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Chapter 6: Market Structure

Market structure objectives. Students should be able toDifferentiate among the four archetypal market structuresDistinguish 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 productWhat is market st

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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 structure objectives Students should be able to Differentiate among the four archetypal 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 structure the archetypes Perfect competition Monopoly Monopolistic competition Oligopoly

    5. Perfect competition characteristics Many buyers and sellers Product homogeneity Low cost and accurate information Free entry and exit Best regarded as a benchmark

    6. Firm demand curve perfect competition

    7. 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

    8. The firms short-run supply curve

    9. The firms long-run supply curve

    10. Competitive equilibrium

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

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

    13. Monopolist faces market demand

    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

    15. Monopolistic competitor in the long run

    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

    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 rivals response Nash equilibrium occurs when each firm does the best it can given rivals actions

    18. Determining the Nash equilibrium

    19. The Cournot model Duopolists A and B face industry demand P=100-Q, Q=QA+QB Each firm takes the others 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

    20. Cournot equilibrium

    21. Comparison of prices and output among different equilibria

    22. The classic prisoners dilemma

    23. The cartels dilemma

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