Transcript Market structure

Brickley, Smith, and Zimmerman,
Managerial Economics and
Organizational Architecture, 4th ed.
Chapter 6: Market Structure
Market structure
objectives
• 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
environment
Market structures
•
•
•
•
Perfect competition
Monopoly
Monopolistic competition
Oligopoly
Perfect competition
characteristics
•
•
•
•
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
(AC)?
• Then we need to do more
analysis
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
contracts
• Licenses and patents
• Learning-curve effects
• Pioneering brand
advantages
Specific assets
Economies of scale
Excess capacity
Reputation effects
Monopoly
• Strong barriers to entry  single
supplier
• 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
profits
Oligopoly
• A few firms produce most market output
• Products may or may not be
differentiated
• Effective entry barriers protect firm
profitability
• Firm interdependence requires strategic
thinking
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
response
• 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