微观经济学（第八版-英文）课件：Monopolistic Competition and Oligopoly

12.1

MonopolisticCompetition12.2

Oligopoly12.3

PriceCompetition12.4

CompetitionversusCollusion:

ThePrisoners’Dilemma12.5

ImplicationsofthePrisoners’DilemmaforOligopolisticPricing12.6

Cartels

MonopolisticCompetitionandOligopolyCHAPTEROUTLINE●

monopolisticcompetitionMarketinwhichfirmscanenterfreely,eachproducingitsownbrandorversionofadifferentiatedproduct.●

oligopolyMarketinwhichonlyafewfirmscompetewithoneanother,andentrybynewfirmsisimpeded.●

cartelMarketinwhichsomeorallfirmsexplicitlycollude,coordinatingpricesandoutputlevelstomaximizejointprofits.MonopolisticCompetition12.1TheMakingsofMonopolisticCompetitionAmonopolisticallycompetitivemarkethastwokeycharacteristics:

1. Firmscompetebysellingdifferentiatedproductsthatarehighlysubstitutableforoneanotherbutnotperfectsubstitutes.Inotherwords,thecross-priceelasticitiesofdemandarelargebutnotinfinite.

2. Thereisfreeentryandexit:Itisrelativelyeasyfornewfirmstoenterthemarketwiththeirownbrandsandforexistingfirmstoleaveiftheirproductsbecomeunprofitable.AMONOPOLISTICALLYCOMPETITIVEFIRMINTHESHORTANDLONGRUNFIGURE12.1(1of2)EquilibriumintheShortRunandtheLongRunBecausethefirmistheonlyproducerofitsbrand,itfacesadownward-slopingdemandcurve.Priceexceedsmarginalcostandthefirmhasmonopolypower.Intheshortrun,describedinpart(a),pricealsoexceedsaveragecost,andthefirmearnsprofitsshownbytheyellow-shadedrectangle.AMONOPOLISTICALLYCOMPETITIVEFIRMINTHESHORTANDLONGRUNFIGURE12.1(2of2)EquilibriumintheShortRunandtheLongRunInthelongrun,theseprofitsattractnewfirmswithcompetingbrands.Thefirm’smarketsharefalls,anditsdemandcurveshiftsdownward.Inlong-runequilibrium,describedinpart(b),priceequalsaveragecost,sothefirmearnszeroprofiteventhoughithasmonopolypower.COMPARISONOFMONOPOLISTICALLYCOMPETITIVEEQUILIBRIUMANDPERFECTLYCOMPETITIVEEQUILIBRIUMFIGURE12.2(1of2)Underperfectcompetition,priceequalsmarginalcost.Thedemandcurvefacingthefirmishorizontal,sothezero-profitpointoccursatthepointofminimumaveragecost.MonopolisticCompetitionandEconomicEfficiencyCOMPARISONOFMONOPOLISTICALLYCOMPETITIVEEQUILIBRIUMANDPERFECTLYCOMPETITIVEEQUILIBRIUMFIGURE12.2(2of2)Undermonopolisticcompetition,priceexceedsmarginalcost.Thusthereisadeadweightloss,asshownbytheyellow-shadedarea.Thedemandcurveisdownward-sloping,sothezeroprofitpointistotheleftofthepointofminimumaveragecost.Inbothtypesofmarkets,entryoccursuntilprofitsaredriventozero.Ismonopolisticcompetitionthenasociallyundesirablemarketstructure

thatshouldberegulated?Theanswer—fortworeasons—isprobablyno:1.Inmostmonopolisticallycompetitivemarkets,monopolypowerissmall.Usuallyenoughfirmscompete,withbrandsthataresufficientlysubstitutable,sothatnosinglefirmhasmuchmonopolypower.Anyresultingdeadweightlosswillthereforebesmall.Andbecausefirms’demandcurveswillbefairlyelastic,averagecostwillbeclosetotheminimum.2.Anyinefficiencymustbebalancedagainstanimportantbenefitfrommonopolisticcompetition:productdiversity.Mostconsumersvaluetheabilitytochooseamongawidevarietyofcompetingproductsandbrandsthatdifferinvariousways.Thegainsfromproductdiversitycanbelargeandmayeasilyoutweightheinefficiencycostsresultingfromdownward-slopingdemandcurves.EXAMPLE12.1MONOPOLISTICCOMPETITIONINTHEMARKETSFORCOLASANDCOFFEETABLE12.1

