Market Structure

A COMPARISON OF PERFECT COMPETITION, MONOPOLISTIC COMPETITION, MONOPOLY, & OLIGOPOLY

Type of Market

Perfect Competition

Monopolistic Competition

Monopoly

oligopoly

Features one

few

No. Of Sellers No. Of Buyers No. of Firms Type of Product

many

many

Many

Many

many

several

one

few

Identical,

-----

Homogeneous

Differentiated (similar but not identical products)

identical or differentiated

Type of  Output

homogeneous

heterogeneous

not applicable (but  consider substitutes  in related markets)

homogeneous or  heterogeneous

Pure monopoly Single seller

Unique

Entry And Exit

Easy and free

Easy and free

Entry barriers

Entry barriers None or limited entry

Blocked entry

often there are some  barriers to entry ­  usually strategically  created Knowledge Mobility of Factors of Production Transport Cost Decision Making Close Substitute

Perfect Perfect

Monopoly Power Cross Elasticity

No

Price Demand

Equal to MC

Imperfect

Absence Independent Yes (so spend lot on selling cost which includes advertising and other sales promotional activities Yes

No

No

0 or -

Horizontal

Equilibrium Price Greater than MC Greater than MC Highly, but not is the market

Greater than MC Indeterminate(b

downward-

Curve or Average Revenue Curve

Or Perfectly Elastic

perfectly, elastic. less elastic than a pure competitor, and more elastic than a pure monopolist.

demand curve. It is inelastic.

cos when one firm reduces price other firms also cut their prices

negatively sloping demand curve

Sellers Demand curve being less than perfectly elastic Supply Curve

Industry Demand Curve Firm’s demand

Slopes Upward (Producers will offer to sell a larger quantity at higher price than at lower price Slopes Downward

price taker – horizontal

no notion of supply  CURVE

price maker downward

does not exist

Downward sloping (Bcos firm and industry are same) price maker – downward

price maker downward

sloping product demand curve

curve/Avera straight Line ge Revenue (AR)curve horizontal and the same as the MR curve

Price and Output

Lower price and higher output than monopoly

sloping

sloping

slopes down to the right lies to the left of the market demand curve

slopes down to the right.

Price is higher and output lower

Hiher price and lower output than Perfect Competition MC=MR<(Less than)AR or price

Equilibrium MC=MR=AR or Price Price Aggregate Demand=Aggregat e Supply SR Profit

pos., neg., or zero

LR Profit

zero

sloping

It has a steeper DC than the monopolistically competitive firm

MC cuts MR from below pos.(Supernorma l), neg.(Loss), or zero (normal) Zero (Normal)

pos., neg., or zero

pos., neg., or zero

pos. or

+ or 0 with Cournot 0 with Bertrand

zero

+ or 0 with  Chamberlin Price Determination

Market  Demand  Curve

downward sloping

don’t really draw one

firm is same as  market Therefore, it is

downward sloping

inelastic. negatively sloping demand curve

Complete control  over the entire supply Seller

Price Taker

Supply Curve

Not a Price maker Perfectly inelastic

SR Profit

pos., neg., or zero

Supply Curve

Elastic

In Market period or Very short Period Price Maker

In short Run pos.(Supernorma pos., neg., or l or abnormal), zero neg.(Loss), or zero (normal)

pos., neg., or zero

Price determined by

Supply curve is less steep than the market period supply curve Industry Firm no price policy rather accepts price determined by industry AVC

Whether to produce or not decided by Firms MR=MC and Equilibrium MC cuts MR from below Maximum MC intersects Profit MR from below Point Supernormal AR(Price) above Profit AC Normal AR(Price) is Profit expected to cover AC Loss AR is less than AVC

MR=MC

MR=SMC(short run Marginal cost)

AR(Price) is above AC

AR>AC- Price above AC AR=AC

AR(Price) is less than AC

AR
In Long Run

LR Profit

zero

Firm MR=MC Equilibrium MR=AR/Price(for competitive firms

Zero (Normal)

pos. or

zero

+ or 0 with Cournot 0 with Bertrand + or 0 with  Chamberlin

MC=MR and AC=AR

Price= MC Price=MC=Min LAC(Long run Average cost) Supernormal No(bcos new Profit firms enter the industry) normal Profit Loss

MR Curve

Price= to the min LRAC(Long run Average cost) No(bcos firms leave the industry At all levels of O/T

No(bcos no restriction to entry and exit of new firms)

Yes (bcos new firsm cannot entry the industry)

