bài giảng kinh tế vi mô tiếng anh ch13 imperfect competition

Strategies and games• oligopolistic or monopolistically competitive firm use a • strategy: quantity it will take to compete with other firms • oligopolies engage in a • game: which strat

Chapter 13

Oligopoly and Monopolistic

Competition

Key issues

1 market structure

2 game theory

3 cartels

4 Cournot model of oligopoly

5 Stackelberg model of oligopoly

6 monopolistic competition

7 Bertrand model of 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,

• typical oligopolists differentiate their products

Monopolistic competition

• small or moderate number of firms

• free entry

• π = 0

• p = AC

• usually products differentiated

Strategies and games

• oligopolistic or monopolistically competitive firm

use a

• strategy:

quantity) it will take to compete with other firms

• oligopolies engage in a

• game:

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

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,

choosing a different strategy

• in a Nash equilibrium, no firm wants to change its strategy because each firm is using its

• best response:

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

• Q = total number of passengers flown by

both firms; sum of:

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

firm earns $4.1 million (< $4.6 million it

would make if firms restricted their outputs

• 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:

actions in previous periods

• in a repeated game, firm can influence its rival's

behavior by

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

Cartels

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"

Why cartels form

• limit entry

• demand elasticity not too large

• few firms

• national association

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

Historic cartels

in late nineteenth century, cartels (trusts)

were legal and common in the United States

• railroads

• sugar

• tobacco

• steel

Laws against cartels

• in response to trusts' high prices, Congress passed

• these laws prohibit firms from explicitly agreeing

to take actions that reduce competition, such as jointly setting price

• these anti-cartel laws are called

Effectiveness of Antitrust Laws

• at first they had no bite because the

language was vague and full of loopholes

• mocked as “the Swiss Cheese Act”

Supreme Court

• In 1902, Teddy Roosevelt had DOJ sue Northern Securities Company (railroad—

part of J.P Morgan empire) under the Sherman Act

• 1906 sued to dissolve Rockefeller’s Standard Oil

• 1911: Supreme Court breaks up oil trust—

Sherman Act gains teeth

• 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

commissions

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

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

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

q c q*

q m Quantity, q, Units

per year

S

MR

Market demand

AC MC

p m

MC m

p c

e c

MC m

p c

Price, p,

$ per unit (b) Market

Q m Q c

Quantity, Q, Units

per 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 a 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

Government created cartels

• U.S., European, & 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.”

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?

• 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

“cartel” profits from higher prices

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

• 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 a city’s price is to legal

maximum depends on number

54 3

Norwalk

78 10

Bridgeport

98 2

Meriden, New London

99 1

Plainville, Stamford, Wallingford

% of maximum allowed fee

# of active firms Town

Lysine cartel

• 1996: Archer Daniels Midland (ADM)

pleaded guilty to price fixing

• ADM admitted to price fixing in lysine

(used in livestock feed) and citric acid (used

in soft drinks and detergents)

• source of following: Connor (1993)

Lysine market

• share of global production of 4 largest manufacturers of lysine in early 1990s

• CR4 of buyers < 30%

• large infrequent purchases

• cost of a new plant $150+ million (over 3 years to build)

• perfectly homogeneous product

Lysine fines

• 5 corporate fines

• lysine cartel U.S fine was 7x previous highest

fine

• 7 personal fines

• in 1999, 3 people got prison sentences of 99

months total (indiv max 36 months)

Individual fines

Michael D Andreas (U.S.), Vice Chairman, ADM, $350,000 fine, 36 months of jail

Terrance Wilson (U.S.), Pres., Corn Products Div., ADM,

$350,000, 33 months Mark Whitacre (U.S.), Pres., Bioproducts Div., ADM,

$350,000, 30 months Kanji Mimoto (J), Div Mgr., Ajinomoto, $75,000 Hirozaku Ikeda (J), Div Mgr., Ajinomoto $0 Kaztoshi Yamada (J), Mng Dir., Ajinomoto, Fugitive Masaru Yamamoto (J), Div Mgr., Kyowa, $50,000 Jhom Su Kim (SK), Pres., Sewon America, 75,000

Lysine buyers

• individual U.S buyers received

compensation ≈ their losses

• that is, they did not get treble damages

• total U.S corporate settlements: about $85

million

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 carbonated soft drinks producer

(38.6% of sales), tried to buy 3rd largest, Dr

Pepper (7.1%)

• Pepsi, 2nd largest producer (27.4%), tried to

acquire 4th 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 FTC blocked Coke and Pepsi mergers in 1986

($54 million less than Coke offered)

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

beverages market

Sunkist, and A&W (root beer) brands]

soft-drink market, and half non-cola part)

• 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

other firm will choose

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)