ELASTICITIESOFDEMANDFORCOLASANDCOFFEEBRANDELASTICITYOFDEMANDColasRCCola–2.4Coke–5.2to–5.7GroundcoffeeFolgers–6.4MaxwellHouse–8.2ChockFullo’Nuts–3.6WiththeexceptionofRCColaandChockFullo’Nuts,allthecolasandcoffeesarequitepriceelastic.Withelasticitiesontheorderof−4to−8,eachbrandhasonlylimitedmonopolypower.Thisistypicalofmonopolisticcompetition.Themarketsforsoftdrinksandcoffeeillustratethecharacteristicsofmonopolisticcompetition.Eachmarkethasavarietyofbrandsthatdifferslightlybutareclosesubstitutesforoneanother.Inoligopolisticmarkets,theproductsmayormaynotbedifferentiated.Whatmattersisthatonlyafewfirmsaccountformostoralloftotalproduction.Insomeoligopolisticmarkets,someorallfirmsearnsubstantialprofitsoverthelongrunbecausebarrierstoentrymakeitdifficultorimpossiblefornewfirmstoenter.Oligopolyisaprevalentformofmarketstructure.Examplesofoligopolisticindustriesincludeautomobiles,steel,aluminum,petrochemicals,electricalequipment,andcomputers.Scaleeconomiesmaymakeitunprofitableformorethanafewfirmstocoexistinthemarket;patentsoraccesstoatechnologymayexcludepotentialcompetitors;andtheneedtospendmoneyfornamerecognitionandmarketreputationmaydiscourageentrybynewfirms.Theseare“natural”entrybarriers—theyarebasictothestructureoftheparticularmarket.Inaddition,incumbentfirmsmaytakestrategicactionstodeterentry.Managinganoligopolisticfirmiscomplicatedbecausepricing,output,advertising,andinvestmentdecisionsinvolveimportantstrategicconsiderations,whichcanbehighlycomplex.Oligopoly12.2EquilibriuminanOligopolisticMarketInanoligopolisticmarket,however,afirmsetspriceoroutputbasedpartlyonstrategicconsiderationsregardingthebehaviorofitscompetitors.Withsomemodification,theunderlyingprincipletodescribeanequilibriumwhenfirmsmakedecisionsthatexplicitlytakeeachother’sbehaviorintoaccountisthesameastheequilibriumincompetitiveandmonopolisticmarkets:Whenamarketisinequilibrium,firmsaredoingthebesttheycanandhavenoreasontochangetheirpriceoroutput.NASHEQUILIBRIUM

●

NashequilibriumSetofstrategiesoractionsinwhicheachfirmdoesthebestitcangivenitscompetitors’actions.●

duopolyMarketinwhichtwofirmscompetewitheachother.NashEquilibrium:Eachfirmisdoingthebestitcangivenwhatitscompetitors

aredoing.FIRM1’SOUTPUTDECISIONFIGURE12.3TheCournotModel●

Cournotmodel Oligopolymodelinwhichfirmsproducea

homogeneousgood,eachfirmtreatstheoutputofitscompetitorsas

fixed,andallfirmsdecidesimultaneouslyhowmuchtoproduce.Firm1’sprofit-maximizingoutputdependsonhowmuchitthinksthatFirm2willproduce.IfitthinksFirm2willproducenothing,itsdemandcurve,labeledD1(0),isthemarketdemandcurve.Thecorrespondingmarginalrevenuecurve,labeledMR1(0),intersectsFirm1’smarginalcostcurveMC1atanoutputof50units.IfFirm1thinksthatFirm2willproduce50units,itsdemandcurve,D1(50),isshiftedtotheleftbythisamount.Profitmaximizationnowimpliesanoutputof25units.Finally,ifFirm1thinksthatFirm2willproduce75units,Firm1willproduceonly12.5units.575REACTIONCURVESANDCOURNOTEQUILIBRIUMFIGURE12.4●