No(bcos if incur loss, firms leave industry) MR curve is twice as steep

Misc MR is lower (less)than

lies below DC

1.MR=AR 2.MR is less than AR 3. MR lies below AR curve

as the demand curve (if the demand curve is a straight line) MR lies below DC curve

ATC Curve 0 tangent to DC Profits at min of ATC

tangent to DC O/T lower than O/T min of ATC

Price control

Firm’s demand curve/Avera ge Revenue (AR)curve

price taker – horizontal straight Line

price maker downward sloping

horizontal and the same as the MR curve

slopes down to the right lies to the left of the market demand curve

Price (or AR) MR cuts MC at a lower point MR curve is twice as steep as the demand curve (if the demand curve is a straight line) tangent to DC O/T lower than O/T min of ATC 1.Price higer than competitive price FIRMS price maker – downward sloping slopes down to the right. It has a steeper DC than the monopolistically

price maker downward sloping

competitive firm Firms

Firm + Profits

Firm – Profits (losses) Firm 0 Profits (breaking even

MC curve must intersect the ATC at the minimum of the ATC curve ATC curve must lie at least partially below the demand curve ATC curve must lie entirely above the demand curve ATC curve must be tangent to the demand curve at the minimum of the ATC curve

Same as Perfect Competition

Same as Perfect Competition

Same as Perfect Competition

Same

Same

Same

Same

Same

Same

ATC curve is tangent to the demand curve at an output level that is lower than the output at the minimum of the ATC curve. The tangency must be directly above the intersection of

ATC curve is tangent to the demand curve at an output level that is lower than the output at the minimum of the ATC curve. The tangency must be directly above the intersection of

ATC curve is tangent to the demand curve at the kink in the demand curve. This occurs at an output level that is lower than the output at the minimum of the ATC curve. The tangency must

the MR and MC curves

the MR and MC curves

be directly above the intersection of the MR and MC curves

Conduct Behavioral  assumption  and  implication

profit maximizing firms MR=MC at x

profit maximizing firms MR=MC at x

profit maximizing firms MR=MC at x

profit maximizing firms MR=MC at x

PERFORMANCE Allocative efficiency

Yes

No

(NSS  maximized?)

P = MC

P rel="nofollow"> MC

Productive efficiency (firm at min of lratc?)

no

yes with Bertrand

price =marginal cost (where the right amount of resources are allocated to the product) Yes

No

P = minimum ATC

Price = min ATC(average total cost), where

no with Cournot

no with Chamberlin

probably not but perhaps

not realized bcos price will exceed marginal cost probably not but perhaps not realized bcos price will exceed marginal

production occurs using the least-cost combination of resources)

cost

P > minimum ATC (productive inefficiency)

Price vs. MC

p=mc at x (profit max)

p>mc at x (profit max)

p>mc at x (profit max)

p>mc at x – Cournot p=mc at x – Bertrand p>mc x Chamberlin

maximize profit where

information Economies of Large scale Production Optimum Firm

MR = MC but MC
full and symmetric

full and symmetric Does not enjoy full advantage of this No

full and symmetric

full and symmetric may exist due to technology and market share

Capacity

Monopolistic competitors have excess capacity; meaning that fewer firms operating at capacity (where P = minimum ATC) could supply the industry output.

Greatest market  power remember to  keep in mind game  COMMENTS remember to think of  hard to decide on  both the market and  definition of  consider dead weight  theory and cartels firm when doing  market/product  loss from the  group, so really only  monopolist’s  analysis in perfect  look at the firm  behavior comp. picture Market power

Purely Competition (competitive)

Imperfect competitive

Nondiscriminating monopolist

discriminating monopolist

Features No. Of Sellers

Many

No. Of Buyers

Many

is less than price beyond the first unit of output

No. of firms Type of Product Entry and Exit Knowledge Mobility of Factors of Production Transport Cost Example Decision Making Monopoly power marginal revenue Inelastic region, Demand Curve

one Homogenous (Identical)

Differentiated(not perfect substitutes)

barriers to entry

Free Incomplete Imperfect Present Agricultural Industry Independent No marginal revenue is negative and total revenue is falling

Demand Curve

Perfectly Elastic

not horizontal

Are identical to the demand curves for their industries. Are downward sloping. Are also their average revenue curves. Fall more slowly than do their marginal revenue curves.

firm’s demand market demand Supply Curve Productive efficiency Allocative Efficiency

obtained when P = min ATC obtained when P = MC

Knowledge

Sufficient

price is greater than marginal cost

price maker ­  downward sloping firm is same as market no notion of supply  CURVE yes probably not but  perhaps

information

full and symmetric

type of output

Behavioral  assumption and  implication

not applicable (but  consider  substitutes in  related markets) profit maximizing  firms  mr = mc at x

short­run profit

could be +/0/­

long­run profit

+ or 0

P vs MC

p=mc at x

Features  Comment

each unit is sold at its  demand price, so the  entire area of NSS  goes to the monopolist  as PS and CS=0!

