Competition and Monopoly

1. Market Classification

• Perfect competition
• Monopoly
• Monopolistic competition
• Oligopoly

2. Perfect Competition

2.1. Four Conditions

2.1.1. Large-Numbers Assumption

• Countless producers and consumers.
• Firms have no pricing power.

2.1.2. Product Homogeneity

• As long as they are the same kind of product, consumers view them as identical.
• Consumers have no need to choose.
• Producers do not need to advertise.

2.1.3. Perfect Information

• Information is everywhere and public.

2.1.4. Perfect Mobility of Resources

• Only when resources are completely mobile can they be freely allocated.

2.2. What Markets Exist

• Securities market
• Agricultural-products market

2.3. Demand Curve

• 
• Profit-maximization condition for a perfectly competitive firm: P0 = MC.

2.4. Short-Run Equilibrium

• With scale unchanged and facing a perfectly competitive market, what price and output maximize the firm’s profit?
• Making a profit
  • 
  • MC: marginal cost
  • AC: average cost
  • AVC: average variable cost
• Breaking even
  • 
• Making a loss
  • Continue producing
    • 
  • Shut down
    • 

2.5. Long-Run Equilibrium

• Firm equilibrium
  • 
• Industry equilibrium
  • The optimal output at the optimal scale is the result reached by long-run industry equilibrium.
  • 
• Firm equilibrium vs. industry equilibrium
  • When an individual firm is in equilibrium, the industry is not necessarily in equilibrium. When the industry is in equilibrium, all firms in the industry are in equilibrium.

3. Monopoly

3.1. Three Conditions

3.1.1. Only One Firm

3.1.2. No Close Substitute

3.1.3. Other Firms Cannot Enter

• Government franchise
• Control of materials
• Technology monopoly
• Unfair competition

3.2. Demand Curve

• 

3.3. Price Discrimination

3.3.1. What It Is

• Segment the same product according to different market conditions and apply individualized pricing.

3.3.2. Types

• Divide it into three types according to the degree to which consumer surplus is taken away.

3.3.2.1. First-Degree Price Discrimination

• Price each unit of the product separately.
  • 
• Characteristics
  • Few buyers
  • The seller knows consumers’ ability to pay especially well.
  • Two-part charging phenomenon
• Examples
  • Securities market
  • Park-within-a-park

3.3.2.2. Second-Degree Price Discrimination

• Price the product by portions or blocks.
  • 
• Examples
  • Postal pricing
  • Telephone pricing

3.3.2.3. Third-Degree Price Discrimination

• Set different prices for the product in different markets.
  • 
• Characteristics
  • Market segmentation
  • Consumers have different demand.

4. Monopolistic Competition

4.1. Four Conditions

4.1.1. Many Firms

4.1.2. Close Substitutes

• Leads to product differentiation.
  • 
  • Core: the function of the product.
  • Physical form: how the product is presented.
  • Additional services
• Competition is especially intense.

4.1.3. Other Firms Can Enter and Exit Freely

4.2. Demand Curve

• 

5. Oligopoly

• There are only a few large firms.
• Firms affect one another.
• They reach agreements.
• Prices are relatively stable.

5.1. Cournot Model

• There are only two oligopolists in the market.
• Production cost is 0.
• 

5.2. Sweezy Model

• The demand curve is a kinked demand curve.
• 

5.3. Price Leadership

• Oligopolists of different sizes.
• What kind of oligopolist can become the price leader?
  • Low cost
  • Large scale

5.4. Prisoner’s Dilemma

• Decision matrix
  • 
• Conclusion
  • Non-cooperation cannot achieve the optimum.
  • Cooperation can achieve a second-best outcome.

5.5. Boxed-Pigs Game

• Background
  • 
• Decision matrix
  • 
• Eliminate-the-worst-decision method
• Examples
  • Large enterprises and small enterprises
  • The eldest and the youngest
  • Large countries and small countries