reactioncurve Relationshipbetweenafirm’sprofit-maximizingoutputandtheamountitthinksitscompetitorwillproduce.Firm1’sreactioncurveshowshowmuchitwillproduceasafunctionofhowmuchitthinksFirm2willproduce.(ThexsatQ2=0,50,and75correspondtotheexamplesshowninFigure12.3.)Firm2’sreactioncurveshowsitsoutputasafunctionofhowmuchitthinksFirm1willproduce.InCournotequilibrium,eachfirmcorrectlyassumestheamountthatitscompetitorwillproduceandtherebymaximizesitsownprofits.Therefore,neitherfirmwillmovefromthisequilibrium.REACTIONCURVES●

CournotequilibriumEquilibriumintheCournotmodelinwhicheachfirmcorrectlyassumeshowmuchitscompetitorwillproduceandsetsitsownproductionlevelaccordingly.COURNOTEQUILIBRIUMCournotequilibriumisanexampleofaNashequilibrium(andthusitissometimescalledaCournot-Nashequilibrium).InaNashequilibrium,eachfirmisdoingthebestitcangivenwhatitscompetitorsaredoing.Asaresult,nofirmwouldindividuallywanttochangeitsbehavior.IntheCournotequilibrium,eachfirmisproducinganamountthatmaximizesitsprofitgivenwhatitscompetitorisproducing,soneitherwouldwanttochangeitsoutput.TheLinearDemandCurve—AnExampleTwoidenticalfirmsfacethefollowingmarketdemandcurveAlso,

Totalrevenueforfirm1:thenSettingMR1=0(thefirm’smarginalcost)andsolvingforQ1,wefindFirm1’sreactioncurve:Bythesamecalculation,Firm2’sreactioncurve:Cournotequilibrium:Totalquantityproduced:

Ifthetwofirmscollude,thenthetotalprofit-maximizingquantityis:Totalrevenueforthetwofirms:R=PQ=(30–Q)Q=30Q–Q2,thenMR1=∆R/∆Q=30–2QSettingMR=0(thefirm’smarginalcost)wefindthattotalprofitismaximizedatQ=15.Then,Q1+Q2=15isthecollusioncurve.Ifthefirmsagreetoshareprofitsequally,eachwillproducehalfofthetotaloutput:

(12.1)(12.2)DUOPOLYEXAMPLEFIGURE12.5Thedemandcurveis

P

=30−Q,andbothfirmshavezeromarginalcost.InCournotequilibrium,eachfirmproduces10.ThecollusioncurveshowscombinationsofQ1andQ2thatmaximizetotalprofits.Ifthefirmscolludeandshareprofitsequally,eachwillproduce7.5.Alsoshownisthecompetitiveequilibrium,inwhichpriceequalsmarginalcostandprofitiszero.FirstMoverAdvantage—TheStackelbergModel●

StackelbergmodelOligopolymodelinwhichonefirmsetsitsoutputbeforeotherfirmsdo.SupposeFirm1setsitsoutputfirstandthenFirm2,afterobservingFirm1’soutput,makesitsoutputdecision.Insettingoutput,Firm1mustthereforeconsiderhowFirm2willreact.P=30–Q

Also,MC1=MC2=0

Firm2’sreactioncurve:

Firm1’srevenue:SettingMR1=0givesQ1=15,andQ2=7.5WeconcludethatFirm1producestwiceasmuchasFirm2andmakestwiceasmuchprofit.GoingfirstgivesFirm1anadvantage.

