week 5 ECON 294 Monopolistically Competitive and Oligopolistic Product Markets

Week 5 Discussion:
Monopolistically Competitive and Oligopolistic Product Markets

John
Nash

Oligopoly or Monopolistic Competition, and that means Team
Work Again! You are asked to collude.You are
asked to collaborate with at least one other classmate and that meansYour Study Group. Your Group needs to
choose to post a thread for one of the two models below (Oligopoly or
Monopolistic Competition).
Note: No need for your team to post in both, but it is
necessary that you respond to your fellow classmates’
selections!
Option #1: If You Choose an Oligopoly.
How would a rational businessperson formulate production and
pricing strategies in an oligopolistic market?
Review the key characteristics of oligopolistic markets in your
text and the expected outcomes for the various situations described. You
may find a payoff matrix helpful in understanding the mutual interdependence
between producers in an oligopoly. John Nash (as played by Russell Crowe
inA
Beautiful Mind) certainly did.
Think about some real world markets which come close to the
Oligopoly characteristics. Finally, what are the implications for efficiency
and equity? You should note how price/cost margins in the long run equilibrium
situations for these markets. Is price equal to average cost? If so, neither
producer or consumer is unfairly ripped off. Is price equal to minimum average
cost? If so then the engineers must be happy as there is no other output level
yielding higher productivity and lower cost and we have productive efficiency.
Is price equal to marginal cost? If so then there is no reallocation of
resources which would make society better off and we have allocative
efficiency. Alternatively, a given market is unfair to consumers if price is
greater than marginal cost, productivity inefficient if price is greater than
minimum average cost, and allocatively inefficient if price is greater than
marginal cost since we value more of the good in question than other goods that
are currently being produced with the same resources. Think about these things
(characteristics of oligopoly, resulting behavior by business decisionmakers,
consequent price/cost margins, and implications for efficiency and equity).
Option #2: If you Choose a Monopolistic Competition
Market.
How would a rational businessperson formulate production and
pricing strategies in a monopolistically competitive market?
Review the key characteristics of monopolistically competitive
markets in your text and the expected outcomes for the various situations illustrated
above. Think about real world products and services which come close to those
characteristics. In fact, you will find that most of what you probably buy on a
daily basis are monopolistically competitive products.You should note how
price/cost margins in the long run equilibrium situations for these markets. Is
price equal to average cost? If so, neither producer or consumer is unfairly
ripped off. Is price equal to minimum average cost? If so, then the engineers
must be happy as there is no other output level yielding higher productivity
and lower cost and we have productive efficiency.Is price equal to marginal
cost? If so, then there is no reallocation of resources which would make
society better off and we have allocative efficiency. Alternatively, a given
market is unfair to consumers if price is greater than marginal cost,
productivity inefficient if price is greater than minimum average cost, and
allocatively inefficient if price is greater than marginal cost since we value
more of the good in question than other goods that are currently being produced
with the same resources.
Here’s what I would like you to do:
1.
As a TEAM,identify a market that your team believe is
“oligopolistic” or “monopolistic competition.”
Your text can help you with this. You can NOT pick a product that
was selected last week or this week by yourself, classmate or another team
(well not if you want credit for it anyways).
2.
Tell us why the market you selected meets the criteria of an
oligopoly or monopolistic competition. Then tell us what that means for
rational business price and production decisions.
3.
Evaluate the result in (2) from perspectives of efficiency and
equity drawing upon price/cost margins for your explanation. Click on the
highlighted terms above if you are unclear on this.You may want to also
consider issues involving the stability of collusive cartels. Please start
with your assigned study teams. If you find yourself solo after Tuesday
midnight (C.S.T.) because of team inactivity, you may join with another solo
classmate.As always, you will profit by reading and responding to your fellow
budding economists’ postings.
Due Date Reminder: