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Market structure

Market structure. Market structure objectives. Students should be able to Differentiate among the four archetypal market structures Distinguish between price takers and price searchers. Market structure. What is a market?

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Market structure

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  1. Market structure Managerial Economics and Organizational Architecture, Chapter 6

  2. Market structureobjectives Students should be able to • Differentiate among the four archetypal market structures • Distinguish between price takers and price searchers Managerial Economics and Organizational Architecture, Chapter 6

  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 Managerial Economics and Organizational Architecture, Chapter 6

  4. Market structure • Perfect competition   • Monopoly   • Monopolistic competition   • Oligopoly   Managerial Economics and Organizational Architecture, Chapter 6

  5. Perfect competitioncharacteristics • Many buyers and sellers • Product homogeneity • Low cost and accurate information • Free entry and exit Managerial Economics and Organizational Architecture, Chapter 6

  6. Firm demand curveperfect competition Managerial Economics and Organizational Architecture, Chapter 6

  7. Firm supply • Short run • Long run Managerial Economics and Organizational Architecture, Chapter 6

  8. The firm’s short-run supply curve Managerial Economics and Organizational Architecture, Chapter 6

  9. The firm’s long-run supply curve Managerial Economics and Organizational Architecture, Chapter 6

  10. Competitive equilibrium Managerial Economics and Organizational Architecture, Chapter 6

  11. 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 Managerial Economics and Organizational Architecture, Chapter 6

  12. Monopoly • Strong barriers to entry  single supplier • Profit maximization • faces market demand and sets MR=MC • Unexploited gains from trade Managerial Economics and Organizational Architecture, Chapter 6

  13. Monopolist faces market demand Managerial Economics and Organizational Architecture, Chapter 6

  14. 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 Managerial Economics and Organizational Architecture, Chapter 6

  15. Monopolistic competitor in the long run Managerial Economics and Organizational Architecture, Chapter 6

  16. 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 Managerial Economics and Organizational Architecture, Chapter 6

  17. 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 Managerial Economics and Organizational Architecture, Chapter 6

  18. Determining the Nash equilibrium Managerial Economics and Organizational Architecture, Chapter 6

  19. The Cournot model • Duopolists A and B face industry demand P=100-Q, Q=QA+QB • Each firm takes the other’s output as fixed E.g., PA=(100-QB*)-QA • Marginal revenue for A is MRA=(100-QB*)-2QA • If MC=0, profit is maximized if QA=50-.5QB, which is reaction function Managerial Economics and Organizational Architecture, Chapter 6

  20. Cournot equilibrium Managerial Economics and Organizational Architecture, Chapter 6

  21. Comparison of prices and outputamong different equilibria Managerial Economics and Organizational Architecture, Chapter 6

  22. The classic prisoners’ dilemma Managerial Economics and Organizational Architecture, Chapter 6

  23. The cartel’s dilemma Managerial Economics and Organizational Architecture, Chapter 6

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