maintain cartel, firms must
• detect cheating
• punish violators
• keep its illegal behavior hidden from governments
Detection and enforcement
• inspect each other's books (e.g., most-favored nation clauses)
• governments report bids on government contracts• divide market by region or by customers
mercury cartel (1928-1972) allocated U.S. to Spain and Europe to Italy
• use industry organizations to detect cheating • offer "low price" guarantees
Insurance price wars
• life insurance companies' prices are normally stable and high
• however, in 1995, companies dropped their prices substantially: 25% or more
• the previous price war 1981-3, when term insurance rates went from $4 to $1 per thousand dollars of coverage for a 35-year-old for a 10-year plan
Cause of price war
• theory 1: sparked by new insurance regulations • insurers knew in advance when these new regulations
(Triple X) were expected to go into effect• new regulations required insurers raise reserves on term
policies to cover future claims; were expected to boost rates by as much as 50%
• companies were cutting rates to attract new customers before the higher rates took effect
Alternative theory
theory 2 (not necessarily incompatible view): a formal or informal agreement to keep prices high fell apart as the end of the original game approached
Government created cartels
• American, European, and other governments established a cartel in 1944 that fixed prices for international airline flights and prevented competition
• baseball teams exempted from some U.S. antitrust laws since 1922 Bud Selig, baseball's commissioner: “[The baseball] antitrust exemption is protection for the
fans.”
• automobiles
Automobile cartel
• Reagan admin. negotiated 1981 voluntary export restraints (VER): Japanese auto manufacturers would reduce their auto exports to U.S.
• Why would Japanese manufacturers “voluntarily” reduce their exports? • to avoid government quotas • to act like a cartel: reducing sales to collusive level
• when U.S. allowed VER agreements to lapse in 1985, Japanese government wanted to continue to restrict exports
Auto cartel effects
• stock market value of Japanese auto industry increased during VER period by $6.6 billion
• VERs raised price of American cars by 5.4% between 1981 and 1983
• U.S. consumers lost $6.9 billion ($1984) due to these export restrictions
• using VER is foolish • foreign and domestic auto manufacturers capture
“cartel” profits from higher prices• tariffs better for U.S.
Entry and cartel success
• barriers to entry help cartel: limit competition • cartels with large number of firms rare (except
professional associations)• Dept. of Justice price-fixing cases 1963-1972
• only 6.5% involved 50 or more conspirators• average number of firms was 7.25• 48% involved 6 or fewer firms
• cartels often fall apart after entry (mercury)
Bail bonds
• Connecticut sets a maximum fee bail-bond businesses can charge for posting a given-size bond
• how close price in a city is to legal maximum depends on number of firms
Town
# of active firms
% of maximum allowed fee
Plainville, Stamford, Wallingford
1 99
Meriden, New London 2 98
Norwalk 3 54
New Haven 8 64
Bridgeport 10 78
Mergers
• if antitrust or competition laws prevent firms from colluding, they may try to merge
• U.S. laws restrict ability of firms to merge if effect would be anticompetitive
Some mergers raise efficiency
• efficiency due to greater scale
• sharing trade secrets
• closing duplicative retail outlets Chase and Chemical banks merged in 1995:
closed or combined 7 branches in Manhattan located within 2 blocks of another branch
Airline mergers
• government did not contest most airline mergers 1985-1988
• prices increased on routes served by firms that merged relative to those on routes without mergers
Soft drinks 1986 merger proposals
• Coke, largest producer of carbonated soft drinks (38.6% of sales), tried to buy third largest, Dr Pepper (7.1%)
• Pepsi, second largest producer (27.4%), tried to acquire fourth largest firm, Seven-Up Co. (6.3%)
• had these proposed mergers taken place, Coke's market share would have risen to 45.7% and Pepsi's to 33.7%
• combined share would have risen from 66.0% to 79.4%
FTC intervenes
Federal Trade Commission (FTC) opposed mergers, arguing that merger
• would increase market shares of big firms• make entry of new firms more difficult• raise costs of other companies doing
