a) Oligopoly is a market structure that is characterized by a small number of firms. In this case, interdependence in regard to market policies is highly emphasized.
b) The reasons for existence of oligopolies include existence of economies of scale due to the fact that large firms are able to operate at minimum average cost, the urge to create mergers and acquisitions and the third reason being ownership of patents by these oligopolistic firms.
2.
a) The four firm concentration ratio can be defined as a traditional measure of the market concentration of the four biggest firms in a particular given industry. This kind of ratio is very important especially for the purposes of measuring the extent of market control by these four biggest industries.
b) The four firm concentration ratio is 251510858
c) i) the Herfindahl-Hirschman Index is also a traditional measure but is concerned with the size of a firm in a certain industry and is an index that is also concerned with the competition of big firms in that industry.
ii) The larger the Herfindahl-Hirschman Index the greater the market power and the lower the market competition.
4)
a) The three different types of barriers to entry in a monopoly include
Advertising - this arises whereby a firm is able to create a very strong advertising campaign which cannot match the advertising campaigns which are administered by other firms thereby creating a very strong brand loyalty hence inhibiting entry of other firms.
Control of an important input of production - this is when the firm is only the one that has the capability to produce a particular input and hence other firms cannot produce the same.
Government regulation - the government may render competition to a particular firm through means such as granting of patents illegal and thus end up creating a statutory monopoly.
b) The benefits of patents in an economic point of view include
Recovery of research and development cost that was used during the innovation of the product. This means that the firm is able to gain full income by pricing the innovation at its desired price as there is no competition.
Another advantage is the acquisition of legal exclusionary rights which exclude other firms from entering the market. In this regard a barrier to entry is created which completely eliminates market competition.
Income improvement is also another advantage and is as a result of other firms not having the capability to access the market. In this regard the firm will be able to generate more income due to lack of competition from other firms.
4
a) Price discrimination is said to exist when the same product is sold at different prices to different buyers.
b) The conditions which are necessary for price discrimination are
market must be divided into sub markets
different submarkets must have different price elasticitys
there must be effective separation of the different sub markets
c) Not every monopoly can price discriminate because price discrimination in a monopoly is determined by several factors such as the classes of buyers (rich or poor) so as to determine what elasticitys to give between various markets and the cost differences associated with price discrimination.
5)
a) The features of a monopolistic competition that differentiate it from a monopoly include
The existence of many substitutes in the monopolistic competition is not there in the monopoly market and instead in the monopoly market there are large numbers of buyers but very few sellers
Monopolistic competition is characterized by extensive advertising which is not exactly the case with a monopoly. A monopoly has its market share by default as there are no competitors.
In the monopolistic competition the demand curve and cost curves are the same for the firms whereas in a monopoly only one demand function for the firm exists. This is because a monopoly is a price giver whereas a monopolistic competition is a price taker.
5)
b)
the diagram that shows a monopolistic competition making profit in the short run is figure A
the diagram that shows a monopolistic competition making profit in the long run is figure C
the diagram that shows a monopolistic competition making loss in the long run is figure B
5)
c) The fact that economic profits arise when revenues exceed the opportunity cost of inputs is very important in this analysis. Economic profit in the monopolistic set up will be eliminated in the long run due to the fact that both demand and average cost will increase in the long run unlike in perfect competition whereby costs remain stable even in the long run.
6) In the short run the monopolist will choose output level A. this is because this is the level of output at which the short run marginal cost curve cuts the short run marginal revenue curve. At this point the slope of both the marginal cost and marginal revenue cost curves are equal.
7)
a) Nash equilibrium is a game theory concept that is widely used in decision making. Nash equilibrium is used to give a solution in a game of two players where each of the players knows about the equilibrium strategies of other players in the game. In this kind of solution no player stands a chance to benefit unilaterally. For example the prisoners dilemma
Dominant strategy equilibrium is a concept that is used to solve many simple games. It occurs when one strategy used by a player is better than another strategy that is applied by another player in the same game.
b) The dominant strategy by Bob is cheat on agreement. This is because regardless of the action taken by Dona he will make a profit
The dominant strategy by Dona is cheat on agreement. This is because regardless of the action taken by Bob he will make a profit
To maximize potential gain both players should stand by the agreement. This is because if they do so they will gain a profit of 10000 as compared to both of the cheating which would result to a profit of only 4000. The outcome of the game will be the uncooperative solution that both Dona and Bob will cheat. This is because none of them will want to make a loss if the other does not stand by the agreement while the other does stand by the agreement.
c) The dominant strategy equilibrium for firm A is to charge a low price. This is because this will yield the highest profit regardless of the action taken by B.