Market structure

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Transcript Market structure

Brickley, Smith, and Zimmerman,
Managerial Economics and
Organizational Architecture, 4th ed.
Chapter 6: Market Structure
Market structure
• Students should be able to
• Differentiate among the four standard
market structures
• Distinguish between price takers and
price searchers
Market structure
• What is a market?
• All firms and individuals willing and able to
buy or sell a particular product
• What is market structure?
• Defined by attributes of the market
Market structures
Perfect competition
Monopolistic competition
Perfect competition
Many buyers and sellers
Product homogeneity
Low cost and accurate information
Free entry and exit
Firm demand curve
perfect competition (Figure 6.1)
Firm supply
• Short run
– Marginal cost curve above average
variable cost
• Long run
– Long-run marginal cost curve
above long-run average cost
The firm’s short-run supply curve
(Figure 6.2)
The firm’s long-run supply curve
(Figure 6.3)
Shut-down Analysis
• If Price (P) > Average Cost (AC)
• Stay Open (this applies to both
short run and long run)
• What if Price (P) < Average Cost
• Then we need to do more
Shut-down Analysis
• If Price (P) < Average Variable
Cost (AVC)
• Shut down immediately
Shut-down Analysis
• What if Average Total Cost
(ATC)> Price (P) > Average
Variable Cost (AVC)?
• Short run: stay in business
• Long run: shut down
Competitive equilibrium
(Figure 6.4)
Barriers to entry
Incumbent reactions
Incumbent advantages
• Precommitment
• Licenses and patents
• Learning-curve effects
• Pioneering brand
Specific assets
Economies of scale
Excess capacity
Reputation effects
• Strong barriers to entry  single
• Profit maximization
– faces market demand and sets MR=MC
• Unexploited gains from trade
Monopolistic competition
Multiple firms produce similar products
Firms face downsloping demand curves
Profit maximization occurs where MC=MR
In the limit, firms compete away economic
• A few firms produce most market output
• Products may or may not be
• Effective entry barriers protect firm
• Firm interdependence requires strategic
The Nash equilibrium
• An oligopolist does the best it can, given
expectations of rival behavior
• Behaviors are noncooperative
• Duopolists considering a low price or a
high price must consider rival’s
• Nash equilibrium occurs when each firm
does the best it can given rival’s actions
Determining the Nash equilibrium
The classic prisoners’ dilemma
The cartel’s dilemma