Market Equilibrium and Market Demand Imperfect Competition Chapter

Market Equilibrium and Market Demand: Imperfect Competition Chapter 9

Discussion Topics üMarket structure characteristics üMonopolistic competition in selling üOligopolies in selling üMonopolies in selling üImplications for consumer and producer surplus

Market Structure Characteristics üNumber of firms and size distribution üProduct differentiation üBarriers to entry üPicture here tells a tale of two markets (no. 2 yellow corn vs. farm equipment) Pages 177 -178

Perfect Competition Ø Up to now we have been assuming the firm and market reflect the conditions of perfect competition… farmers come close as anybody to meeting these conditions. Ø A large number of small firms (2 million farms) Ø A homogeneous product (no. 2 yellow corn) Ø Freely mobile resources (no barriers to entry caused by patents, etc. or barriers to exit) Ø Perfect knowledge of market conditions (quality outlook information from government and university sources)

Merging Demand Supply Price D S Chapters 6 -7 PE Chapters 3 -5 Chapter 8 QE Quantity

Firm is a “Price Taker” Under Perfect Competition Price The Market D S The Firm Price AVC MC PE QE OMAX Quantity

If Demand Increases…… The Market Price D D 1 The Firm S Price AVC MC PE QE 10 11 Quantity

If Demand Decreases…… The Market Price D 2 D The Firm S Price AVC MC PE QE 9 10 Quantity

Firm is a “Price Taker” in the Input Market Price Labor Market D S Price The Firm MVP MIC PE QE LMAX Quantity

Firm is a “Price Taker” in the Input Market Price Fertilizer Market D S Price The Firm MVP PE MIC QE LMAX Quantity

Imperfect Competition 1. Many of the markets in which farmers buy inputs and sell their products however do not meet these conditions 2. This chapter initially focuses on specific types of imperfect competitors in the farm input market, where firms are capable of setting the prices farmers must pay for specific inputs to their production.

Imperfect Competition in Selling

Unlike perfect competitors who face a perfectly elastic demand curve, imperfect competitors selling a differentiated product benefit from a downward sloping demand Curve (see Table 9. 1 for both curves) Page 182

See table 11. 1 on page 237 The marginal revenue in this instance is also downward sloping, and goes to zero at the point where total revenue peaks. Beyond this point, revenue falls as price falls. Page 182

Types of Imperfect Competitors in Input Markets 1. Monopolistic competition 2. Oligopoly 3. Monopoly Let’s start here…

Monopolistic Competitors ü Many sellers ü Ability to differentiate product by advertising and sales promotions ü Profits can exist in the short run, but others bid them away in the long run ü Equate MC with MR, but price off the downward sloping demand curve Page 181 -184

Short run profits. The firm produces QSR where MR=MC at E above, but prices its products at PSR by reading off the demand curve which reveals consumer willingness to pay Page 183

Short run loss. The firm suffers a loss in the current period following the same strategy of operating at QSR given by MC=MR at point E. Page 183

At quantity QSR, average total cost (ATCSR) is greater than PSR, which creates the loss depicted above… Page 183

In the long run, profits are bid away as more firms enter the market. Or losses will no longer exist as firms leave the market. At QLR, the remaining firms are just breaking even as shown by the lack of gap between the demand curve and ATC curve. Page 184

Top 10 Burger Restaurants Rank Brand Market Share Advertising Mil. Dol. 1 Mc. Donald’s 42. 8% $571. 7 2 Burger King 20. 2 407. 5 3 Wendy’s 11. 5 188. 4 4 Hardee’s 5. 7 50. 5 5 Jack in the Box 3. 6 51. 2 6 Sonic Drive-ins 3. 3 28. 1 7 Carl’s Jr. 1. 9 34. 3 8 Whataburger 1. 1 6. 7 9 White Castle 1. 0 10. 1 10 Steak n Shake 0. 9 5. 7 Total Top 10 92. 0% $1, 347. 4 Total Market $42. 3 billion $1, 359. 7 Imperfect competition you face weekly Page 185

Oligopolies ü A few number of sellers ü Non-price competition between oligopolists ü Match price cuts but not price increases by fellow oligopolists ü Like monopolistic competitors, they have some ability to set market prices Pages 184 -188

Demand curve DD represents the case when all oligopolists move prices together and share the market. Page 187

Note that shifting MC curves reflecting technological advances will not affect PE and QE. It does affect profit however (MC drops from point 3 to point 4). Page 187

Examples of Oligopolists Ø Farm machinery manufacturers Ø Domestic automobile industry Ø Domestic airline industry Ø Pesticide and fertilizer industry Products sold are largely identified or differentiated by company brand or name.

Monopolies ü Only seller in the market ü Entry of other firms is restricted by patents, etc. ü They have absolute power over setting market price ü They produce a unique product ü They can make economic profits in the long run because they can set price without competition. Page 188 -191

Total revenue is equal to the area 0 PECQE, which forms the blue box to the left… Notice the monopoly, like the previous forms of imperfect competition, produces where MC=MR (point A), but then reads up to the demand curve (point C) when setting price PE. Page 189

Total variable costs for the monopolist is equal to area 0 NAQE, or the yellow box to the left. Page 189

Total fixed costs for the monopolist is equal to area NMBA, or the green box to the left… Page 189

Total cost is therefore equal to area 0 MBQE, or the green box plus the yellow box to the left Page 189

Finally, the economic profit earned by the monopolist is equal to area MPECB, or total revenue (blue box) minus total costs (green box plus yellow box). Page 189

Let’s compare a monopoly with perfect competition from an economic welfare perspective Page 191

Perfect Competition Case Consumer surplus under perfect competition is equal to the sum of areas 1, 4, 5, 8 and 9, or the blue triangle to the left Page 191

Perfect Competition Case Producer surplus under perfect competition is equal to the sum of areas 2, 3, 6 and 7, or the green triangle to the left Page 191

Perfect Competition Case Total economic surplus under perfect competition is therefore equal to the blue and green triangles to the left, or the sum of areas 1 through 9. Page 191

Monopoly Case The monopolist producers where MC=MR, but sells at a price PM which consumers are willing to pay. Page 191

Monopoly Case Consumers would be economically worse-off by areas 1, 4 and 5 under a monopoly. They are paying a higher price PM for a smaller quantity QM. Page 191

Monopoly Case Producer surplus under A monopoly is equal to the sum of areas 3, 4, 5, 6 and 7, or the green area to the left. Thus, producers lose area 2 but gain areas 4+5, making them economically better-off than perfect competitors Page 191

Monopoly Case Finally, society as a whole would be economically worse-off by areas 1+2. This is called a dead weight loss. This reflects the fact that less of the economy’s available resources in this market are being used to provide products to consumers…. Page 191

Summary of imperfect competitors from a selling perspective Page 190

Summary ü Unlike perfect competition, imperfect competitors have ability to influence price. ü Monopolistic competitors try to differentiate their product. ü Monopolists are the only seller in their product market. Monopsonists are the only buyer. ü Oligopolies are a few number of sellers while oligopsonies are a few number of buyers. ü Know the economic welfare implications of imperfect competition.

Chapter 10 focuses resource use in agriculture and the environment….