Economics – Different market structures | e-Consult
Different market structures (1 questions)
To analyse this, we can use a game theory approach and a diagram. Assume both firms have a demand curve, D, and a marginal revenue curve, MR. Each firm's profit is calculated as Total Revenue (TR) - Total Cost (TC).
Firm's Profit Maximisation: Each firm will produce where marginal cost (MC) equals marginal revenue (MR). The optimal quantity will be found at the point where MC intersects MR. The corresponding price can be found by looking at the demand curve at that quantity.
Strategic Interaction: The outcome depends on the firms' expectations of each other's behaviour.
- Prisoner's Dilemma: If both firms maximise their own profits without considering the other, they may end up with lower profits than if they cooperated. This is the Prisoner's Dilemma.
- Collusion: Firms could collude to fix prices and restrict output, acting like a monopoly. This would result in higher profits for both firms. However, collusion is illegal and difficult to sustain.
- Tacit Collusion: Firms may implicitly agree to avoid aggressive pricing, even without explicit agreements.
Diagram (Conceptual): A diagram would show the demand and marginal revenue curves for each firm. The MC curve would intersect the MR curve at the profit-maximising quantity for each firm. The price would then be determined by the demand curve at that quantity.