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Industrial Organization

Industrial Organization. AG BM 102. Introduction. Willard’s Mistake Competitive Environment Relevant Market Market power Market structure – Market Conduct-Market performance.

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Industrial Organization

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  1. Industrial Organization AG BM 102

  2. Introduction • Willard’s Mistake • Competitive Environment • Relevant Market • Market power • Market structure – Market Conduct-Market performance

  3. Market Structure – those characteristics of the market that significantly affect the behavior and interaction of buyers and sellers

  4. Market Conduct – a firm’s policies toward its market and toward the moves made by its rivals in that market

  5. Market Performance – how well does an industry do what society might reasonably expect it to do

  6. Market – a collection of firms, each of which is supplying products that have some degree of substitutability, to the same potential buyers • Common buyers for sellers • Common sellers for buyers • Relatively homogeneous product

  7. Industry- sellers of a particular product or closely competing products

  8. Relevant market – the portion of the total market that a participant views as including his or her direct competitors and customers (or suppliers)

  9. Some market models • Pure competition • Monopoly – a single seller • Monopsony – a single buyer

  10. Marginal RevenueThe change in total revenue from expanding sales by one more unit

  11. Marginal revenue

  12. Calculating Marginal Revenue

  13. Calculating Marginal Revenue • Solve the demand function for P • P = 12 –Q • Take the coefficient of Q and double it • MR = 12 – 2Q

  14. Monopoly

  15. For Monopoly, find where MC =MR and then go up to the price on the demand curve

  16. Marginal Factor CostThe change in total factor cost from buying one additional unit of an input

  17. Marginal Factor Cost

  18. Calculating Marginal Factor Cost

  19. Calculating Marginal Factor Cost • Solve the Supply curve for P • P = Q • Double the coefficient of Q • MFC = 2Q • Ordinarily the line doesn’t run through the origin • The process is the same – solve for P – double the coefficient of Q

  20. Monopsony

  21. For Monopsony, find where MFC =MVP and then go down to the price on the supply curve

  22. Concluding Comments • Where does a 500 pound gorilla sit? • Market power is important • Understanding it helps you understand market behavior

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