business in this market• ease "collusion among participants in the
relevant markets"
Relevant market definition
• Coca-Cola: all beverages including tap water
• Federal Judge Gesell: carbonated soft drinks (based on cross-elasticities of demand)
Outcome
• after Coke and Pepsi mergers blocked by FTC in 1986• Dr Pepper Co. sold for $416 million to investor group
($54 million less than Coke offered) • Seven-Up Co. sold for $240 million to another
investment group ($140 million less than Pepsico's bid)
• lower values to others than to Coke and Pepsi is consistent with FTC's view that Coke and Pepsi would have gained market power through these mergers
Eventually
• Dr Pepper and Seven-Up merged• by 1995: Dr Pepper/Seven-Up: 11.5% of carbonated
beverages market • Cadbury: 5.5% [Schweppes, Canada Dry, Crush,
Sunkist, and A&W (root beer) brands] • Cadbury bought Dr Pepper/Seven-Up (17% of soft-
drink market, and half non-cola part)• Coke: 41%, Pepsi: 32%
• mergers increased share of top 3 firms • FTC's actions limited share of top 2 firms
Noncooperative oligopoly
• many models of noncooperative oligopoly behavior
• firms choose quantities• Cournot model• Stackelberg model
• firms set prices: Bertrand model
Cournot
• Augustin Cournot introduced first formal model of oligopoly in 1838
• oligopoly firms choose how much to produce at same time
• as in prisoners' dilemma game, firms are playing noncooperative game of imperfect information• each firm chooses its output level before knowing what
other firm will choose• firms may choose any output level they want
Basic model
• duopoly: 2 firms (no other firms can enter)
• firms sell identical products
• market that lasts only 1 period (product or service cannot be stored and sold later)
Cournot model of airline market
• duopoly: United Airlines (UA) and American Airlines (AA) fly passengers between Chicago and Los Angeles
• no possible entry (limited landing rights at both airports)
Cournot equilibrium
• Nash equilibrium where firms choose quantities
• set of quantities sold by firms such that, holding quantities of all other firms constant, no firm can obtain a higher profit by choosing a different quantity
Figure 13.2a American Airlines’ Profit-Maximizing Output
p, $ perpassenger
MC
MR D
(a) Monopoly
qA , Thousand American Airlinespassengers per quarter
339
147
243
0 339169.596
Figure 13.2b American Airlines’ Profit-Maximizing Output
MRr Dr D
p, $ perpassenger
MC
(b) Duopoly
qA, Thousand American Airlinespassengers per quarter
qU = 64
339
147
275
211
0 339275137.564 128
Figure 13.3 American and United’s Best-Response Curves
qU, Thousand Unitedpassengers per quarter
United ’s best-response curve
Cournot equilibrium
American’s best-response curve
qA, Thousand Americanpassengers per quarter
192
64
48
96
0 1929664
Figure 13.4a Duopoly Equilibria
Price-taking equilibrium
qU, Thousand United passengers per quarter
United’s best-response curve
Cournot equilibrium
Cartelequilibrium
Stackelberg equilibrium
Contractcurve
American’s best-response curve
(a) Equilibrium Quantities
qA , Thousand American passengers per quarter
192
64
48
96
0 192966448
Figure 13.4b Duopoly Equilibria
U, $ million profitof United Airlines
Cournot profits
Price-taking profits
Profit possibility frontier
Cartel profits
Stackelbergprofits
American monopolyprofit
(b) Equilibrium Profits
A, $ million profit of American Airlines
9.2
4.1
2.3
4.6
0 9.24.64.1
Algebraic approach
• estimate of linear market demand function is
Q(p) = 339 – p• linear residual demand facing AA is
qA = Q(p) – qU = (339 – p) – qU
p = 339 - qA - qU
• slope of residual demand curve is p/qA = -1, so slope of MRr = -2
MRr = 339 - 2qA - qU
Calculus
• linear residual demand facing AA is
p = 339 - qA – qU
• so AA’s revenue is
R = 339qA - qA2 - qUqA
• so AA’s marginal revenue (using the Cournot assumption) is
MRr = dR/dqA = 339 – 2qA - qU
AA Maximizes profit
MRr = 339 - 2qA - qU = 147 = MC
best-response function
qA = 96 - ½ qU
Cournot equilibrium
• intersection of best-response functions
qA = 96 - ½ qU
qU = 96 - ½ qA
• solve by substituting
qA = 96 - ½(96 - ½ qA)
qA = 64
Q = qA + qU = 128
p = 339 – Q = $211
Solved problem
• Math version of Solved Problem 13.1 in text.• Government charges American Airlines and
United Airlines a specific tax of per passenger on the Los Angeles-Chicago route.
