Perfect Competition 1 Many firms sell identical products to many buyers 2 There are no restrictions to entry into the industry 3 Established firms have no advantage over new ones 4 Sellers and buyers are well informed about price Each firm is a price talker a firm that cannot influence the market price and sets its own prices EX Agricultural commodities A barrier to entry or an economic barrier to entry is a fixed cost that must be incurred by a new entrant regardless of production or sales activities into a market that incumbents do not have or have not had to incur A barrier to exit is obstacles in the path of a firm that wants to leave a given market or industrial sector These obstacles often have associated costs prohibiting the firm from leaving the market Marginal Revenue a change in a firm s total revenue that results from a one unit change in output produced and sold Average Revenue Revenue per unit sold equal to total revenue divided by the quantity of output produced sold When a firm is unprofitable in the short run they still must pay fixed cost Goal is to minimize losses MONOPOLY 1 1 seller and many buyers 2 Price maker 3 No close substitutes for the product 4 Entry of new firms not feasible EX google Monopoly power the ability of a monopoly to influence prices by controlling the quantities that it produces in the market TOTAL MARKET CONTROL PRICE MAKERS Monopolist can choose price or quantity but NOT BOTH If a monopoly wants to increase its quantity it must lower the price for every unit it sells Quantity Effect selling one more unit increases total revenue by the price Price Effect selling more unit decreases total revenue because the price must be lowered Profit Maximization steps 1 MR MC 2 Find the corresponding price at that output from the demand curve 3 Show the profits Price Discrimination the selling of different units of a good or service for different prices First degree price discrimination the practice of charging each and every consumer the price that she is willing and able to pay for a good or service Second degree price of discrimination the practice of charging different prices per unit for different quantities or blocks of a good or service Third degree price of discrimination the practice of dividing market participants into groups based on their elasticities of demand in order to charge each group a different price for the same good or service Monopolistic Competition Characteristics 1 Many buyers sellers competition 2 Differented products similar but not identical 3 Little control over price 4 Few barriers to entry and exit 5 Each firm earns zero economic profit EX clothing fast food grocery stores More elastic than monopoly but less than PC In monopolistically competitive markets entry barriers It is more difficult to analyze a monopolistically competitive market than a perfectly competitive market because in a monopolistically competitive market Oligopoly 1 Few 2 4 large sellers and many buyers 2 Price makers mutual interdependent 3 Differentiated or homogeneous product 4 Some barriers to entry natural or legal Cartel a group of firms acting together to limit output raise price ad increase economic profit act as a monopoly ILLEGAL under U S antitrust laws Price Leadership a practice used by the dominant firm in a Non collusive oligopolistic market to signal price changes a form of tacit collusion Limit Pricing the practice used by the dominant firm in a Non collusive oligopolistic market to prevent the entry of new firms by establishing a price lower than the short run profit maximizing price Keep new firms out of the market Game Theory The study of strategic behavior of decision makers Payoff Matrix a table showing the potential outcomes arising from the choices made by decision makers Dominant Strategy A situation in which a particular strategy yields the highest payoff regardless of the other decision maker s strategy Nash Equilibrium An outcome in which decision makers choose their dominant strategy and each has no incentive to independently change his or her strategy Collusion A situation in which decision makers coordinate their actions to achieve a desired outcome Collusion is generally used to achieve an outcome that would not be possible in the absence of coordinated actions and it is typically associated with illegal or anticompetitive behaviors Game Tree a mapping tool that shows the strategies available to players engaged in a sequential game as well as the potential outcomes received by those players