Market Structure Comparison and Evaluation. Review!!. Perfect competition Assumptions:. Firms are small and have little affect on impact on price (price takers) or total output Industry has lots of firms Identical products (no brand names ) Perfect (symmetrical) information
Firms are small and have little affect on impact on price (price takers) or total output
Industry has lots of firms
Identical products (no brand names)
Perfect (symmetrical) information
Entry/exit Easy (investment and sunk costs low)
No incentive to innovate
Lack of variety to consumer
Given normal profits, price fluctuations occur due to resource (input) prices.
No EOS: economies of scale
One firm in the industry, No substitute goods.
Barriers to entry exist, very high barriers associated with high capital costs (sunk costs)
May be able to make abnormal profit in the long run because of the barriers to entry
Productively and Allocatively inefficient -less incentive to be
Can charge higher price
for lower output
behavior to maintain power
Lower Prices to Suppliers - A monopoly may use its market power and pay lower prices to its suppliers. E.g. Supermarkets have been criticized for paying low prices to farmers.
Worse products Lack of competition may lead to less product innovation.
Charge Higher prices to producers Monopolies may use their supernormal profits to charge higher prices to producers of other products
Diseconomies of Scale - It is possible that if a monopoly gets too big it may experience diseconomies of scale. - higher average costs because it gets too big
High Concentration Ratio-A few firms hold a high percentage of market share (there may be many small firms)
Usually high barriers to entry
Products may be identical (homogenous) or differentiated
Firms are interdependent (Large enough to effect the market price)
Economies of scale may be achieved, leading to lower costs
Greater innovation through R & D because of supernormal profits
Product development may lead to greater choice of products
·JB will match a price decrease by McD's so as to not lose market share
·JB will ignore a price increase by McD's so it can capture customers who will switch to JB.
·D1 represents demand when McD's increases price, D2 when it lower price.
·Put together, the demand curve faced by a oligopolist is kinked, highly elastic above current price and highly inelastic below current price
3 Necessary Conditions
Some poorer consumers get subsidized by wealthier consumers (like college tuition & financial aid)
Sometimes entire groups of consumers can get lower prices because they are subsidized by another group (ex: domestic students get lower tuition because higher tuition for foreign students helps cover costs)
Usually leads to higher output in the market which should lead to economies of scale and lower costs thus lower prices for consumers
Loss of consumer surplus for consumers
Some consumers pay more than they would have at market equilibrium prices
Small firms exist in the market
Firms differentiate their product
No great barriers to entry
Consumers enjoy a greater variety of products
Prices are low… cannot be much higher than average costs
Law of diminishing returns:
Economies of scale