Unit 8 Assignment: Oligopoly And Monopolistic Competition ✓ Solved

Unit 8 Assignment Oligopoly And Monopolistic Competition And Product

Analyze the strategic interactions and outcomes between two medical doctors operating in a duopoly in Springfield, considering one-shot and repeated game scenarios. Assess the implications for market structure and long-term market efficiency, comparing monopolistic competition with perfect competition based on four specified criteria.

In this scenario, Dr. Fine and Dr. Feelgood are the sole providers of walk-in medical services in Springfield, forming a duopoly. Each doctor can choose between charging a high or a low price for a standard visit. The payoff matrix (profits per patient in dollars) is provided in an attached table. The assignment involves examining the one-shot game, the effects of repeated play under different strategies, and the long-term market implications by comparing monopolistic competition and perfect competition based on four key criteria.

1. Determine the Nash (non-cooperative) equilibrium in the one-shot game given the payoff matrix.

2. Consider a repeated interaction over two periods, with each doctor adopting one of two strategies: always charge the low price or tit-for-tat (start with high, then mirror the other’s previous action). For each of the four strategic combinations, compute Dr. Fine’s payoffs for the first and second periods, as well as the total payoffs.

3. Analyze whether the statement “In the long run, there is no difference between monopolistic competition and perfect competition” holds true, false, or is ambiguous, by evaluating the four strategies based on:

• a. The price charged to consumers
• b. The average total cost of production
• c. The efficiency of the market outcome
• d. The typical firm’s profit in the long run

Justify your answers for each criterion regarding the long-term market structure and outcomes.

Sample Paper For Above instruction

Introduction

The comparison between monopolistic competition and perfect competition involves understanding market structures and strategic interactions among firms. The scenario involving Dr. Fine and Dr. Feelgood presents an excellent case to examine these differences through game theory analysis, focusing on the implications of strategic pricing decisions within a duopoly environment. This paper evaluates their strategic choices in a one-shot game, a repeated game over two periods, and the broader market implications, particularly focusing on long-term outcomes relative to perfect and monopolistic competition.

Part 1: One-Shot Game and Nash Equilibrium

In the one-shot game, both doctors choose their strategies simultaneously without future repercussions. Analyzing the payoff matrix—where profits depend on their combined pricing choices—reveals that each doctor’s best response often leads to a Nash equilibrium determined by dominant strategies. Typically, if the payoff to charging low prices is higher regardless of the competitor’s choice, both will choose to charge low, resulting in a Nash equilibrium that is inefficient, similar to a classical prisoner's dilemma. If, however, the payoff matrix favors high pricing when the other also charges high, then the equilibrium shifts accordingly. Without the explicit matrix, the typical outcome in duopolies suggests that both may gravitate towards low pricing strategies, reducing per-patient profits but avoiding worse outcomes.

Part 2: Repeated Game with Strategic Choices

In a two-period setting, strategies such as "always charge low" and "tit-for-tat" influence payoffs significantly. When Dr. Fine plays "always charge low" while Dr. Feelgood plays "always charge low," each period’s payoff remains consistent, emphasizing steady but potentially low profits. If Dr. Fine adopts "always charge low," but Dr. Feelgood employs "tit-for-tat," the dynamics shift; the initial period may incur different payoffs, and the subsequent period hinges on the other's previous move, potentially fostering cooperation. Conversely, when both employ "tit-for-tat," the outcome resembles sustained cooperation or punishment phases, influencing total payoffs over the two periods. Calculating these payoffs requires the specific payoffs from the matrix but generally illustrates how strategic reciprocity might enhance or diminish profits over time.

Part 3: Long-Run Market Implications and Competition Types

The statement that “In the long run, there is no difference between monopolistic competition and perfect competition” is nuanced. Analyzing the four criteria offers insight:

• a. The price charged to consumers: Under perfect competition, prices tend toward marginal cost, leading to minimal profit margins. Monopolistic competition features differentiated products, allowing slightly higher prices. Over time, in both markets, prices tend to stabilize at levels closer to marginal cost, but the presence of product differentiation in monopolistic markets sustains some markup, making the difference persistent rather than obliterated.
• b. The average total cost of production: In the long run, both market types produce at productive efficiency, where price equals minimum average total cost, making their costs converge. However, monopolistic competition typically involves excess capacity, meaning firms do not produce at minimum cost, leading to differences in efficiency.
• c. The efficiency of the market outcome: Perfect competition achieves allocative and productive efficiency, whereas monopolistic competition sacrifices some efficiency for product differentiation. Therefore, these outcomes remain distinct in the long run.
• d. The typical firm’s profit in the long run: In perfect competition, profits tend to zero in the long run as free entry erodes economic profits. Monopolistic competition allows for normal profits due to product differentiation, but with excess capacity, firms earn only normal profits, making long-run profits similar at a superficial level but differing in market dynamics and efficiency.

Conclusion

The analysis demonstrates that, while some aspects of market outcomes converge over time—such as prices approximating marginal costs—fundamental differences persist in terms of product differentiation, efficiency, and profit levels. The strategic interactions between firms, time horizons, and market entry or exit significantly influence these outcomes, underpinning the nuanced distinction between monopolistic and perfect competition even in the long run.

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