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Chapter 6: Market Structure

Chapter 6: Market Structure. Brickley, Smith, and Zimmerman, Managerial Economics and Organizational Architecture , 4th ed. Market structure objectives. Students should be able to Differentiate among the four standard market structures Distinguish between price takers and price searchers.

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Chapter 6: Market Structure

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  1. Chapter 6: Market Structure Brickley, Smith, and Zimmerman, Managerial Economics and Organizational Architecture, 4th ed.

  2. Market structureobjectives • Students should be able to • Differentiate among the four standard market structures • Distinguish between price takers and price searchers

  3. 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

  4. Market structures • Perfect competition • Monopoly • Monopolistic competition • Oligopoly

  5. Perfect competitioncharacteristics • Many buyers and sellers • Product homogeneity • Low cost and accurate information • Free entry and exit

  6. Firm demand curveperfect competition (Figure 6.1)

  7. Firm supply • Short run • Marginal cost curve above average variable cost • Long run • Long-run marginal cost curve above long-run average cost

  8. The firm’s short-run supply curve(Figure 6.2)

  9. The firm’s long-run supply curve(Figure 6.3)

  10. 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

  11. Shut-down Analysis • If Price (P) < Average Variable Cost (AVC) • Shut down immediately

  12. Shut-down Analysis • What if Average Total Cost (ATC)> Price (P) > Average Variable Cost (AVC)? • Short run: stay in business • Long run: shut down

  13. Competitive equilibrium(Figure 6.4)

  14. Incumbent reactions Specific assets Economies of scale Excess capacity Reputation effects Incumbent advantages Precommitment contracts Licenses and patents Learning-curve effects Pioneering brand advantages Barriers to entry

  15. Monopoly • Strong barriers to entry  single supplier • Profit maximization • faces market demand and sets MR=MC • Unexploited gains from trade

  16. 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

  17. 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

  18. 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

  19. Determining the Nash equilibrium

  20. The classic prisoners’ dilemma

  21. The cartel’s dilemma

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