structures.ppt

8/7/2019 structures.ppt

1/100

MarketStructures

MarketStructures


2/100

The Degree of CompetitionThe Degree of Competition

Classifying markets number of firms

freedom of entry to industry

nature of product nature of demand curve

The four market structures

perfect competition monopoly

monopolistic competition

oligopoly

Classifying markets number of firms

freedom of entry to industry

nature of product nature of demand curve

The four market structures

perfect competition monopoly


oligopoly


3/100


4/100


5/100


6/100


7/100


8/100


9/100


10/100

Perfect CompetitionPerfect Competition

Assumptions firms are price takers

freedom of entry

identical products

perfect kno ledge

Short-run e uilibrium of the firm

price, output and profit


freedom of entry

identical products

perfect kno ledge




11/100

O

(b) Firm

Q (thousands)

O

(a) Industry

P

Q (millions)

S

D

Pe

MC

ARD = AR

= MR

Qe

AC

AC

Short-run e uilibrium of industry and firm under

perfect competition

Short-run e uilibrium of industry and firm under

perfect competition


12/100

Qe

P1D1 = AR1

= MR1AR1

O O

(a) Industry

P

Q (millions)

S

D

(b) Firm

MC AC

AC

Q (thousands)

Loss minimising under perfect competitionLoss minimising under perfect competition


13/100



freedom of entry

identical products perfect kno ledge



The short-run supply curve of the firm


freedom of entry

identical products perfect kno ledge



The short-run supply curve of the firm


14/100

O O

(a) Industry

P

P1

Q (millions)

S

D1

(b) Firm

D1 = MR1

MC

P2D2= MR2

D2

P3

D3 = MR3

D3

Q (thousands)

Deriving the short-run supply curveDeriving the short-run supply curve

a

b

c

= S


15/100


Long-run e uilibrium of the firm

all supernormal profits competed a ay

LRAC= AC= MC= MR= AR

Long-run e uilibrium of the firm

all supernormal profits competed a ay

LRAC= AC= MC= MR= AR


16/100

O O

(a) Industry

P

Q (millions)

S1

D

(b) Firm

LRAC

PL

P1

QL

Se

AR1 D1

ARL DL

Q (thousands)

Long-run e uilibrium under perfect competitionLong-run e uilibrium under perfect competition

New firms enterSupernormal profitsProfits return

to normal


17/100

QO

(SR)AC

(SR)MC

LRAC

AR = MR

DL

LRAC= (SR)AC= (SR)MC= MR= AR

Long-run e uilibrium of the firm under perfect competitionLong-run e uilibrium of the firm under perfect competition


18/100


Incompatibility of economies of scaleith perfect competition

enefits of perfect competition

price e uals marginal cost

prices kept lo

firms must be efficient to survive

Incompatibility of economies of scaleith perfect competition

enefits of perfect competition

price e uals marginal cost

prices kept lo

firms must be efficient to survive


19/100

MonopolyMonopoly

Defining monopoly arriers to entry

economies of scale

economies of scope

product differentiation and brand loyalty lo er costs for an established firm

o nership/control of key factors

o nership/control over outlets

legal protection mergers and takeovers

aggressive tactics

intimidation

Defining monopoly arriers to entry

economies of scale

economies of scope

product differentiation and brand loyalty lo er costs for an established firm

o nership/control of key factors

o nership/control over outlets

legal protection mergers and takeovers

aggressive tactics

intimidation


20/100

MonopolyMonopoly

The monopolists demand curve do n ard sloping

MRbelo AR

Equilibrium price and output

Equilibrium output, here MC= MR


MRbelo AR




21/100

Profit ma imising under monopolyProfit ma imising under monopoly

MR

QO

MC

Qm


22/100

MonopolyMonopoly


MRbelo AR



Equilibrium price, found from demand curve


MRbelo AR





23/100

QO

MC

AC

Qm

MR

AR

AC


AR


24/100

MonopolyMonopoly


MRbelo AR




Profit

Measuring profit


MRbelo AR




Profit

Measuring profit


25/100

QO

MC

AC

Qm

MR

AR

AC


AR

Total profit


26/100

MonopolyMonopoly


MRbelo AR

Equilibrium price and output Equilibrium output, here MC= MR


Profit

Measuring profit

Supernormal profit can persist in long run


MRbelo AR

Equilibrium price and output Equilibrium output, here MC= MR


Profit

Measuring profit

Supernormal profit can persist in long run


27/100

MonopolyMonopoly

Disadvantages of monopoly high prices / lo output short run



28/100

AR = D

MC

MR

QO Q1

P1

Monopoly

Equilibrium of industry under perfect competition and

monopoly ith the same MCcurve




29/100

QO

MC( = supply underperfect competition)

