Transcript Slide 1

Pure Competition
aka Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
Pure
Competition
Monopolistic
Competition
Oligopoly
Monopoly
Number
of Firms
Pure
Competition
Monopolistic
Competition
Many small
Many small
Oligopoly
A few large
Monopoly
one
Considers action or reaction of other firms
Product type
Barriers to
Entry
Diff or
Homog
Need to stress differences?
Homogeneous Differentiated
none
none
large
one
large
Long run profits possible?
Price
Taker/Maker
taker
taker/seeker
maker
maker
Ability to influence market price?
Non-price
Competition
no
yes
yes
As important as price?
yes
1. Number of Sellers
2. Product Types
3. Entry and Exit
4. Non-Price Competition
5. Economic Profits
6. Price Maker/Taker
Characteristics?
1. Many Sellers
2. Identical Products
3. Easy Entry and Exit
4. No Non-Price competition
5. SR profits/losses, no LR profits
6. Price Taker
Characteristics?
1. Many Sellers
2. Differentiated Products
3. Easy Entry and Exit
4. Non-Price competition
5. SR profits/losses, no LR profits
6. Price Taker
Characteristics?
1. Few Sellers
2. Differentiated or
Identical Products
3. Difficult Entry and Exit
4. Non-Price competition
5. LR profits/losses
6. Price Maker
Characteristics?
1. One Seller
2. Single Product
3. Blocked Entry
4. Non-Price competition
5. LR profits
6. Price Maker
Into which of the 4 market structures would you place each of
the following:
• A small organic farm producing herbs on 5 acres
•A large grain farm producing wheat on 2,500 acres
•A major airline
•A community college
•A local water company that faces no direct competition
•A small retail shoe store in a large mall
•A discount shoe store in a large city
•A college food service
•The long-term parking facility at an airport
•Passenger service on Amtrak
•The best bakery in town
a. Monopoly
d. Pure
Competition
c. Monopolistic
Competition
b. Oligopoly
Equilibrium
Price
Operating at Minimum ATC
ATC
MC
$6
$5
$4
$3
$2
$1
0
10
20
30
40
50
60
Quantity
Price
Each Firm Makes Production
Decisions Based on Prices
$6
Firm
1
$5
$4
Firm Firm
2
3
Firm
4
$3
$2
$1
0
10
20
30
40
50
60
Quantity
Producers and Consumers
Determine Price
Price
$6
$5
Consumer
Demand
D
S
Producer
Supply
$4
$3
$2
$1
0
D
S
10
20
30
40
50
60
Quantity
Price
Each producer can sell as much
as they want at Market Price
$6
Firm
1
$5
$4
Firm
3
Firm
4
Demand Curve Faced by Firms
$3
D
$2
$1
0
10
20
30
40
50
60
Quantity
Equilibrium
Price
Operating at Minimum ATC
ATC
MC
$6
$5
$4
$3
Price = Demand = MR
$2
$1
0
10
20
30
40
50
60
Quantity
Case 1: Prices rise
Profits
Entry or Exit?
Supply
Price
$6
1. Price goes up
2. Firms enter, Supply increases
3. Price goes down
ATC
MC
$5
$4
SR Profits
$3
$2
$1
0
Price = Demand = MR
4. No LR Profits
10
20
30
40
50
60
Quantity
Case 2: Prices fall
Profits
Entry or Exit?
Supply
Price
$6
1. Price goes down
2. Firms leave, Supply decreases
3. Price goes up
ATC
MC
$5
$4
P = D = MR
$3
$2
$1
0
SR Losses
4. No LR Losses
10
20
30
40
50
60
Quantity
Characteristics?
1. Many Sellers
2. Differentiated Products
3. Easy Entry and Exit
4. Non-Price competition
5. SR profits/losses, no LR profits
6. Price Taker
McHits or McMisses?
Hulaburger - 1962
Filet o Fish - 1963
Strawberry shortcake - 1966 Big Mac - 1968
Hot Apple Pie - 1968
Egg McMuffin - 1975
Drive Thru - 1975
McSpaghetti- late 1970s
Chicken McNuggets - 1983
Extra Value Meal - 1991
Arch Deluxe - 1996
McLean Deluxe - 1991
Big Xtra - 1999
55-cent Special - 1997
Chicken Fajitas and Breakfast Burrito – 1990s
McPizza- late 1980s – early 1990s
McHotDog
McDLT
Afrika
McLobster
McSalad Shakers
McOnion Nuggets
Mighty Wings - 2013
Big-N-Tasty - 2010
McRib and others ??
McMisses and Other Delights
McDonalds
Mighty Wings
Too spicy, too expensive
($1), and too unappetizing.
