Assignment: Evaluating Firm Behavior and Industry Performance With Imperfect Competition

The components of each of the three market structures (monopolistic competition, oligopoly, and monopoly) are instrumental in determining and limiting the strategies that individual firms can successfully implement. For example, an industry that is a natural monopoly will not have to make as many decisions about pricing strategy as an industry that is a monopolistic competition. Or, if a firm is in an oligopolistic market, those decisions will have to be weighed more heavily against their competitors' prices and features in order to remain competitive.

With only a few exceptions, all industries are characterized by some form of imperfect competition that prevents their long-run equilibrium from exhibiting totally efficient resource use and allocation. Among the reasons for imperfect competition are product differentiation (e.g., differences among brands of the same product), barriers to entry (e.g., economies of scale or patents), market power (e.g., firms face downward sloping demand curves), and a lack of perfect information (e.g., buyers are not aware of the prices charged by all sellers).

• What distinguishes a natural monopoly from other monopolies? What are the pros and cons of regulating natural monopolies? Does your answer differ depending on the specific product or industry being regulated?
• Assume Acme Corporation is a typical monopoly:
• Construct a graph illustrating Acme's average and marginal cost curves and the demand curve facing it. Identify profit maximizing output and price, total revenues, total costs, and total profits.
• Assume the economy moves into a recession and the demand for Acme's product falls. On the same graph, show the effect of the recession on equilibrium price, output, and profits.
• Consider a local public utility, such as the water utility or scavenger company, that is regulated. Provide a diagram or graph illustrating the typical price and output set by regulators. Then respond to the following questions:
• What might happen if the company was not regulated?
• To what extent does regulation lead to equilibrium price and output levels that are consistent with production and allocation efficiencies?
• Do you think the local community would be better served if the industry was no longer regulated and entry was available to any other company wanting to serve the community?
• What are the key differentiating characteristics of a market characterized by oligopoly versus monopolistic competition? Provide one specific example of each type of industry and defend your assignment of the industry to monopolistic competition or oligopoly.
• What makes the monopolistic competition model different from the monopoly model? Explain how the differences affect short- and long-run equilibrium.
• Use the following Payoff Matrix for Company A and Company B, the only two companies that produce widgets, to answer the following questions.
• What is the expected outcome of this one-time (not repeated) game? Defend your answer.
• How might your answer change if the game is repeated indefinitely?
• To what extent does this example illustrate why firms in some concentrated oligopolies exhibit cooperative or collusive behavior even though they don't explicitly collude?

Company B Lowers Price Company B Does Not Lower Price

Company A Lowers Price Company B's Payoff: $100 Company B's payoff: -$100

Company A's Payoff: $100 Company A's payoff: $1,000

Company A Does Not Lower Price Company B's Payoff: $1000 Company B's payoff: $500

Company A's Payoff: -$100 Company A's payoff: $500

• Describe at least two benefits to companies implementing corporate social responsibility (CSR) and shared value strategies. Include at least two examples of companies that have adopted CSR or shared value, and discuss how they benefited from them.