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 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 structurethe archetypes Perfect competition Monopoly Monopolistic competition Oligopoly

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

6. Firm demand curveperfect 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 firm�s short-run supply curve

9. The firm�s 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 rival�s response Nash equilibrium occurs when each firm does the best it can given rival�s 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 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

20. Cournot equilibrium

21. Comparison of prices and outputamong different equilibria

22. The classic prisoners� dilemma

23. The cartel�s dilemma