(12.2)(12.3)(12.4)PriceCompetition12.3PriceCompetitionwithHomogeneousProducts—TheBertrandModel●

BertrandmodelOligopolymodelinwhichfirmsproduceahomogeneousgood,eachfirmtreatsthepriceofitscompetitorsasfixed,andallfirmsdecidesimultaneouslywhatpricetocharge.Let’sreturntotheduopolyexampleofthelastsection.P=30–Q

MC1=MC2=$3Q1=Q2

=9,andinCournotequilibrium,themarketpriceis$12,sothateachfirmmakesaprofitof$81.Nowsupposethatthesetwoduopolistscompetebysimultaneouslychoosingapriceinsteadofaquantity.NashequilibriumintheBertrandmodelresultsinbothfirmssettingpriceequaltomarginalcost:P1=P2=$3.Thenindustryoutputis27units,ofwhicheachfirmproduces13.5units,andbothfirmsearnzeroprofit.IntheCournotmodel,becauseeachfirmproducesonly9units,themarketpriceis$12.Nowthemarketpriceis$3.IntheCournotmodel,eachfirmmadeaprofit;intheBertrandmodel,thefirmspriceatmarginalcostandmakenoprofit.PriceCompetitionwithDifferentiatedProductsSupposeeachoftwoduopolistshasfixedcostsof$20butzerovariablecosts,andthattheyfacethesamedemandcurves:Firm1’sdemand:Firm2’sdemand:CHOOSINGPRICESFirm1’sprofit:Firm1’sprofitmaximizingprice:Firm1’sreactioncurve:Firm2’sreactioncurve:NASHEQUILIBRIUMINPRICESFIGURE12.6Heretwofirmsselladifferentiatedproduct,andeachfirm’sdemanddependsbothonitsownpriceandonitscompetitor’sprice.Thetwofirmschoosetheirpricesatthesametime,eachtakingitscompetitor’spriceasgiven.Firm1’sreactioncurvegivesitsprofit-maximizingpriceasafunctionofthepricethatFirm2sets,andsimilarlyforFirm2.TheNashequilibriumisattheintersectionofthetworeactioncurves:Wheneachfirmchargesapriceof$4,itisdoingthebestitcangivenitscompetitor’spriceandhasnoincentivetochangeprice.Alsoshownisthecollusiveequilibrium:Ifthefirmscooperativelysetprice,theywillchoose$6.Thefirmshavethesamecosts,sotheywillchargethesamepriceP.TotalprofitisgivenbyπT=π1+π2=24P–

4P2+2P2−40=24P−

2P2−

40.Thisismaximizedwhen

πT/

P=0.

πT/

P=24−4P,sothejointprofit-maximizingpriceisP=$6.Eachfirm’sprofitisthereforeπ1

=π2

=12P−

P2-20=72−

36−

20=$16EXAMPLE12.2APRICINGPROBLEMFORPROCTER&GAMBLEP&G’sdemandcurveformonthlysales:AssumingthatP&G’scompetitorsfacethesamedemandconditions,withwhatpriceshouldyouenterthemarket,andhowmuchprofitshouldyouexpecttoearn?TABLE12.2P&G’SPROFIT(INTHOUSANDSOFDOLLARSPERMONTH)COMPETITOR’S(EQUAL)PRICES($)P&G’s

Price($)1.101.201.301.401.501.601.701.801.10–226–215–204–194–183–174–165–1551.20–106–89–73–58–43–28–15–21.30–56–37–192153147621.40–44–25–612294662781.50–52–32–153203452681.60–70–51–34–18–11430441.70–93–76–59–44–28–131151.80–118–102–87–72–57–44–30–17

$1.40isthepriceatwhichyourcompetitorsaredoingthebesttheycan,soitisaNashequilibrium.Asthetableshows,inthisequilibriumyouandyourcompetitorseachmakeaprofitof$12,000permonth.Ifyoucouldcolludewithyourcompetitors,youcouldmakealargerprofit.Youwouldallagreetocharge$1.50,andeachofyouwouldearn$20,000.CompetitionversusCollusion:

