Unit 8Key TopicsKey Topics (cont’d)Characteristics of ‘perfectly’ competitive marketsPerfect CompetitionCharacteristics of ‘imperfectly’ competitive marketsGeneral types of imperfectly competitive marketsBarriers to entryBarriers to entry (cont’d)Prices charged by imperfectly competitive firmsDemand Curve ‘Constraint’Recall, P = MR for P-taking (competitive firm)MR for P-setting firm of lowering P to sell 1 more Q (graph)Marginal Revenue Example, Imperfect CompetitionMR and TR max vs π maxTR max vs π max (graph)More Monopoly Questions, IssuesMonopoly (vs Perfect Competition)Price DiscriminationPrice Discrimination (graph)Monopolies and the Roles of GovernmentSlide 22Monopoly Regulation AlternativesUnit 8More Economics of Competition and Competitive StrategiesKey Topics1. Alternative market structuresa. Perfect competitionb. Imperfect competition2. Barriers to entry3. Revenue concepts for a price-taking firm (review)a. P = ARb. MRc. TRKey Topics (cont’d)4. Operating decisions for a price-setting firma. TR max ($ sales max)b. Π maxc. Rent-seeking actionsd. Price discrimination5. Revenue concepts and operating decisions for a P-setting firm6. Monopolies and roles of governmenta. Restrict market powerb. Grant & regulate ‘natural’ monopoliesCharacteristics of ‘perfectly’ competitive markets1. Many firms each relatively small compared to the size of the entire market or industry.2. Firms produce ‘homogeneous’ products.3. Relative ease of firm entry in to or exit out of the market.4. Information about prices and production costs widely available.5. Firms have no control over prices and are price ‘takers’.6. In long run, product price = minimum average cost = marginal cost (i.e. no excess profits or losses).Perfect CompetitionDS0Units of output, QP*=5Price per unit ($)P*=50Units of output, qP=MRThe industryA representative firmCharacteristics of ‘imperfectly’ competitive markets1. Limited number of firms so each has a relatively significant share of total output for the industry or market.2. Firms produce ‘heterogeneous’ products.3. Relative difficulty of firm entry in to or out of the market.4. Information about prices and production costs NOT widely available.5. Firms have some control over prices charged for their products and are price ‘setters’.6. In long run, product price > average cost and price > marginal cost.General types of imperfectly competitive markets1. Monopolistic competitionMany firms selling slightly differentiated products2. OligopolyFew firms selling products with varying degrees of differentiation3. MonopolyONE firm selling product that has no (or few) close substitutesBarriers to entry1. Government franchises = exclusive licenses to sell product/servicesWhy? - Economies of scale (i.e. greater efficiency lower production costs)- Greater governmental control (e.g. alcohol)2. Patents = exclusive right to sell a product or use a process to the inventor (for 20 years)Why?- To promote research, scientific progressBarriers to entry (cont’d)3. High capital costs (e.g. production, marketing)4. Ownership of scarce factor of productionPrices charged by imperfectly competitive firms1. They are a choice decision, not given (or taken)2. They are constrained by consumer demand for the firm’s product (i.e. can set either P or Q, but NOT both).Demand Curve ‘Constraint’PPaqaqaNot possibleD curve facing P-setting firm(shows max P & Q combinations)Recall, P = MR for P-taking (competitive firm)However, MR < P for P-setting firmqP = MR = AR$MR for P-setting firm of lowering P to sell 1 more Q (graph)Pq-$+$P1P2ΔP{q1(q1+1)Δq = 1{Marginal Revenue Example, Imperfect CompetitionQuantity Price Total Revenue Marginal Revenue0 $11 0 --1 10 $10 $102 9 18 83 8 24 64 7 28 45 6 30 26 5 30 07 4 28 -28 3 24 -4MR and TR max vs π maxMR = slope of TRTR max = $ sales max MR = 0 (= D curve mid point)Π max MR = MCTR max vs π max (graph)q$TRTCMR=0 TR maxMR=MC π maxMore Monopoly Questions, IssuesCan you show with a graph:1. A monopolist maximizing its profits, yet still losing money?2. The consumer surplus impacts of monopoly (vs competition)?3. The impact on a monopolist’s profit of offering a price discount on large quantity purchases?Monopoly (vs Perfect Competition)Profits can persist LR (entry blocked)Output less & price higher ( loss of consumer surplus)May act to preserve profits (= rent-seeking behavior) (e.g. lobbying, advertising, build entry barriers)Price Discrimination= charging different prices to different groups of buyers (i.e. different markets)Examples:Airlines, movie theatres, golf courses, restaurants, telephone companies, utility companiesPrice Discrimination (graph)qA*$$Mkt AMkt Bq qPaMRadAPBMC = ATCdBMRBqB*Monopolies and the Roles of Government1. Promote competition/restrict market power antitrust laws- Sherman Antitrust Act, 1890 (restraint of trade illegal)- Clayton Act, 1914 (anticompetitive mergers and tying contracts illegal)- Federal Trade Commission Act, 1914 (established FTC as regulatory agency and made ‘unfair methods of competition illegal)Other legality issues: rule of reason vs. per se; conduct vs structure; remedies = consent decrees, treble damages, etc.Monopolies and the Roles of Government2. Grant monopolies (natural) and regulate so consumers benefit from economies of scaleMonopoly Regulation Alternatives1. Require P = MC not practical as P < ATC2. Require P = ATC (or P = ATC+)- Little incentive to minimize costs3. Incentive pricing - set prices for number of yrs into future & allow firms to keep
View Full Document
Unlocking...