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 D1 P D2 Q Q P D3 D4 Q Increasing degrees of Competition Increasing degrees of Market Power Q Market structure the archetypes Monopoly Oligopoly Monopolistic competition Perfect competition Alternative Market Structures The Most Competitive Case The Price Taker Firm Perfect competition Price Taker Characteristics 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 Market D Firm S Pe Pe D S D Qe Q T 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 Pe Price Marginal Revenue 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 Qe Q Qx T Price Taker Firm Zero Profits P MC ATC D Pe D MR Qe Q T Price Taker Firm Loss P Pe MC Loss ATC D MR Qe Q T Market Response to Losses P D S So P Po D S Q Qo Qx T 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 Market D Firm MC S ATC Pe Pe D S D Qe Q T Qe Q T Sources of Market Power Barriers to entry Incumbent reactions Incumbent advantages Precommitment contracts Licenses and patents Learning curve effects Pioneering brand advantages Specific assets Economies of scale Excess capacity Reputation effects 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
View Full Document
Unlocking...