ThePrisoners’Dilemma12.4Inourexample,therearetwofirms,eachofwhichhasfixedcostsof

$20andzerovariablecosts.Theyfacethesamedemandcurves:Firm1’sdemand:Firm2’sdemand:WefoundthatinNashequilibriumeachfirmwillchargeapriceof$4andearnaprofitof$12,whereasifthefirmscollude,theywillchargeapriceof$6andearnaprofitof$16.SoifFirm1charges$6andFirm2chargesonly$4,Firm2’sprofitwillincreaseto$20.AnditwilldosoattheexpenseofFirm1’sprofit,whichwillfallto$4.TABLE12.3PAYOFFMATRIXFORPRICINGGAMEFIRM2CHARGE$4CHARGE$6Firm1Charge$4$12,$12$20,$4Charge$6$4,$20$16,$16●

payoffmatrixTableshowingprofit(orpayoff)toeachfirmgivenitsdecisionandthedecisionofitscompetitor.●

noncooperativegame Gameinwhichnegotiationandenforcementofbindingcontractsarenotpossible.PAYOFFMATRIXTHEPRISONERS’DILEMMATABLE12.4PAYOFFMATRIXFORPRISONERS’DILEMMAPRISONERBCONFESSDON’TCONFESSPrisonerAConfess–5,–5–1,–10Don’tconfess–10,–1–2,–2●

prisoners’dilemmaGametheoryexampleinwhichtwoprisonersmustdecideseparatelywhethertoconfesstoacrime;ifaprisonerconfesses,hewillreceivealightersentenceandhisaccomplicewillreceiveaheavierone,butifneitherconfesses,sentenceswillbelighterthanifbothconfess.IfPrisonerAdoesnotconfess,herisksbeingtakenadvantageofbyhisformeraccomplice.Afterall,nomatterwhatPrisonerAdoes,PrisonerBcomesoutaheadbyconfessing.Likewise,PrisonerAalwayscomesoutaheadbyconfessing,soPrisonerBmustworrythatbynotconfessing,shewillbetakenadvantageof.Therefore,bothprisonerswillprobablyconfessandgotojailforfiveyears.Oligopolisticfirmsoftenfindthemselvesinaprisoners’dilemma.EXAMPLE12.3PROCTER&GAMBLEINAPRISONERS’DILEMMAWearguedthatP&Gshouldexpectitscompetitorstochargeapriceof$1.40andshoulddothesame.ButP&Gwouldbebetteroffifitanditscompetitorsallchargedapriceof$1.50.TABLE12.5PAYOFFMATRIXFORPRICINGPROBLEMUNILEVERANDKaoCHARGE$1.40CHARGE$1.50P&GCharge$1.40$12,$12$29,$11Charge$1.50$3,$21$20,$20Sincethesefirmsareinaprisoners’dilemma,itdoesn’tmatterwhatUnileverandKaodo.P&Gmakesmoremoneybycharging$1.40.ImplicationsofthePrisoners’DilemmaforOligopolisticPricing12.5PriceRigidity●

pricerigidityCharacteristicofoligopolisticmarketsbywhichfirmsarereluctanttochangepricesevenifcostsordemandschange.●

kinkeddemandcurvemodelOligopolymodelinwhicheachfirmfacesademandcurvekinkedatthecurrentlyprevailingprice:athigherpricesdemandisveryelastic,whereasatlowerpricesitisinelastic.Doestheprisoners’dilemmadoomoligopolisticfirmstoaggressivecompetitionandlowprofits?Notnecessarily.Althoughourimaginaryprisonershaveonlyoneopportunitytoconfess,mostfirmssetoutputandpriceoverandoveragain,continuallyobservingtheircompetitors’behaviorandadjustingtheirownaccordingly.Thisallowsfirmstodevelopreputationsfromwhichtrustcanarise.Asaresult,oligopolisticcoordinationandcooperationcansometimesprevail.THEKINKEDDEMANDCURVEFIGURE12.7EachfirmbelievesthatifitraisesitspriceabovethecurrentpriceP*,noneofitscompetitorswillfollowsuit,soitwilllosemostofitssales.Eachfirmalsobelievesthatifitlowersprice,everyonewillfollowsuit,anditssaleswillincreaseonlytotheextentthatmarketdemandincreases.Asaresult,thefirm’sdemandcurveDiskinkedatpriceP*,anditsmarginalrevenuecurveMRisdiscontinuousatthatpoint.IfmarginalcostincreasesfromMCto

