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Market Structure By Group #1: Silvia Luque Kyoung Min Jasung Park Charlie Li Qian Market Structure By Group #1: Silvia Luque Kyoung Min Jasung Park Charlie Li Qian Samantha Rodriguez

Five Types of Market Structure Perfect Competition Monopolistic Competition Oligopoly Oligopsony Monopoly Five Types of Market Structure Perfect Competition Monopolistic Competition Oligopoly Oligopsony Monopoly

Perfect Competition Economic model that describes a hypothetical market form in which no producer Perfect Competition Economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices.

Description of Perfect Competition Efficient outcome Foundation of theory of supply and demand Market Description of Perfect Competition Efficient outcome Foundation of theory of supply and demand Market equilibrium Resources and allocated and used efficiently Collective social welfare is maximazed

Requirements Atomicity > Small producers & consumers Homogeneity Goods & services are substitutes = Requirements Atomicity > Small producers & consumers Homogeneity Goods & services are substitutes = no product differentiation Perfect &complete info. Firms & consumers know the prices set by all firms Equal access Production technologies & resources perfectly mobile Free entry Any firm may enter or exit the market Individual buyers and sellers act independently No scope for groups to change price

Why does a Perfect Competition firms demand curve is also its marginal revenue curve? Why does a Perfect Competition firms demand curve is also its marginal revenue curve? For a perfectly competitive firm with no market control, the marginal revenue curve is a horizontal line. Because a perfectly competitive firm is a price taker and faces a horizontal demand curve, its marginal revenue curve is also horizontal and coincides with its average revenue (and demand) curve.

Perfect Competition Graph Perfect Competition Graph

Example of Perfect Competition e. Bay auctions can be often be seen as perfectly Example of Perfect Competition e. Bay auctions can be often be seen as perfectly competitive. There are very low barriers to entry (anyone can sell a product, provided they have some knowledge of computers and the Internet), many sellers of common products and many potential buyers. In the e. Bay market competitive advertising does not occur, because the products are homogeneous and this would be redundant. However, generic advertising (advertising which benefits the industry as a whole and does not mention any brand names) may occur.

Free Software: Example of Perfect Competition Free software works along lines that approximate perfect Free Software: Example of Perfect Competition Free software works along lines that approximate perfect competition. Anyone is free to enter and leave the market at no cost. All code is freely accessible and modifiable, and individuals are free to behave independently.

Monopolistic Competition Monopolistic Competition

Monopolistic Competition Characteristics: – A large number of firms- it is like perfect competition Monopolistic Competition Characteristics: – A large number of firms- it is like perfect competition – Entry easy – few barriers to entry and exit, so it is unlike monopoly – Differentiated products– they are therefore closed, but not perfect,

Monopolistic Competition The strategies for Differentiated products Fast-food market Mac Donald's, Taco-Bell, and Wendy’s Monopolistic Competition The strategies for Differentiated products Fast-food market Mac Donald's, Taco-Bell, and Wendy’s Brand Name Starbucks

Monopolistic Competition Implications for the diagram: In the Short Run Above-Normal Profit MC Price Monopolistic Competition Implications for the diagram: In the Short Run Above-Normal Profit MC Price ATC P 1 Abnormal Profit A monopolistically competitive firm faces a Downward-sloping demand curve. The firm maximizes profit by producing Q 1, where MR=MC, and charging a price, P 1, given by the demand curve above Q 1. Profit is the rectangle CBAP 1. C=ATC MR Q 1 Demand Quantity

Monopolistic Competition Implications for the diagram: Price Normal Profit MC ATC P MR Q Monopolistic Competition Implications for the diagram: Price Normal Profit MC ATC P MR Q 2 MR Q 1 Notice that the existence of more substitutes makes the new AR (D) curve more price elastic. The firm reduces output to a point where MC = MR (Q 2). At this output AR = AC and the firm will make normal profit. AR(D) Demand Quantity

Monopolistic Competition Implications for the diagram: Price Economic Loss MC ATC C=ATC P Loss Monopolistic Competition Implications for the diagram: Price Economic Loss MC ATC C=ATC P Loss 1 MR Q 1 D Quantity Because there is relative freedom of entry and exit into the market, new firms will enter encouraged by the existence of abnormal profits. New entrants will increase supply causing price to fall. As price falls, the MR curves shift inwards as revenue from each sale is now less.

