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Perfect Competition
Unrestricted
Homogeneous (undifferentiated)
Cabbages, carrots (approximately) Plumbers, restaurants Cement cars, electrical appliances gas and electricity in many countries
Unrestricted
Differentiated
Monopoly
One
Unique
Perfect Competition
Assumptions
large number of firms firms are price takers freedom of entry and exit identical products perfect knowledge
Distinction between short and long run ShortShort-run equilibrium of the firm
P = MC
possible supernormal profits
P
S
MC
AC
Pe
AR AC
D = AR = MR
D O Q (millions) Qe
(a) Industry
MC
AC
AC P1 AR1
D1 = AR1 = MR1
D O Q (millions) O Qe Q (thousands)
(a) Industry
(b) Firm
(a) Industry
(b) Firm
Q (thousands)
(a) Industry
(b) Firm
Perfect Competition
ShortShort-run supply curve of industry LongLong-run equilibrium of the firm
all supernormal profits competed away
Long-run equilibrium under perfect competition LongNew firms enter Supernormal profits
P
S1 Se P1 PL AR1 ARL
D O Q (millions) O QL Q (thousands)
(a) Industry
(b) Firm
LRAC
DL AR = MR
Perfect Competition
ShortShort-run supply curve of industry LongLong-run equilibrium of the firm
all supernormal profits competed away long-run industry supply curve
S1
S2
Long-run S
D1
O
(a) Constant industry costs
D2
Q
S1
S2
Long-run S
c a
D2 D1
O Q
(b) Increasing industry costs: external diseconomies of scale
S1
S2
a c
Long-run S
D1
D2
Perfect Competition
ShortShort-run supply curve of industry LongLong-run equilibrium of the firm
all supernormal profits competed away long-run industry supply curve
Perfect Competition
ShortShort-run supply curve of industry LongLong-run equilibrium of the firm
all supernormal profits competed away long-run industry supply curve
Incompatibility of economies of scale with perfect competition Does the firm benefit from operating under perfect competition?
Market Structures
Monopoly
Monopoly
Defining monopoly Only one seller Barriers to entry
economies of scale product differentiation and brand loyalty lower costs for an established firm ownership/control of key factors or outlets legal protection mergers and takeovers aggressive tactics
Monopoly: Why?
Natural monopoly (increasing returns to scale). Artificial monopoly a patent sole ownership of a resource formation of a cartel; e.g. OPEC
Monopoly: Assumptions
Many buyers priceOnly one seller i.e. price-maker Homogeneous product Perfect information Restricted entry and possibly exit
Monopoly: Features
The monopolists demand curve is the (downward sloping) market demand curve The monopolist can alter the market price by adjusting its output level.
Monopoly
The monopolist's demand curve
downward sloping MR below AR
MC
MR
O
Qm
MC
AR
AR MR
O
Qm
Monopoly
The monopolist's demand curve
downward sloping MR below AR
MC
AC
AR
AC
AR MR
O
Qm
MC
AC
AR
AC
AR MR
O
Qm
Price Discrimination
Why do business week offer bargain rates to students? PRICE DISCRIMINATION Charging different prices for a product when the price differences are not justified by cost differences. Objective of the firm is to attain higher profits than would be available otherwise.
First degree
Charge maximum from able and willing to Pay
Second Degree
Buyers divided into groups, based on demand
Third Degree
Entire market divided into submarkets
Price Discrimination
Firm must be an imperfect competitor (a price maker) Price elasticity must differ for units of the product sold at different prices Firm must be able to segment themarket and prevent resale of units across market segments
In the absence of price discrimination, a firm that charges Rs.2 and sells 40 units will have total revenue equal to Rs.80.
In the absence of price discrimination, a firm that charges Rs.2 and sells 40 units will have total revenue equal to Rs.80. Consumers will have consumers surplus equal to Rs.80.
If a firm that practices firstdegree price discrimination charges Rs.6 and sells 40 units, then total revenue will be equal to Rs.160 and consumers surplus will be zero.
If a firm that practices seconddegree price discrimination charges Rs.4 per unit for the first 20 units and Rs.2 per unit for the next 20 units, then total revenue will be equal to Rs.120 and consumers surplus will be Rs.40.