MC’,thefirmwillstillproducethesameoutputlevelQ*andchargethesamepriceP*.PriceSignalingandPriceLeadership●

pricesignalingFormofimplicitcollusioninwhichafirmannouncesapriceincreaseinthehopethatotherfirmswillfollowsuit.●

priceleadershipPatternofpricinginwhichonefirmregularlyannouncespricechangesthatotherfirmsthenmatch.Insomeindustries,alargefirmmightnaturallyemergeasaleader,withtheotherfirmsdecidingthattheyarebestoffjustmatchingtheleader’sprices,ratherthantryingtoundercuttheleaderoreachother.Priceleadershipcanalsoserveasawayforoligopolisticfirmstodealwiththereluctancetochangeprices,areluctancethatarisesoutofthefearofbeingundercutor“rockingtheboat.”EXAMPLE12.4PRICELEADERSHIPANDPRICERIGIDITYINCOMMERCIALBANKINGPRIMERATEVERSUSCORPORATEBONDRATEFIGURE12.8Theprimerateistheratethatmajorbankschargelargecorporatecustomersforshort-termloans.Itchangesonlyinfrequentlybecausebanksarereluctanttoundercutoneanother.Whenachangedoesoccur,itbeginswithonebank,andotherbanksquicklyfollowsuit.Thecorporatebondrateisthereturnonlong-termcorporatebonds.Becausethesebondsarewidelytraded,thisratefluctuateswithmarketconditions.EXAMPLE12.5THEPRICESOFCOLLEGETEXTBOOKSMosttextbookssoldintheUnitedStateshaveretailpricesinthe$200range.Infactevenothermicroeconomicstextbooks—whichareclearlyinferiortothisone—sellforaround$200.Publishingcompaniessetthepricesoftheirtextbooks,soshouldweexpectcompetitionamongpublisherstodrivedownprices?Partlybecauseofmergersandacquisitionsoverthelastdecadeorso,collegetextbookpublishingisanoligopoly.Thesepublishershaveanincentivetoavoidapricewarthatcoulddrivepricesdown.Thebestwaytoavoidapricewaristoavoiddiscountingandtoincreasepricesinlocksteponaregularbasis.Theretailbookstoreindustryisalsohighlyconcentrated,andtheretailmarkupontextbooksisaround30percent.Thusa$200retailpriceimpliesthatthepublisherisreceivinganet(wholesale)priceofabout$150.Theelasticityofdemandislow,becausetheinstructorchoosesthetextbook,oftendisregardingtheprice.Ontheotherhand,ifthepriceistoohigh,somestudentswillbuyausedbookordecidenottobuythebookatall.Infact,itmightbethecasethatpublisherscouldearnmoremoneybyloweringtextbookprices.Sowhydon’ttheydothat?First,thatmightleadtoadreadedpricewar.Second,publishersmightnothavereadthisbook!PRICESETTINGBYADOMINANTFIRMFIGURE12.9TheDominantFirmModel●

dominantfirm Firmwithalargeshareoftotalsalesthatsetspricetomaximizeprofits,takingintoaccountthesupplyresponse

ofsmallerfirms.Thedominantfirmsetsprice,andtheotherfirmssellalltheywantatthatprice.Thedominantfirm’sdemandcurve,DD,isthedifferencebetweenmarketdemandDandthesupplyoffringefirmsSF

