Unit 8 Microeconomics: Oligopoly And Monopoly Assignment

Unit 8microeconomicsunit 8 Assignment Oligopoly And Monopolistic Co

Dr. Fine and Dr. Feelgood are the only two medical doctors offering immediate walk-in medical services in the town of Springfield. They operate in a duopoly, each capable of charging either a high or a low price for a standard medical visit. The payoff matrix shows their profits per patient for each combination of strategies.

1. Suppose the two doctors play a one-shot game—they interact only once and never again. Determine the Nash (non-cooperative) equilibrium in this one-shot game.

2. Now suppose the two doctors play this game twice. Each can adopt one of two strategies: “always charge the low price” or “tit for tat” (start with a high price and then mirror the other’s previous action). Write down the payoffs to Dr. Fine in four scenarios:

• a. Dr. Fine plays “always charge the low price” when Dr. Feelgood also plays “always charge the low price”.
• b. Dr. Fine plays “always charge the low price” when Dr. Feelgood plays “tit for tat”.
• c. Dr. Fine plays “tit for tat” when Dr. Feelgood plays “always charge the low price”.
• d. Dr. Fine plays “tit for tat” when Dr. Feelgood also plays “tit for tat”.

3. Debate whether the statement “In the long run, there is no difference between monopolistic competition and perfect competition” is true, false, or ambiguous. Justify your answer for each of the following criteria:

• 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

Paper For Above instruction

Microeconomic theory offers profound insights into the dynamics of market structures and strategic interaction. In particular, the analysis of duopolies and the comparison between monopolistic and perfect competition provide valuable understanding of market behavior and efficiency. This paper addresses the specified problem involving two doctors in Springfield operating in a duopoly setting, explores the strategic options in repeated games, and discusses the implications of market structure on long-term market outcomes.

Analysis of One-Shot Duopoly Game and Nash Equilibrium

The scenario involves two doctors making strategic pricing decisions—either charging a high or low price for medical services. The core concept relevant here is the Nash equilibrium, which occurs when neither player can improve their payoff by unilaterally changing their strategy. For the one-shot game, the payoff matrix reflects the profits associated with each combination of pricing decisions.

Assuming the payoff matrix is such that both doctors have an incentive to undercut each other by charging low prices, the dominant strategy for both in a one-shot setting tends to be to choose the low price. This is because charging low maximizes individual profits when the other charges either high or low. Consequently, the unique Nash equilibrium for this one-shot interaction is both doctors charging low prices, resulting in lower profits compared to a collusive high-price agreement but stable because neither has an incentive to deviate unilaterally.

Mathematically, if the profits for Doctor Fine are represented as

• (High, High): $X
• (High, Low): $Y
• (Low, High): $Y
• (Low, Low): $Z

where Z

Dynamic Strategies in Repeated Games

The extension to a two-period game introduces strategic considerations based on the compositions of the strategies—“always charge low” and “tit for tat.” This setup captures the possibility of fostering cooperation over time to sustain higher profits, contrasting with the one-shot scenario where defection is dominant.

In the first scenario, if Dr. Fine always charges low when Dr. Feelgood also always charges low, the payoffs are straightforward: both receive the low-profit payoff in both periods, summing their total profits over the two periods.

When Dr. Fine adopts an “always charge low” strategy against Dr. Feelgood’s “tit for tat,” the payoffs depend on the initial move and subsequent responses, often resulting in a pattern where cooperation can be maintained, leading to higher cumulative profits for both compared to mutual defection.

If both doctors employ “tit for tat,” the outcome hinges on their ability to sustain cooperation; typically, mutual tit-for-tat yields higher long-term profits than mutual defection, owing to the threat of punishment for deviation. The detailed payoffs in each case are contingent upon the specific payoff matrix, but the general insight is that reciprocal strategies can sustain cooperation, leading to mutually beneficial outcomes over repeated interactions.

Market Structure and Long-Run Competition: Monopolistic vs. Perfect Competition

The statement “In the long run, there is no difference between monopolistic competition and perfect competition” has been a subject of extensive debate. Analyzing each criterion helps elucidate the validity of this statement.

a. The Price Charged to Consumers

In perfect competition, prices tend to equal marginal costs in the long run due to free entry and exit, resulting in prices being driven down to the level of average total cost. Conversely, in monopolistic competition, firms have some degree of market power stemming from product differentiation, which allows them to set prices above marginal costs. In the long run, free entry erodes supernormal profits, pushing prices closer to marginal costs, but typically still above them because of product differentiation. Therefore, while the price levels in both markets may converge toward costs, they do not necessarily become identical, making the claim ambiguous or false in this regard.

b. The Average Total Cost of Production

In both market structures, free entry and exit lead firms to produce at a point where they earn zero economic profit in the long run. Entry in monopolistic competition drives average total costs to the minimum of the long-run average cost curve, similar to perfect competition. However, due to product differentiation, firms often operate with excess capacity, implying that average total costs in monopolistic competition may remain above the minimum, making this criterion ambiguous but generally closer than the initial statement suggests.

c. The Efficiency of the Market Outcome

Perfect competition results in allocative and productive efficiency because prices equal marginal costs and goods are produced at the minimum of average total costs. Monopolistic competition, constrained by product differentiation and excess capacity, does not reach such efficiencies, leading to deadweight loss. Therefore, the market outcome in monopolistic competition is less efficient than in perfect competition, making the statement false in this criterion.

d. The Typical Firm’s Profit in the Long Run

Both market types tend toward zero economic profit in the long run. Yet, the nature of that zero profit differs: in perfect competition, firms earn a normal profit with no market power, while in monopolistic competition, firms enjoy some market power but still earn zero economic profit in the long run. This difference does not contradict the statement but nuances its meaning. Overall, this criterion favors the view that the long-run equilibrium profits are similar, making the statement ambiguous or slightly false depending on interpretation.

Conclusion

In sum, the comparison between monopolistic and perfect competition in the long run reveals similarities in zero long-run profit outcomes, but differences persist in pricing and efficiency. The statement “In the long run, there is no difference between monopolistic competition and perfect competition” is generally false when considering market efficiency and prices but is more nuanced regarding profits and costs. Strategic interactions in duopolies further exemplify how firms can sustain cooperation or competition over time, influencing market outcomes and consumer welfare. These insights underscore the importance of understanding market dynamics and strategic behavior in microeconomic analysis.

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