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This chapter explores the four main market structures: monopoly, oligopoly, monopolistic competition, and perfect competition. Key concepts include the distinction between price takers and price searchers, the characteristics of each market type, and how firms respond to profits and losses in competitive environments. Understanding market dynamics and the implications for pricing, demand, and firm behavior is crucial for analyzing economic efficiency and industry equilibrium.
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ECON 308 Week 5 Chapter 6: 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? • 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
Demand Facing the Firm $P $P $P $P D1 D3 D4 D2 Q Q Q Q Increasing degrees of Competition Increasing degrees of Market Power
Market structurethe archetypes • Monopoly • Oligopoly • Monopolistic competition • Perfect competition
Alternative Market Structures The Most Competitive Case: The Price Taker Firm
Perfect competition = Price TakerCharacteristics • Many buyers and sellers • Product homogeneity • Low cost and accurate information • Free entry and exit • Best regarded as a benchmark
Market and Firm Demand $P $P Firm Market D S Pe Pe D S D Q/T Qe Q/T
Firm supply • Short run • Marginal cost curve above average variable cost • P* = SRMC • Long run • Long-run marginal cost curve above long-run average cost
Price Taker Firm $ P MC Price = Marginal Revenue Pe D= MR Profit Maximizing Rate of output Qe Q/T
Total Revenue = Pe x Qe $ P MC Pe D Total Revenue Qe Q/T
Total Cost = AC x Q $ P MC AC Pe D AC at Qe Total Cost Qe Q/T
Profit = TR - TC $ P MC AC Pe D Q Q/T
Profits occur if (P=MC) > AC $ P MC AC Pe D= MR Qe Q/T
Market Response to Profits $P D So S’ Pe P’ D So Qx/T Qe Q’
Price Taker Firm: Zero Profits $ P MC ATC D Pe’ D’= MR Qe Q/T
Price Taker Firm: Loss $ P ATC MC Loss Pe D= MR Qe Q/T
Market Response to Losses $P D S’ So P’ Po D S’ Qx/T Q’ Qo
Price Taker Firm: Zero Profits $ P MC ATC Pe’ D’= MR Po D Qe Q/T
Implications of Price-Taker Industry • Demand for the firm is horizontal at the market price • Efficiency: Price equals marginal cost of production • Competition drives price to equal Average cost • Economic profits only exist in the short-run.
Long-Run Industry Equilibrium $P $P Firm Market MC D S ATC Pe Pe D S D Q/T Qe Qe Q/T
Incumbent reactions Specific assets Economies of scale Excess capacity Reputation effects Incumbent advantages Precommitment contracts Licenses and patents Learning-curve effects Pioneering brand advantages Sources of Market Power:Barriers to entry
Monopoly • Strong barriers to entry single supplier • Profit maximization • faces market demand and sets MR=MC • Unexploited gains from trade
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
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