Q1

MR

P1

P2

Q2

AR = D

Comparison withPerfect competition






30/100

MonopolyMonopoly


high prices / lo output long run




31/100

MonopolyMonopoly



lack of incentive to innovate





32/100

MonopolyMonopoly




X-inefficiency




X-inefficiency


33/100

MonopolyMonopoly




X-inefficiency

Advantages of monopoly




X-inefficiency



34/100

MonopolyMonopoly




X-inefficiency


economies of scale




X-inefficiency


economies of scale


35/100

QO Q1

MR

P1

MCmonopoly

AR = D


monopoly ith different MCcurves




36/100

QO

MC( = supply)perfect competition

Q1

MR

P1

P2

Q2

MCmonopoly

AR = D

x

Q3

P3






37/100

MonopolyMonopoly




X-inefficiency


economies of scale profits can be used for investment




X-inefficiency




38/100

MonopolyMonopoly




X-inefficiency



high profits encourage risk taking




X-inefficiency



high profits encourage risk taking


39/100

MonopolyMonopoly

Contestable markets

importance of potential competition

a perfectly contestable market

contestable markets and naturalmonopolies

importance of costless e it

Contestable markets and the publicinterest

Contestable markets

importance of potential competition

a perfectly contestable market

contestable markets and naturalmonopolies

importance of costless e it

Contestable markets and the publicinterest


40/100

Monopolistic CompetitionMonopolistic Competition

Assumptions of monopolisticcompetition

Equilibrium of the firm

short run



short run


41/100

QO Qs

AR! D

MC

AC

MR

Short-run equilibrium of the firm

under monopolistic competition

Short-run equilibrium of the firm


Ps

ACs


42/100




short run

long run



short run

long run


43/100

Long-run equilibrium of the firm


Long-run equilibrium of the firm


ARL ! DL

MRL

QO QL

PL

LRAC

LRMC


44/100




short run

long run

underutilisation of capacity in the long run



short run

long run



45/100

Q2

P2 DL under perfectcompetition

Long run equilibrium of the firm under perfect and


Long run equilibrium of the firm under perfect and


QO

P1

LRAC

DL under monopolisticcompetition

Q1


46/100




short run

long run


on-price competition



short run

long run




47/100




short run

long run



The public interest



short run

long run



The public interest


48/100




short run

long run



The public interest

comparison ith perfect competition



short run

long run



The public interest

comparison ith perfect competition


49/100


50/100

OligopolyOligopoly

Key features of oligopoly barriers to entry

interdependence of firms

Competition versus collusion

Collusive oligopoly cartels

equilibrium of the industry







51/100

QO

Industry D !AR

Profit-ma imising cartelProfit-ma imising cartel


52/100

Profit-ma imising cartelProfit-ma imising cartel

QO

Industry D !AR

Industry MC

Industry MR

Q1

P1


53/100

OligopolyOligopoly






allocating and enforcing quotas






allocating and enforcing quotas

Oil iOil i


54/100

0

5

10

15

20

25

30

35

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02

$ per barrel Actual price

Yom Kippur

War: Arab oil

embargo

First oil fromNorth Sea

Revolution

in Iran

Iraq invades

Iran

OPECs first

quotas

Cease-fire in

Iran-Iraq warRecession

in Far East

Iraq invades

Kuwait

New OPEC

quotas

World-wide

recovery

World-wide

slowdown

Impending

war

with Iraq

Oil pricesOil prices

Oil iOil i


55/100

0

5

10

15

20

25

30

35

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02

$ per barrel Actual priceCost in 1973 prices

Yom Kippur

War: Arab oil

embargo

First oil fromNorth Sea

Revolution

in Iran

Iraq invades

Iran

OPECs first

quotas

Cease-fire in

Iran-Iraq warRecession

in Far East

Iraq invades

Kuwait

New OPEC

quotas

World-wide

recovery

World-wide

slowdown

Impending

war

with Iraq

Oil pricesOil prices

Oli lOli l


56/100

OligopolyOligopoly

Tacit collusion price leadership dominant firm



57/100

Price leader aiming to ma imise profits for a given market sharePrice leader aiming to ma imise profits for a given market share


58/100

QO

AR!D market

MC

MRleader

PL

QT

AR!D leader

QL

l t

Price leader aiming to ma imise profits for a given market sharePrice leader aiming to ma imise profits for a given market share

Oli lOli l


59/100

OligopolyOligopoly


price leadership barometric



Oli lOli l


60/100

OligopolyOligopoly



rules of thumb



rules of thumb

Oli lOli l


61/100

OligopolyOligopoly

Factors favouring collusion Fe firms

Open ith each other

Similar production meth

ods and averagecosts

Similar products

Dominant firm

Significant entry barriers

Stable market

o government measures to curb collusion

Factors favouring collusion Fe firms

Open ith each other

Similar production meth

ods and averagecosts

Similar products

Dominant firm

Significant entry barriers

Stable market

o government measures to curb collusion

Oli lOli l


62/100

OligopolyOligopoly

The breakdo n of collusion

on-collusive oligopoly game theory

alternative strategies

ma ima and ma imin

simple dominant strategy games




ma ima and ma imin


P fit f fi A d t diff t iP fit f fi A d t diff t i


63/100

Profits for firms A and at different pricesProfits for firms A and at different prices