• What is the new equilibrium number of passengers that each airline flies?
• What's the equilibrium number if the tax is $30?
Answer
• determine how the firms' best-response functions change due to the tax:
• AA sets its MRr equal to its MC (including the tax)
MRr = 339 - 2qA - qU = 147 + = MC• rearranging, AA’s best-response function is
qA = 96 - /2 - qU/2 • similarly, UA's best-response function is
qU = 96 - /2 - qA/2
Answer (cont.)
• solve for the equilibrium quantities in terms of :
• substitute UA's best-response function into AA's and rearrange:
qA = (2/3)(96 – /2) = 64 – /3• substitute for qa in UA's best-response
function:
qU = 64 – /3
Answer (cont.)
solve for the equilibrium quantities where = $30:
qA = qU = 64 – [1/3] = 54
European cigarette tax incidence
• As with a monopoly, an oligopoly may pass through less or more than 100% of a tax to consumers
• Delipalla and O’Donnell’s (2001) estimate degree of pass-through to consumers from a specific tax on cigarettes:
• less than 100% in the Netherlands (67%), Belgium (79%), and Germany (82%)
• about 100% in Denmark, the United Kingdom, Portugal, and Ireland
• extremely high in Italy (359%), France (604%), and Luxembourg (700%)
Cournot equilibrium varies with number of firms
• typical Cournot firm maximizes its profit
MR = p(1 + 1/[n]) = MC• n is elasticity of residual demand curve facing
each firm is market elasticity of demand• n is number of firms
• Lerner index: 1p MC
p n
Air ticket prices and rivalry
• markup of price over marginal cost is much greater on routes in which one airline carries most of the passengers than on other routes
• a single firm is the only carrier or the dominate carrier on 58% of all U.S. domestic routes• monopoly serves 18% of all routes• duopolies 19%• three firms 16%• four firms 13%• five or more firms 35%
Air ticket prices (cont.)
• although nearly two-thirds of all routes have three or more carriers, one or two firms dominate virtually all routes• dominant firm: has at least 60% of ticket sales by value
but is not a monopoly• dominant pair if they collectively have at least 60% of
the market but neither firm is a dominant firm and three or more firms fly this route
• all but 0.1% of routes have a monopoly (18%), a dominant firm (40%), or a dominant pair (42%)
Air ticket prices (cont.)
• (average price includes “free” frequent flier tickets and other below-cost tickets)
• ticket price is • 2.1 x MC on average across all U.S. routes and market
structures• 3.3 x MC for monopolies• 3.1 x MC for dominant firms• 1.2 x MC for dominant pairs
• if there is a dominant pair, whether there are 4 or 5 firms, price is between 1.3 x MC for a 4-firm route and 1.4 x for a route with 5 or more firms
Stackelberg model
• Cournot model: both firms make their output decisions simultaneously
• Heinrich von Stackelberg's model: firms act sequentially• leader firm sets its output first• then its rival (follower) sets its output
Figure 13.5 Stackelberg Game Tree
American
64
96
48(4.6, 4.6)
(3.8, 5.1)
(2.3, 4.6)
48
Leader’s decision Follower’s decision Profits (A, U)
64
96
48(5.1, 3.8)
(4.1, 4.1)
(2.0, 3.1)
64
64
96
48(4.6, 2.3)
(3.1, 2.0)
(0, 0)
96
United
United
United
Figure 13.6 Stackelberg Equilibrium
qU, Thousand Unitedpassengers per quarter
qA, Thousand American passengers per quarter
qU = 48
96
0 qA = 96
MR r
D r
D
MC
p, $ perpassenger
(a) Residual Demand American Faces
qA, Thousand American passengers per quarter
qU = 48
339
195
243
147
0 339192
192
qA = 96 Q = 144
United’s best-response curve
(b) United ’s Best-Response Curve
Question
• when firms move simultaneously,
• why doesn't AA announce it will produce Stackelberg-leader output,
• so as to induce UA to produce the Stackelberg follower's output level?