Taken off the market in
2013. The remainder were
sold for 60¢
McMisses and Other Delights
McHotDog
Pulled, but reappeared in Japan as a breakfast
item
McMisses and Other Delights
McDonald’s Pizza
and McPizza
Long wait time an
preference to get pizzas
somewhere else.
Offered in late 1980s
and early 1990s
McMisses and Other Delights
McSpaghetti
McMiss in the late 1970s
Still available at some international McDonalds
McMisses and Other Delights
McDonalds Hula Burger
This pineapple and cheese sandwich was offered
as a non-meat alternative to Catholics in 1962.
McMisses and Other Delights
McLean Deluxe
Marketed in 1991
as 91% fat free
Infused with water
and carrageen
(seaweed extract)
to make up for the
missing fat.
McMisses and Other Delights
McDLT
Just a burger separated from the lettuce and
tomato by styrofoam.
Not big with environmentalists
McMisses and Other Delights
McDonald’s Afrika
A pita with beef, cheese, lettuce, and tomato.
Released during a famine in southern Africa.
McMisses and Other Delights
McLobster
2013 Canadian release. Strong reaction to the
below $7 price for “100% Atlantic lobster”.
McMisses and Other Delights
McDonald’s Arch Delux
1996. Tried to appeal to gormand grownups with
a “secret sauce”. Most expensive failure yet
McMisses and Other Delights
McSalad Shakers
Not enough people interested in this
healthy alternative.
McMisses and Other Delights
McDonald’s Onion Nuggets
Substituting chopped onions for chicken did not
last very long.
McMisses and Other Delights
McDonald’s Chicken Fajitas and
Breakfast Burrito
In early 1900s, this attempt at new cuisine did
not go over very well either.
McMisses and Other Delights
McDonald’s Big N Tasty
An attempt to compete with the Whopper.
It was pulled in 2010
McMisses and Other Delights
Friendly’s Grilled Cheese Burger Melt
1,160 calorie
burger inside
of two grilled
cheese
sandwiches
was too
unappetizing.
McMisses and Other Delights
Dairy Queens Breeze
So few people wanted to replace milkshakes, the
frozen yoghurt often spoiled before it was used.
McMisses and Other Delights
Burger King’s Enormous Omelet
Too big for customers early in the morning.
McMisses and Other Delights
Burger King’s Burger Shots
aka, Burger Bundles and Burger Buddies in earlier
versions. Name changes did not help.
McMisses and Other Delights
Burger Kings Satisfries
Low calorie alternative, but pulled in 2014
McMisses and Other Delights
Burger King’s Shake-em up Fries
Customers were required to shake the powdered
cheese in the bag. It sounded good in theory.
McMisses and Other Delights
Taco Bell’s Bell Beefer
Customers decided to stick with tacos at
Taco Bell and get burgers elsewhere.
McMisses and Other Delights
Taco Bells Seafood Salad
Pulled after a number of reported cases of food
poisoning.
McMisses and Other Delights
Wendy’s Breakfast
They keep unsuccessfully trying to add
breakfast items.
McMisses and Other Delights
Wendy’s Frescata
An attempt to go healthy and compete with
Subway.
McMisses and Other Delights
Wendy’s Superbar
An all-you-can-eat buffet with the hot meal.
McMisses and Other Delights
Jack-in-the-Box Frings
In the early 1970s, they found out customers
wanted either, or, but not both together.
McMisses and Other Delights
Sonic’s Pickle Os
Their attempt to bring back fried pickles from
the 1960s failed in 2003 .
McMisses and Other Delights
Pizza Hut’s Priazzo
Two-layer crust, lots of cheese and meat,
intending to imitate Chicago-style. Took too long
Main McDonalds Menu
Big Mac
Big N Tasty
Big N Tasty w/ Cheese
Quarter Pounder w/ Cheese
Double Quarter Pounder w/ Cheese
Crispy Chicken
Chicken McGrill
Filet-O-Fish
Double Cheeseburger
Cheeseburger
Hamburger
Chicken McNuggets (4)
Chicken McNuggets (6)
Chicken McNuggets (9)
McSalad Shaker Chef Salad
McSalad Shaker Garden Salad
McSalad Shaker Grilled Chicken Caeser Salad
Fish Supreme
Chicken Parmesan Sandwich
2/3 lb. Monster Thickburger®
1/3 lb. Low Carb Thickburger®
Little Thick Cheeseburger
1/4 lb. Little Thickburger®
1/3 lb. Cheeseburger
Chili Cheese Thickburger®
1/3 lb. Original Thickburger®
1/3 lb. Mushroom 'N' Swiss Thickburger®
1/3 lb. Bacon Cheese Thickburger®
Big Chicken Fillet Sandwich
Charbroiled Chicken Club Sandwich
Charbroiled BBQ Chicken Sandwich
Big Hot Ham 'N' Cheese™
Regular Hamburger
Regular Cheeseburger
Double Cheeseburger
5-Piece Chicken Breast Strips
7-Piece Chicken Breast Strips
Big Shef
Double Jr.