Monopolistic Competition Implications for the diagram: Price ATC MC Entry and Normal Profit This Monopolistic Competition Implications for the diagram: Price ATC MC Entry and Normal Profit This is the long run equilibrium position of a firm in monopolistic competition. In a monopolistically competitive industry, entering firms produce a close substitute, not an identical or standardized product. D 2 =ATC D 1 MR Q 2 D 2 Quantity

Perfect and Monopolistic Competition Compared The perfectly completive firm produces at the point where Perfect and Monopolistic Competition Compared The perfectly completive firm produces at the point where the price line, the horizontal MR curve, MC Price intersects the MC curve. This is the bottom of the ATC curve in the long run, quantity Qpc at price Ppc. The ATC monopolistically competitive firm means that the quantity produced, where MR=MC. The downwardsloping demand curve faced by monopolistically competitive firm Pmc means that the quantity produced, Qmc is less than the quantity MRpc =Dpc Ppc produced by the perfectly competitive firm, Qpc. The price charged by the monopolistically competitive firm is also higher than that charged by the perfectly competitive firm, Pmc Dmc MRmc Qmc versus Ppc. In both cases, however, Qpc the firms earn only a normal profit. Quantity

Monopolistic Competition In each case there are many firms in the industry Each can Monopolistic Competition In each case there are many firms in the industry Each can try to differentiate its product in some way Entry and exit to the industry is relatively free Consumers and producers do not have perfect knowledge of the market – the market may indeed be relatively localised.

Monopolistic Competition Restaurants Plumbers/electricians/local builders Private schools Plant hire firms Insurance brokers Health clubs Monopolistic Competition Restaurants Plumbers/electricians/local builders Private schools Plant hire firms Insurance brokers Health clubs Hairdressers Estate agents Damp proofing control firms

OLIGOPOLY An OLIGOPOLY is a market form in which a market or industry is OLIGOPOLY An OLIGOPOLY is a market form in which a market or industry is dominated by a small number of sellers(Oligopolists)

OLIGOPOLY Example of Oligopoly around our life in U. S. A. OLIGOPOLY Example of Oligopoly around our life in U. S. A.

Fast foods l. Mc. Donalds, Burger King, KFC Fast foods l. Mc. Donalds, Burger King, KFC

Bookstores Amazon, Barnes & Noble Bookstores Amazon, Barnes & Noble

Oils Shell, Exxon. Mobil Oils Shell, Exxon. Mobil

Electrical goods SONY, Dell Electrical goods SONY, Dell

Mobile phone networks Verizon, AT&T Mobile phone networks Verizon, AT&T

OLIGOPOLY Characteristics of Oligopoly Product Branding Entry barriers Interdependent decision-making Non-price competition OLIGOPOLY Characteristics of Oligopoly Product Branding Entry barriers Interdependent decision-making Non-price competition

Oligopsony A market dominated by many sellers and a few buyers Oligopsony A market dominated by many sellers and a few buyers

Definition of Oligopsony An oligopsony is a market form in which the number of Definition of Oligopsony An oligopsony is a market form in which the number of buyers is small while the number of sellers in theory could be large. This typically happens in market for inputs where a small number of firms are competing to obtain factors of production. It contrasts with an oligopoly, where there are many buyers but just a few sellers. An oligopsony is a form of imperfect competition.

Cocoa: Example of Oligopsony Cocoa: Example of Oligopsony

Three Buyers of Cocoa Bean Three firms buy the vast majority of world cocoa Three Buyers of Cocoa Bean Three firms buy the vast majority of world cocoa bean production, mostly from small farmers in third-world countries.

Tobacco in US: Example of Oligopsony Tobacco in US: Example of Oligopsony

Three Major Buyers of Tobacco in US Three companies (Altria, Brown & Williamson, and Three Major Buyers of Tobacco in US Three companies (Altria, Brown & Williamson, and Lorillard Tobacco Company) buy almost 90% of all tobacco grown in the US.

Characteristics of Oligopsony The buyers have a major advantage over the sellers. – They Characteristics of Oligopsony The buyers have a major advantage over the sellers. – They can play off one supplier against another, thus lowering their costs. – They can also dictate exact specifications to suppliers, for delivery schedules, quality, and (in the case of agricultural products) crop varieties. – They also pass off much of the risks of overproduction, natural losses, and variations in cyclical demand to the suppliers.

What is a Monopoly? A monopoly is a market structure in which there is What is a Monopoly? A monopoly is a market structure in which there is a single supplier of a product. “Monopoly" is a term from economics that refers to a situation where only a single company is providing an irreplaceable good or service.

How do Monopolies Occur? This was a side effect of being the inventor of How do Monopolies Occur? This was a side effect of being the inventor of a product for which there is high demand but no preexisting supply. Other monopolies occur when consolidation across industries results in a single supplier. This was the case with the company Standard Oil, which had to be broken up by the government in 1911.

Description of a Monopoly One firm that produces a good that is desired by Description of a Monopoly One firm that produces a good that is desired by customers The firm in question is the only place where the good or service can be found, they have the ability to charge whatever they want, to the damage of market competition that is the foundation of a healthy economy.

Advantages of a Monopoly Research and Development. Supernormal Profit can be used to fund Advantages of a Monopoly Research and Development. Supernormal Profit can be used to fund high cost capital investment spending. Successful research can be used for improved products and lower costs in the long term. Economies of scale. Increased output will lead to a decrease in average costs of production. These can be passed on to consumers in the form of lower prices.