.ThedominantfirmproducesaquantityQDatthepointwhereitsmarginalrevenueMRDisequaltoitsmarginalcostMCD.ThecorrespondingpriceisP*.Atthisprice,fringefirmssellQFsothattotalsalesequalQT.Cartels12.6Producersinacartelexplicitlyagreetocooperateinsettingpricesandoutputlevels.Ifenoughproducersadheretothecartel’sagreements,andifmarketdemandissufficientlyinelastic,thecartelmaydrivepriceswellabovecompetitivelevels.Cartelsareofteninternational.WhileU.S.antitrustlawsprohibitAmericancompaniesfromcolluding,thoseofothercountriesaremuchweakerandaresometimespoorlyenforced.Furthermore,nothingpreventscountries,orcompaniesownedorcontrolledbyforeigngovernments,fromformingcartels.Forexample,theOPECcartelisaninternationalagreementamongoil-producingcountrieswhichhassucceededinraisingworldoilpricesabovecompetitivelevels.First,astablecartelorganizationmustbeformedwhosemembersagreeonpriceandproductionlevelsandthenadheretothatagreement.Thesecondcondition,andmaybethemostimportant,isthepotentialformonopolypower.Evenifacartelcansolveitsorganizationalproblems,therewillbelittleroomtoraisepriceifitfacesahighlyelasticdemandcurve.CONDITIONSFORCARTELSUCCESSAnalysisofCartelPricingCartelpricingcanbeanalyzedbyusingthedominantfirmmodeldiscussedearlier.Wewillapplythismodeltotwocartels,theOPECoilcartelandtheCIPECcoppercartel.ThiswillhelpusunderstandwhyOPECwassuccessfulinraisingpricewhileCIPECwasnot.ANALYZINGOPECTHEOPECOILCARTELFIGURE12.10TDisthetotalworlddemandcurveforoil,andSC

isthecompetitive(non-OPEC)supplycurve.OPEC’sdemandDOPECisthedifferencebetweenthetwo.Becausebothtotaldemandandcompetitivesupplyareinelastic,OPEC’sdemandisinelastic.OPEC’sprofit-maximizingquantityQOPECisfoundattheintersectionofitsmarginalrevenueandmarginalcostcurves;atthisquantity,OPECchargespriceP*.IfOPECproducershadnotcartelized,pricewouldbePc,whereOPEC’sdemandandmarginalcostcurvesintersect.ANALYZINGCIPECTHECIPECCOPPERCARTELFIGURE12.11TDisthetotaldemandforcopperandScisthecompetitive(non-CIPEC)supply.CIPEC’sdemandDCIPECisthedifferencebetweenthetwo.Bothtotaldemandandcompetitivesupplyarerelativelyelastic,soCIPEC’sdemandcurveiselastic,andCIPEChasverylittlemonopolypower.NotethatCIPEC’soptimalpriceP*isclosetothecompetitivepricePc.AstheexamplesofOPECandCIPECillustrate,successfulcartelizationrequirestwothings:First,thetotaldemandforthegoodmustnotbeverypriceelastic.Second,eitherthecartelmustcontrolnearlyalltheworld’ssupplyor,ifitdoesnot,thesupplyofnoncartelproducersmustnotbepriceelastic.Mostinternationalcommoditycartelshavefailedbecausefewworldmarketsmeetbothconditions.EXAMPLE12.6THECARTELIZATIONOFINTERCOLLEGIATEATHLETICSIntercollegiateathleticsisabig—andanextremelyprofitable—industry.Likeanyindustry,intercollegiateathleticshasfirmsandconsumers.The“firms”aretheuniversitiesthatsupportandfinanceteams.Theinputstoproductionarethecoaches,studentathletes,andcapitalintheformofstadiumsandplayingfields.TheconsumersarethefansandtheTVandradionetworks.Therearemanyfirmsandconsumers,whichsuggeststhattheindustryiscompetitive.Butthepersistentlyhighlevelofprofitsinthisindustryisinconsistentwithcompetition.Thisprofitabilityistheresultofmonopolypower,obtainedviacartelization.ThecartelorganizationistheNationalCollegiateAthleticAssociation(NCAA).TheNCAArestrictscompetitioninanumberofimportantways.Toreducebargainingpowerbystudentathletes,theNCAAcreatesandenforcesrulesregardingeligibilityandtermsofcompensation.Toreducecompetitionbyuniversities,it