Transcript Competition And Market Structure

Competition And Market
Structure
Types Of Market Structure
Monopolistic Competition:
- Many firms produce differentiated products.
- Sold the products to many buyers.
- Such as: local physicians market, local
markets for video rental, dry
cleaning.
Monopolistic Competition
 Maximizes its profit at the point at which its
marginal revenue equals marginal cost.
MR = MC
 Monopolistic competition different from a
differentiated products oligopoly:
- monopolistically competitive markets are
characterized by free entry.
Monopolistic Competition (continued)
 Figure 13.13 Page 510
Profit Maximization Monopolistic Competition.
Types Of Market Structure: Oligopoly
1. Homogeneous Products Oligopoly.
2. Differentiated Products Oligopoly.
Types Of Market Structure: Oligopoly
(continued)
Homogeneous Products Oligopoly:
Markets in which a small number of firms sell
products that have virtually the same:
-- attributes,
-- performance characteristics,
-- image,
-- price.
Types Of Market Structure: Oligopoly
(continued)
Differentiated Products Oligopoly Markets:
Markets in which a small number of firms sell
products that are substitutes for each other but
also differ from each other:
-- attributes,
-- performance characteristics,
-- image,
-- price.
The Cournot Model of Oligopoly:
 Homogenous products of oligopoly.
 Considered a duopoly market (a market in
which there are just two firm).
Example:

The firms:
1. Samsung.
2. LG.

Their product is DRAM Chips (identical product from Samsung
and LG).

Their MC is identical.

Both firms will charge the same price.

Without colluding with each other.

No knowledge of each other’s plan.

How much to produce by each firm?
Example (continued):
 The market price is not known until both
firms have made their output choice.
 Each firm will make the output choice that
maximizes its profit based on its expectation
of the other firm’s output choice.
Example (continued):
Figure 13.1. Page 485.
 Suppose Samsung expects LG to produce
50 units of output.
 Suppose Samsung expects LG to produce
20 units of output.
Equilibrium In Cournot Market
Figure 13.2. Page 486.
Rs = Samsung’s reaction function.
Rlg = LG’s reaction function.
A = Samsung produces 20 units based
information LG will produce 50 units.
B = Samsung produces 35 units based information LG
will produce 20 units.
The Cournot Equilibrium at E = Samsung produces 30 units
and LG produces 30 units.
The Cournot Equilibrium VS Monopoly Equilibrium
And Perfectly Competitive Equilibrium
 Figure 13.4.
- If Samsung and LG behave as profit
maximizing Cartel (Monopoly),
They will produce a total 45 units (22.5 units
by Samsung, and 22.5 units by LG).
The Cartel (Monopoly) equilibrium point is M (22.5
units Samsung, 22.5 units LG), where Cournot
Oligopoly equilibrium is at E (30 units Samsung, 30
units LG).
The Cournot Equilibrium VS Monopoly Equilibrium
And Perfectly Competitive Equilibrium (continued):
Suppose that a market consists N identical
firms, that the market demand curve is:
P = a – bQ
P = price of output.
a = intercept.
b = coefficient (slope).
Q = output
With MC is c
The Cournot Equilibrium VS Monopoly Equilibrium
And Perfectly Competitive Equilibrium (continued):
 Monopoly Market Structure:
Price = (0.5 a) + (0.5 c)
Market quantity: 0.5 {(a-c)/b}
a = intercept
b = coefficient
c = MC
The Cournot Equilibrium VS Monopoly Equilibrium
And Perfectly Competitive Equilibrium (continued):
 Cournot Duopoly Market Structure:
Price = {(1/3) a} + {(2/3) c}
Market quantity: (2/3) {(a-c)/b}
a = intercept
b = coefficient
c = MC
The Cournot Equilibrium VS Monopoly Equilibrium
And Perfectly Competitive Equilibrium (continued):
 Perfect Competition Market Structure:
Price = c
Market quantity: {(a-c)/b}
a = intercept
b = coefficient
c = MC