Disadvantages of a Monopoly Price and Lower Output than under Perfect Competition. This leads Disadvantages of a Monopoly Price and Lower Output than under Perfect Competition. This leads to a decline in consumer surplus and a deadweight welfare loss A monopoly is productively inefficient because it is not the lowest point on the Average Cost curve

Disadvantages of a Monopoly (Continued) A Monopolist makes Supernormal Profit leading to an unequal Disadvantages of a Monopoly (Continued) A Monopolist makes Supernormal Profit leading to an unequal distribution of income. A monopoly may use its market power and pay lower prices to its suppliers.

Graphing a Monopoly Graphing a Monopoly

Example of a Monopoly A recent example of a monopoly would be that of Example of a Monopoly A recent example of a monopoly would be that of the pharmaceutical giant Pfizer over the drug Viagra®, which at the time of its release had no substitutes or competitors. Microsoft; settled anti-trust litigation in the U. S. in 2001; fined by the European Commission in 2004, which was upheld for the most part by the Court of First Instance of the European Communities in 2007. The fine was 1. 35 Billion USD in 2008 for incompliance with the 2004 rule

Monopolistic Competition Monopolistic Competition

Monopolistic Competition Characteristics: – A large number of firms- it is like perfect competition Monopolistic Competition Characteristics: – A large number of firms- it is like perfect competition – Entry easy – few barriers to entry and exit, so it is unlike monopoly – Differentiated products– they are therefore closed, but not perfect, substitutes so,

Monopolistic Competition The strategies for Differentiated products Fast-food market Mac Donald's, Taco-Bell, and Wendy’s Monopolistic Competition The strategies for Differentiated products Fast-food market Mac Donald's, Taco-Bell, and Wendy’s Brand Name

Monopolistic Competition Implications for the diagram: Price In the Short Run MC Above-Normal Profit Monopolistic Competition Implications for the diagram: Price In the Short Run MC Above-Normal Profit ATC P 1 Abnormal Profit A monopolistically competitive firm faces a Downward-sloping demand curve. The firm maximizes profit by producing Q 1, where MR=MC, and charging a price, P 1, given by the demand curve above Q 1. Profit is the rectangle CBAP 1. C=ATC MR Q 1 Demand Quantity

Monopolistic Competition Implications for the diagram: Normal Profit MC Price ATC P MR Q Monopolistic Competition Implications for the diagram: Normal Profit MC Price ATC P MR Q 2 MR Q 1 AR(D) Demand Quantity Notice that the existence of more substitutes makes the new AR (D) curve more price elastic. The firm reduces output to a point where MC = MR (Q 2). At this output AR = AC and the firm will make normal profit.

Monopolistic Competition Implications for the diagram: Economic Loss Price MC ATC C=ATC P 1 Monopolistic Competition Implications for the diagram: Economic Loss Price MC ATC C=ATC P 1 Loss MR Q 1 D Quantity Because there is relative freedom of entry and exit into the market, new firms will enter encouraged by the existence of abnormal profits. New entrants will increase supply causing price to fall. As price falls, the MR curves shift inwards as revenue from each sale is now less.

Monopolistic Competition Implications for the diagram: ATC Entry and Normal Profit MC Price D Monopolistic Competition Implications for the diagram: ATC Entry and Normal Profit MC Price D 2 =ATC D 1 MR Q 2 D 2 Quantity This is the long run equilibrium position of a firm in monopolistic competition. In a monopolistically competitive industry, entering firms produce a close substitute, not an identical or standardized product.

Perfect and Monopolistic Competition Compared The perfectly completive firm produces at the point where Perfect and Monopolistic Competition Compared The perfectly completive firm produces at the point where the price line, the horizontal MR curve, MC Price intersects the MC curve. This is the bottom of the ATC curve in the long run, quantity Qpc at price Ppc. The ATC monopolistically competitive firm means that the quantity produced, where MR=MC. The downwardsloping demand curve faced by monopolistically competitive firm Pmc means that the quantity produced, Qmc is less than the quantity MRpc =Dpc Ppc produced by the perfectly competitive firm, Qpc. The price charged by the monopolistically competitive firm is also higher than that charged by the perfectly competitive firm, Pmc Dmc MRmc Qmc versus Ppc. In both cases, however, Qpc the firms earn only a normal profit. Quantity

Monopolistic Competition In each case there are many firms in the industry Each can Monopolistic Competition In each case there are many firms in the industry Each can try to differentiate its product in some way Entry and exit to the industry is relatively free

Monopolistic Competition Restaurants Plumbers/electricians/local builders Private schools Plant hire firms Insurance brokers Health clubs Monopolistic Competition Restaurants Plumbers/electricians/local builders Private schools Plant hire firms Insurance brokers Health clubs Hairdressers Estate agents

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