Monopoly
The monopolist's demand curve
downward sloping MR below AR
Monopoly
The monopolist's demand curve
downward sloping MR below AR
P1 P2 = MSB
= MSC
MC1
AR = MSB MR
O Q1 Q2
Q
Perfectly competitive output
Monopoly output
Monopsony
Monopoly: the only seller. Monopsony: the only buyer, pricechooses a price-quantity combination on the industry supply curve that max its profit it exercises its market power by buying at a price below the price that competitive buyers would pay
Monopsony
w, per worker
60
When supply curve linear and upward sloping, the marginal expenditure curve is twice as steep as the supply curve
ME, Marginal expenditure Supply
ME = 40 ec wc = 30 wm = 20 Suppose a firm is the sole employer in a town, and the firm uses one factor, labour, to produce a final good em
20
30
60
Monopsony
Monopsony power (ME w)/w 1/ = 1/ w, Rs. per worker
Remember a firm will hire workers up to the point where the marginal value of the last unit of the worker = the marginal cost to the firm ie where the demand (for labour) curve = ME curve
60 ME, Marginal expenditure Supply If the market for labour were perfectly competitive and the firm faced a horizontal supply curve, than the equilibrium would be at ec Demand for labour
ME = 40 ec wc = 30 wm = 20 20 em
20
30
60
Bilateral Monopoly
Uncontrolled monopoly gets higher than competitive market prices. Uncontrolled monopsony gets lower than competitive market prices. Monopoly/monopsony confrontation breeds compromise. One buyer : One seller
Bilateral Monopoly
y ME MC
Monopsony Equilibrium
P1 P* b
e1 Monopoly Equilibrium P2 a
x2
x1
X*
x MR
Monopolistic Competition
Monopolistic Competition
Monopolistic competition occurs if many firms serve a market with free entry and exit, but in which one firms products are not perfect substitutes for the products of other firms.
Monopolistic Competition
Assumptions of monopolistic competition
large number of firms freedom of entry differentiated product (product differentiation) Chamberlain SELLING COST downward-sloping demand curve
Monopolistic Competition
Selling Cost Demand is not determined by price alone
Style, services, Selling activities Shift in demand due to these factors
Monopolistic Competition
Industry and Product Group
Industry: Same products Product Group: Closely related products High price and cross elasticities
MC AC
Ps
AR D MR
O Qs Q
MC AC
Ps ACs
AR D MR
O Qs Q
MC AC
Ps ACs
AR D MR
O Qs Q
Monopolistic Competition
Assumptions of monopolistic competition
large number of firms freedom of entry differentiated product downward-sloping demand curve
LRMC LRAC
Ps PL
SAR
ARL DL
SMR O QL Qs
MRL
Monopolistic Competition
Assumptions of monopolistic competition
large number of firms freedom of entry differentiated product downward-sloping demand curve
LRMC LRAC a
PL
b ARL DL MRL
QL
Monopolistic Competition
Limitations of the model
imperfect information difficulty in identifying industry demand curve entry may not be totally free indivisibilities importance of non-price competition
Monopolistic Competition
Group Equilibrium Product group
Technical substitutability Economic substitutability
Within group each firm has its own demand curve Slight product differentiation
LRAC
P1
DL under perfect
competition
Q1
DL under monopolistic
competition O
Q2
Q1
Limitations of Concentration Measures The two main limitations of concentration measures alone as determinants of market structure are their failure to take proper account of oThe geographical scope of a market The oBarriers to entry and firm turnover Barriers
Oligopoly
Oligopoly
Key features of oligopoly
barriers to entry interdependence of firms incentives to compete versus incentives to collude Collusive Non Collusive
Duopoly
P D Firm A Period 1: OA; ie, 2 : (1-1/4) = 3/8
P`
Oligopoly
Bertrands model Rivals keep price constant Price war
Oligopoly
NonNon-collusive oligopoly: the kinked demand curve theory
assumptions of the model
P1
Q1
Kinked demand for a firm under oligopoly NonNon-collusive oligopoly: the kinked demand curve theory
assumptions of the model the shape of the demand and MR curves
The MR curve
Rs
P1 MR
a
D = AR
Q1
The MR curve
Rs
P1
a b
O Q1 MR D = AR
The MR curve
Rs
P1
a b
O Q1 MR D = AR
Oligopoly
NonNon-collusive oligopoly: the kinked demand curve theory
assumptions of the model the shape of the demand and MR curves stable prices
P1
a
D = AR
b
O Q1 MR
Oligopoly
NonNon-collusive oligopoly: the kinked demand curve theory
assumptions of the model the shape of the demand and MR curves stable prices limitations of the model
Oligopoly
NonNon-collusive oligopoly: game theory
alternative strategies: maximax and maximin simple dominant strategy games
Oligopoly
NonNon-collusive oligopoly: game theory
alternative strategies: maximax and maximin simple dominant strategy games the prisoners dilemma
Confess
B gets 10 years A gets 3 months Each gets 3 years (3,3)
Confess
ProfitProfit-maximising cartel
Rs
Industry D AR
O Q
ProfitProfit-maximising cartel
Rs
Industry MC
Industry D AR Industry MR
O Q
ProfitProfit-maximising cartel
Rs
Industry MC
P1
Industry D AR Industry MR
O
Q1
Oligopoly
Tacit collusion
price leadership: dominant firm (large or
low cost)
aggressive
MC AC
AR = D market
AR = D market
AR = D leader
AR = D market
AR = D leader MR leader
O Q
AR = D market
AR = D leader MR leader
O Q
MC
AR = D market
AR = D leader MR leader
O Q
MC
PL
l
AR = D market
AR = D leader MR leader
O QL Q
MC
PL
t
AR = D market
AR = D leader MR leader
O QL QT Q
Oligopoly
Tacit collusion
price leadership: dominant firm (large) price leadership: barometric (old
experienced)
Oligopoly
Tacit collusion
price leadership: dominant firm price leadership: barometric other forms of tacit collusion: rules of thumb
o average cost pricing o price benchmarks
Thank you..