Cheeseburger
Deluxe
1/4 lb.* Single
1/2 lb.* Double with
Cheese
3/4 lb.* Triple with
Cheese
Baconator®
Jr. Hamburger
Jr. Bacon
Cheeseburger
Jr. Cheeseburger
Deluxe
Jr. Cheeseburger
Double Stack
Deluxe Double
Stack
Triple Stack
Spicy Chicken Go
Wrap
Crispy Chicken
Deluxe
Spicy Chicken
Sandwich
Homestyle Chicken
Fillet
Homestyle Chicken Grilled Chicken Go
Go Wrap
Wrap
Chicken Club
Ultimate Chicken
Grill
10-piece Chicken
Nuggets
Premium Fish Fillet Crispy Chicken
Sandwich
Sandwich
Price
Differentiated Product means
Down-sloping Demand Curve
$6
Elastic or Inelastic?
$5
$4
$3
$2
D
$1
0
10
20
30
40
50
60
Quantity
Long Run Equilibrium
Price
Not at Minimum ATC
$6
ATC
$5
$4
$3
Demand
$2
$1
0
10
20
30
40
50
60
Quantity
Case 1: Prices rise
Profits
Entry or Exit?
Supply
1. Increased Demand, Price goes up
2. Firms enter, Demand faced
Price
$6
by each firm decreases
ATC
$5
$4
SR Profits
$3
$2
$1
0
3. Price goes down
4. No LR Profits
10
20
30
40
Demand
50
60
Quantity
Case 2: Prices fall
Profits
Entry or Exit?
Supply
1. Demand falls, Price goes down
Price 2. Firms leave, Demand faced
$6
by each firm increasesATC
$5
$4
$3
$2
$1
0
Demand
SR Losses
3. Price goes up
4. No LR Losses
10
20
30
40
50
60
Quantity
Characteristics?
1. Few Sellers
2. Differentiated or
Identical Products
3. Difficult Entry and Exit
4. Non-Price competition
5. LR profits/losses
6. Price Maker (Price Leaders)
Price
Different Expectations Above
and Below Market Price
Elastic and Inelastic
$6
$5
$4
$3
$2
$1
0
10
20
30
40
50
60
Quantity
1.
3.
4.
5.
One Seller 2. One Product
Blocked Entry (and exit?)
Non-Price competition
LR profits/losses
6. Price Maker (to maximize profits)
Price
Monopolist finds Price and
Quantity that Maximizes Profit
Elastic or Inelastic?
$6
$5
$4
$3
$2
D
$1
0
10
20
30
40
50
60
Quantity
1. Firms in the same industry always compete in the same
market.
2. The boundaries of a market are determined by product
substitutability and geographic considerations.
3. There can be significant disagreement and dispute about
the actual boundaries of a market.
4. Pure competition is the market structure where a large
number of firms sell identical products.
5. In pure competition, the market demand curve and the
demand curve for an individual seller's product are both
downward sloping.
6. In the long run, a firm in pure competition earns an
economic profit and operates at the minimum point on its
long-run average total cost curve.
7. Purely competitive sellers can earn economic profit over
both the short run and the long run.
8. The demand curve for each individual seller's product in
a monopolistically competitive market is a horizontal line at
the going market price.
9. Product differentiation in a monopolistically competitive
market may allow the seller to raise its price and not lose
all of its buyers.
10. Advertising by sellers in a monopolistically competitive
market that emphasizes the differences between their
products may benefit the consumer by providing
information on product availability and attributes.
11. Firms in monopolistically competitive markets can earn
excess profits over the short run and the long run.
12. Oligopolists are like monopolistic competitors in that
both are price takers.
13. A cartel occurs when several sellers formally join
together and act like a single-firm monopoly.
14. The individual seller's demand curve is the market demand
curve in monopoly.
15. There is no reason for a monopolist to advertise because
it has no competitors.
16. Over the long run, buyers fare better in terms of prices
when facing oligopolists than when facing sellers in any other
market structure.
17. A firm trying to maximize its profit or minimize its loss
from producing should operate where marginal revenue
exceeds marginal cost by the greatest amount.
18. An individual purely competitive seller's marginal revenue
curve is identical to the demand curve for its product.
19. A seller whose price is less than average total cost but
greater than average variable cost will minimize its loss by
producing rather than by shutting down.
20. The marginal revenue curve and the demand curve for a
seller's product are the same when the demand curve for its
product is downward sloping.