2.00 1.80

2.00

1.80

Xs price

Ys price

A

C D

10m each

8m each12m for Y

5m for X

5m for Y

12m for X

OligopolOligopol


64/100

OligopolyOligopoly




ma ima and ma imin


ash equilibrium




ma ima and ma imin


ash equilibrium

P fit f fi A d t diff t iP fit f fi A d t diff t i


65/100

Profits for firms A and at different pricesProfits for firms A and at different prices

2.00 1.80

2.00

1.80

Xs price

Ys price

A

C D

10m each

8m each12m for Y

5m for X

5m for Y

12m for X

OligopolyOligopoly


66/100

OligopolyOligopoly




ma ima and ma imin

simple dominant strategy games ash equilibrium

the prisoners dilemma




ma ima and ma imin

simple dominant strategy games ash equilibrium

the prisoners dilemma

Th i ' dilTh i ' dil


67/100

The prisoners' dilemmaThe prisoners' dilemma

ot confess Confess

ot

confess

Confess

Amanda's alternatives

igel's

alternatives

A

C D

Each gets

1 year

Each gets

3 years

igel gets3 months

Amanda gets

10 years

igel gets10 years

Amanda gets

3 months

OligopolyOligopoly


68/100

OligopolyOligopoly



alternative strategies ma ima and ma imin

simple dominant strategy games the prisoners dilemma

ash equilibrium

more comple non-dominant strategy

games





ash equilibrium


games

OligopolyOligopoly


69/100

OligopolyOligopoly





ash equilibrium


games the importance of threats and promises





ash equilibrium



OligopolyOligopoly


70/100

OligopolyOligopoly





ash equilibrium



the importance of timing of decisions





ash equilibrium



the importance of timing of decisions


71/100

A decision treeA decision tree


72/100

Boeingdecides

A decision treeA decision tree

Boeing 10m

Airbus 10m (1)

Boeing +30m

Airbus +50m

(2)

Boeing +50m

Airbus +30m(3)

Boeing 10m

Airbus 10m(4)

Airbusdecides

B2

Airbusdecides

B1

A


73/100

Kinked demand for a firm under oligopolyKinked demand for a firm under oligopoly


74/100


QO

P1

Q1

Current priceand quantity

give one pointon demand curve



75/100

QO

P1

Q1

D

D


OligopolyOligopoly


76/100

OligopolyOligopoly

on-collusive oligopoly th

e kinkeddemand curve theory

assumptions of the model

stable prices




stable prices

Stable price under conditions of a kinked demand curveStable price under conditions of a kinked demand curve


77/100

QO

P1

Q1

MC2

MC1

MR

ab

D !AR

pp

OligopolyOligopoly


78/100

OligopolyOligopoly




stable prices limitations of the model





OligopolyOligopoly


79/100

OligopolyOligopoly





Oligopoly and the public interest






OligopolyOligopoly


80/100

OligopolyOligopoly






advantages






advantages

OligopolyOligopoly


81/100

OligopolyOligopoly






advantages

disadvantages






advantages

disadvantages

OligopolyOligopoly


82/100

OligopolyOligopoly






advantages

disadvantages

difficulties in dra ing general conclusions






advantages

disadvantages

difficulties in dra ing general conclusions

Price DiscriminationPrice Discrimination


83/100


Meaning of price discrimination First degree

Second degree

Third degree (the most common form)


Second degree


Third-degree price discriminationThird-degree price discrimination


84/100

P

QO

P1

D

200

Revenue froma single price

Third-degree price discriminationThird-degree price discrimination


85/100

O

P1

D

200

P2

150

P

Q

Increased revenue

from pricediscriminationA higher discriminatory

price is now introduced



86/100



Second degree


Conditions necessary for price

discrimination


Second degree



discrimination



87/100



Second degree



discrimination

Advantages to the firm


Second degree



discrimination

Advantages to the firm



88/100


Profit ma imising prices and outputunder price discrimination


Profit-ma imising output underProfit-ma imising output under


89/100

O O O

MRX

(a) Market X

DX

Profit ma imising output under

third degree price discrimination





90/100

O O O

DY

MRX

MRY

(a) Market X (b) Market Y

DX






91/100



92/100





O O O

MRX

MRY MRT

MC

(a) Market X (b) Market Y (c) Total

(markets X + Y)

DX

DY



93/100

O O O

MRX

MRY MRT

MC


(markets X + Y)

DX

3000





DY



94/100

O O O

DX

MRX

MRY MRT

MC

5


(markets X + Y)

3000





DY



95/100

O O O

MRX

MRY MRT

MC

5

1000


(markets X + Y)

DX

3000





DY



96/100

O O O

MRX

MRY MRT

MC

5

1000 2000


(markets X + Y)

DX

3000

o t a s g output u de


o t a s g output u de


DY



97/100

O O O

MRX

MRY MRT

MC

5

9

1000 2000


(markets X + Y)

DX

3000

g p


g p


DY



98/100

O O O

MRX

MRY MRT

MC

DY

57

1000 2000 3000


(markets X + Y)

9

DX

g p


g p




99/100


Price discrimination and the public

interest

competition



interest

competition



100/100



interest

competition

profits



interest

competition

profits

structures.ppt

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