Transcript Spectrum of Market Competition

Spectrum of Market Competition
 Perfect
Competition
 Monopolistic
Competition
 Oligopoly
 Monopoly
 Most
competitive
 Least
competitive
Perfect Competition
Conditions for Pure Competition
1.Many
buyers and sellers
2. No one buyer or seller has
the ability to influence price
3. Products are homogenous
(very similar)
Conditions for Pure Competition
4.
Free exit or entry (no
barriers to entry)
5. Perfect knowledge
6. Perfect mobility of
resources
Price Takers
Both
buyers and sellers are
“price takers”; both must take
the market price
No one buyer or seller can
change the price by not
buying or producing.
Profit Maximization
The
Purely Competitive
firm maximizes profit
where MC=MR
Monopoly
Single
seller of a product
Product has no close
substitutes
Single seller is only seller
in market, so IS the
market.
Barriers to Entry
Monopoly
can be
formed by:
Natural Barriers;
distance, population,
economies of scale
Barriers (cont’d)
A monopoly
can also be
formed by artificial barriers
Legal: patents, copyright,
tariffs, licenses, franchise
Illegal: predatory pricing,
violence
Profit Maximization
A monopoly
maximizes
profit where MC=MR
A monopoly must search
for the price on the AR
curve
See examples on board
Consumer Surplus
The
difference between
what a consumer was
willing to pay and the
market clearing price they
had to pay.
Costs of Monopoly
Price Discrimination
A monopoly
can charge
different customers
different prices, taking
away Consumer Surplus
Airplane example
Other Costs of Monopoly
Dead
weight loss is the
loss to consumers from the
higher prices and lower
production from a
monopoly, in the graph
Costs: Rent Seeking
 “Rent
seeking” is the term for
what the monopoly spends to
become and stay a monopoly.
 We could also include the
money spent by government, or
would be competitors, to fight
the monopoly
X-inefficiency
This
is the term given to
monopoly waste; since they
have no competition, the
monopoly has no reason to
stay “lean and mean”
3 supervisors, 2 teachers
Controlling a monopoly
Government
can require
“marginal cost pricing” or
“average cost pricing” See
board
Government could also tax
or charge a licensing fee
Break up a monopoly
Create
competing firms
out of the monopoly:
Standard Oil, Bell
Telephone… Microsoft?
Monopolistic Competition
Many
firms competing with
products which are
perceived to be different
Conditions of MONOCOMP
1.
Many firms
2. Differentiated product,
perceived to be different
3. Easy entry to market by
competitors
Importance of Elasticity of Demand

See the board
How to get Inelastic Demand
 Achieve
Product differentiation
 Price competition
 Non price competition
Advertising
Colors
Any edge
Oligopoly
 A market
with only a few firms
 Pure Oligopoly homogenous
product with a single price
 Differentiated Oligopoly goods
are perceived to be different,
so you end up with “price
clusters”
Price Clusters

Autos: GM, Ford, Daimler/Chrysler
compete at different price levels
 Chevy Ford Dodge $
 Pontiac Mercury Chrysler $$
 Cadillac Lincoln Mercedes
$$$$$
Price Clusters
 Beer
 Anheiser
Busch, Coors, Miller
 Busch, Keystone, Strohs $
 Bud, Miller, Coors
 Michelob, MGD, Fat Tire
Concentration Ratios
Measure
the degree of
concentration in a market
A four firm concentration ratio
greater than 40%, is
considered an oligopoly
Examples

From Beverages
page
252 in
Coca Cola
text
Cars
45%
Pepsi
31%
Tobacco
Philip
Morris
49%
RJR
24%
Schweppes
14%
B&W
15%
Chrysler
16%
GM
29%
Ford
25%
Cooperation vs. Competition
“People
of the same trade
seldom meet together… but
the conversation ends in…
some conspiracy to raise
prices” Adam Smith
Types of Cooperation
 Price
Matching: ensures high
prices, not low.
 Price Leadership: all firms look
to one firm (biggest) to set
prices matched by others
 Price Fixing: Collusive price
setting, or cartel (illegal)
Game Theory

Decision Grid on board
Kinked Demand Curve

On board
Consequences of Price Fixing
1.
Consent Decree, to stop
illegal activity
2. Treble Damages (3X the
losses)
3. Fines and jail time
Music CD agreement

Music CD agreement
$480 million overcharge
 - $67.4 million refunds
 - $74.7 million in free cds to schools
 =$338 million in profit due to price fixing