Answer
when firms move simultaneously, UA doesn't view AA's warning that it will produce a large quantity as a credible threat:
• not in AA’s best interest to produce large quantity• because AA cannot be sure that UA believes threat
and reduce its output, AA produces Cournot level• when one firm moves first, its threat to produce
large quantity is credible because it has already committed to producing large quantity
Monopolistic competition
• market structure in which firms• have market power• are price setters
• firms enter if there is a profit opportunity ( = 0)• monopolistically competitive equilibrium:
MR = MCp = AC
(demand curve tangent to AC curve)
Figure 13.8 Monopolistically Competitive Equilibrium
p, $ per unit
q, Units per yearq
p
MRr Dr
MC AC
p = AC
MRr = MC
Figure 13.9a Monopolistic Competition Among Airlines
p, $ perpassenger
275137.5640q, Thousand passengers
per quarter
300
275
211183
147
(a) Two Firms in the Market
ACMC
MRr for 2 firms
= $1.8 million
Dr for 2 firms
if F = $2.3 million
Figure 13.9b Monopolistic Competition Among Airlines
p, $ perpassenger
243121.5480q, Thousand passengers
per quarter
300
243
195
147
(b) Three Firms in the Market
ACMC
MRr for 3 firms
D for 3 firmsr
Number of firms
• number of firms in equilibrium is smaller, • greater economies of scale• less market demand at each price
• fewer monopolistically competitive firms,• less elastic is each firm’s residual demand
curve at equilibrium• higher fixed cost
Fixed cost and number of firms
• fixed costs determine number of firmsAC = 147 + F/q
• smallest quantity at which AC curve reaches its minimum called • full capacity, or • minimum efficient scale
• monopolistically competitive equilibrium in downward-sloping section of AC curve, so monopolistically competitive firm operates at less than full capacity in LR
Bertrand
• firms set price instead of quantity
• changes equilibrium
• (unlike monopoly, choice of quantity vs. price matters)
Figure 13.10 Bertrand Equilibrium with Identical Products
p2, Price of Firm 2,$ per unit
Firm 2 ’s best-response curve
Firm 1’s best-response curve
45° line
e
p1, Price of Firm 1, $ per unit
10
5
0 5 109.99
Figure 13.11 Bertrand Equilibrium with Differentiated Products
pc, Price of Coke,$ per unit
Pepsi ’s best-responsecurve ( MCp = $5) Coke ’s best-response
curve ( MCc = $14.50)
Coke’s best-responsecurve ( MCc = $5)
pp, Price of Pepsi, $ per unit
25
18
13
0 2513 14
e1
e2
1. Market structure
• prices, profits, and quantities in a market equilibrium depend on the market's structure
• all firms maximize profit by setting MR = MC• oligopolies and monopolistically competitive
firms are price setters: face downward-sloping demand curves
• oligopoly: entry blocked• monopolistic competition: free entry
2. Game theory
• set of tools used to analyze conflict and cooperation between firms
• each firm forms a strategy or battle plan of the actions to compete with other firms
• firms' set of strategies is a Nash equilibrium if,• holding the strategies of all other firms constant,• no firm can obtain a higher profit by choosing a
different strategy
3. Cooperative oligopoly models
• with collusion, firms collectively produce monopoly output and earn monopoly profit
• each individual firm has an incentive to cheat on a cartel arrangement so as to raise its own profit even higher
4. Cournot model of noncooperative oligopoly
• if oligopoly firms act independently, market output and firms' profits lie between competitive and monopoly levels
• Cournot model: each oligopoly firm sets its output simultaneously
• Cournot (Nash) equilibrium: each firm produces its best-response output given rivals’ outputs
• as number of Cournot firms increases, Cournot equilibrium price, quantity, and profits approach price-taking levels
5. Stackelberg model of noncooperative oligopoly
• Stackelberg leader chooses its output first
• then its rivals - Stackelberg followers – choose outputs
• leader produces more and earns a higher profit than followers
6. Monopolistic competition
• monopolistically competitive firms are price setters: MR= MC, so p > MC
• there's free entry: p = AC