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In this article we will discuss about the effects of price controls in competitive industry and monopoly. Price Control in a Competitive Industry: Sometimes the market equilibrium price of an essential item may be too high for the buyers to buy the commodity in required quantities. In such a case the government may put a ceiling on its price, i.e., fix up a maximum price of the good ...
- Price Ceilings
- Average Cost Pricing
- Rate-Of-Return Regulation
- Efficient Regulatory Mechanisms
Suppose the monopolist is not allowed to charge a price above p0. Then if it sells less than is demanded at p0 it must do so at the price p0 (rather than at a higher price), and so its marginal revenue is p0. If it sells more than is demandedat the price p0then the price is the same as it is in the absence of any restriction, and hence its marginal...
The outcome that this regulation produces is illustrated in the figure. In the left panel the output y0 under the regulation is larger than the efficient output y*, while in the right panel it is less than the efficient output. (In both cases the curves are drawn so that there is only one output at which AC and AR are equal; in other cases there ma...
To see this, suppose that a firm uses capital (input 2) and another input (1). The return on capital is If r = w2 then rate-of-return regulation is equivalent to average cost pricing: it requires the firm to make zero profit. Assume that r > w2. Then under rate-of-return regulation the firm's profit-maximization problem is: Let (y*,z1*,z2*) be a so...
Suppose there are many demanders, each of whom either buys 0 or 1 units of the good; buyer i has the reservation price Ri, with R1 > R2 > ... Rn> 0. Then the following mechanism induces amonopolist to produce efficiently and requires the regulator to know only the demand function. The calculation that leads the monopolist to do so is the following....
11.2 Collusion or Competition? When oligopoly firms in a certain market decide what quantity to produce and what price to charge, they face a temptation to act as if they were a monopoly. By acting together, oligopolistic firms can hold down industry output, charge a higher price, and divide the profit among themselves. When firms act together ...
Nov 13, 2020 · Collusion – meaning and examples. Collusion occurs when rival firms agree to work together – e.g. setting higher prices in order to make greater profits. Collusion is a way for firms to make higher profits at the expense of consumers and reduces the competitiveness of the market. In the above example, a competitive industry will have price ...
Collusion and Game Theory. Collusion occurs when oligopoly firms make joint decisions, and act as if they were a single firm. Collusion requires an agreement, either explicit or implicit, between cooperating firms to restrict output and achieve the monopoly price. This causes the firms to be interdependent, as the profit levels of each firm ...
a group of firms that collude to produce the monopoly output and sell at the monopoly price. collusion: when firms act together to reduce output and keep prices high. cut-throat competition: oligopolistic outcome when firms decide to cut prices to capture market share; in the limit, this leads to zero economic profits.
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Figure 11.3 “Monopoly Through Collusion” shows a case in which the two firms are identical. They sell identical products and face identical demand and cost conditions. To simplify the analysis, we will assume that each has a horizontal marginal cost curve, MC. The demand and marginal revenue curves are the same for both firms.
