Ch. 13,14,15Final: SA old stuff SA newer stuff SA brand new Problem SolvingMarket Structures- compare and contrast - final • Perfect Competition• Monopolistic Competition• Oligopoly• MonopolyExamples of Market Structure• Perfect Competition (family farm- nothing distinct or unique about your product and you are completely subject to what the market wants to do, price taker)• Monopolistic Competition (fast food- firms don’t really have market power, lots of competition BUT if you’re in the mood for pizza you won’t getsushi——products are distinct)• Oligopoly (airlines- has competition but it’s only a few firms—ex if united comes out with big sale, other airlines will do something similar, but airlines are notreally considered competitive industry— you could not compete against any airline without significant amounts of money and time: you have to get airplanes,gates, etc. There are barriers to getting involved, not a lot of competitors but fierce competition)• Monopoly (microsoft- used to be a monopoly but now not everybody needs windows because apple and others, only they can produce windows though whichgives them power….at&t was also a monopoly previously, google)Features of Market Structures• Market Size• Market Power• Product Differentiation• Barriers to Entry• Long Run Economic ProfitPerfectCompetitionMonopolisticCompetitionOligopoly MonopolyMarketSizeMany firms: no one has any meaningful powerMany firms: large market Few firms (auto making) One single firm (google)MarketPowerNONE: If u raise corn price,you’ll have extra cornNONE:If McD’s comes withsomething new barely anypowerSome but, stilldegree of fierce competitionSignificant: If microsoftcrashesyou still need computerProductDifferentiationIdentical Products: if you do something diff, theres otherfirmsDifferentiated Products Differentiated ProductsArtificial but meaningful diffUnique ProductBarriersto Entry!! (******)NO Barriers NO Barriers Significant Barriers Effective BarriersLong RunEconomic ProfitNo prospects No prospects Reasonably Likely Reasonably Likely First two columns very similar EXCEPT product differentiation.Barriers To EntryEconomies of Scale- cable: add more and more units at average falling cost, as long as its falling in range of market then you’re hard to compete against(NATURAL MONOPOLY)•Government-imposed barriers- drugs: if you invent the next best painkiller, you have exclusive rights. Given window, tylenol is only one who can create it, buteventually other markets can enter, patents have a life span.Resource-based barriers- diamonds in Australia: if places where these resources exist are limited—> monopolyNetwork Effects- sometimes the size of the market share impacts the effectiveness of product—if you’re the only one on Facebook, doesn’t matter but if mostof your friends are on fb you’ll pick it. If you have a Microsoft windows pc and so do a lot of people, what will software producers make? windows. The morepopular a platform gets, the more useful the product is and the more people contribute to that products….dec competitionTransitioning to Long Run: Price will drop till it hits bottom of bowl shop. All 3 meet at a point: economic profits are the blue line: they disappear: profit maximizingwhere mc crosses demand. We can still have accounting profits.Perfect Competition• In the long run…• the absence of barriers to entry or exit guarantees that “super profits” will disappear. • In the long run: P = minimum
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