Week 7 — Rivals: oligopoly and monopolistic competition
Why do rivals who agree to keep prices high break the deal, how do my company’s rivals fight, and how big is the price-war risk?
This week you will
- Explain why rivals who agree to keep prices high are tempted to break the deal.
- Say whether your company’s rivals fight mainly over capacity or over price, and what keeps that fight soft.
- Judge the price-war risk that your Final Memo’s rivals section asks about.
1. Watch
Work through the three concept pages in this order. Each page has a short video at the bottom.
| # | Concept page | Textbook |
|---|---|---|
| 1 | Cartels and cheating | P&B 11.1 (skim the antitrust-law and merger detail) |
| 2 | Quantity vs. price competition | P&B 11.2 (intuition only), 11.3 (conclusions only, no algebra) |
| 3 | Monopolistic competition | P&B 11.4 (skim the number-of-firms arithmetic) |
Skip Chapter 12 entirely.
2. Try
On each concept page, do the “Try it” box. Before the class price war, play Price war vs. the bots on the Cartels page at least twice. Then try this company version: who are your rivals, and what do they fight with?
- Start from the three rivals on your P0 Company Card and the “Competition” paragraph in Item 1 of your company’s 10-K.
- Capacity first? A cruise line or an airline commits ships and planes years ahead and then fills them. That is quantity competition: prices stay above cost, and the danger is a rival adding capacity.
- Price changed any day? A gas retailer or a delivery app changes prices on things customers compare in seconds. That is price competition. What keeps the price above cost is whatever makes the product different: location, brand, a loyalty program, switching costs.
- Many small rivals? A restaurant group or a fitness chain is closer to monopolistic competition: a solid margin, but entry keeps profit down.
- Open the Rivalry simulator, press Use my numbers, pick how many rivals really matter, and see which line today’s price sits nearest. Export the picture if it helps your argument.
- Finish with the price-war question: if your company cut its price tomorrow, would rivals see it and match within days? One past episode, or a 10-K risk factor about “pricing pressure”, is your evidence.
That is memo Section 4 in four moves.
Your memo’s Data Table starts here: open My Numbers and press Export Data Table. It builds the memo’s Data Table from every number you saved in Weeks 1–7. Type your recommended price and its one-line reason on that page first.
Class experiments: the price war and the deal vote
Anonymous and not graded. You run a gas station at a highway exit and post a price in two rounds; the model settles each round and publishes a profit table under made-up station names. Rehearse first with the bots game on the cartels and cheating page.
Round 1
Round 2 (opens after round 1 results are visible)
Which deal would you buy? The options are the one-line deals from the Playbook P6 posts (company and deal only).
3. Check yourself
Answer the “Check yourself” questions at the end of each concept page. They are not graded. They tell you if you are ready for the homework.
4. Do in Moodle
- Practice Homework U7 — concept questions, plus Excel Lab items with
Lab_U7.xlsx(two gas stations). - Final Pricing Memo — Section 4 “Rivals and how they will respond” is new this week. The Week 7 Final Memo page in Moodle walks through every section.
- No Playbook page and no peer comments this week.
- Market demand P = a − b·Q, marginal cost c, n firms
- Cartel: Q = (a − c) ÷ (2b), P = a − b·Q, quota = Q ÷ n
- Quantity competition: each firm q = (a − c) ÷ ((n + 1)·b), total Q = n·q, P = a − b·Q
- Price competition, identical product: P = c
- Monopolistic competition: MR = MC for the best plan; long run P = AC (zero economic profit) while P > MC
Due dates and points are in Moodle.