*DC-Demand Curve *O/T –Output *P-Price (Average Revenue) *Normal Profits(Zero Profits) PERFECT COMPETITION, MONOPOLY, MONOPOLISTIC COMPETITION, AND OLIGOPOLY: GRAPHING TIPS

(1)

For all firms, the MC curve must intersect the ATC at the minimum of the ATC curve.

(2) When a firm is making positive profits, the ATC curve must lie at least partially below the demand curve. (3) When a firm is making negative profits (losses), the ATC curve must lie entirely above the demand curve. (4) When a firm is making zero profits (breaking even), the ATC curve must be tangent to the demand curve. (5) For perfect competition, the firm’s demand curve must be horizontal and the same as the MR curve. (6) For monopolistic and monopolistically competitive firms, the firm’s demand curve slopes down to the right. Theoretically, the monopolistic firm has a steeper demand curve than the monopolis-tically competitive firm. For both the monopolistic and monopolistically competitive firms, the MR curve is twice as steep as the demand curve (if the demand curve is a straight line). (7) When a perfectly competitive firm is making zero profits, the ATC curve is tangent to the demand curve at the minimum of the ATC curve. (8) When the monopolistic or monopolistically competitive firm is making zero profits, the ATC curve is tangent to the demand curve at an output level that is lower than the output at the minimum of the ATC curve. The tangency must be directly above the intersection of the MR and MC curves.

(9) When the oligopolist (in the kinked demand curve model) is making zero profits, the ATC curve is tangent to the demand curve at the kink in the demand curve. This occurs at an output level that is lower than the output at the minimum of the ATC curve. The tangency must be directly above the intersection of the MR and MC curves. (10) For the oligopolist (in the kinked demand curve model), the MC cost curve intersects the MR curve in the vertical segment of the MR curve. Each of the downward-sloping segments of the MR curve is twice as steep as the corresponding section of the demand curve (if the demand curve segments are straight lines).

Perfectly Competitive Firm making Positive Profits (SR only): P MC

ATC

P*

D = MR

ATC*

Q*

Q

Perfectly Competitive Firm making Negative Profit (SR only): P MC

ATC

ATC* P* D = MR Q*

Q

Perfectly Competitive Firm making Zero Profits (SR or LR): P MC

ATC

P*=ATC* D = MR

Q*

Q

Monopoly Firm making Positive Profits (SR or LR): P MC

ATC

P* ATC* D MR Q*

Q

Monopoly Firm making Negative Profit (SR only): P MC

ATC

ATC* P* MR

D

Q*

Q

Monopoly Firm making Zero Profits (SR or LR): P MC

ATC

P*=ATC*

MR Q*

D Q

Monopolistically Competitive Firm making Positive Profits (SR only): P MC

ATC

P* ATC*

D

MR Q*

Q

Monopolistically Competitive Firm making Negative Profit (SR only): P

MC

ATC

ATC* P* D MR Q*

Q

Monopolistically Competitive Firm making Zero Profits (SR or LR): P MC

ATC

P*=ATC*

MR

D

Q*

Q

Oligopoly Firm (Kinked Demand Curve Model) making Positive Profits (SR or LR): P MC

ATC

P* ATC*

MR Q*

D Q

Oligopoly Firm (Kinked Demand Curve Model) making Negative Profit (SR only): P ATC*

MC

ATC

P*

MR

D

Q*

Q

Oligopoly Firm (Kinked Demand Curve Model) making Zero Profits (SR or LR): P ATC MC P*=ATC*

D MR Q*

Q

Non-discriminating monopolist: P

Economic Profit MC

P1 ATC

A1

MR

Q1

D

Discriminating Monopolist:

P

Economic Profit MC

P1 ATC A2

MR

Q1

Q2

D

SOME TERMS AND DEFINITIONS term

definition

formula

price elasticity of demand

percentage change in qty demanded that results from a 1% change in product price

%∆Qd/%∆P

price elasticity of supply

percentage change in qty supplied that results from a 1% change in product price

%∆Qs/%∆P

income elasticity of demand

percentage change in qty demanded that results from a 1% change in income

%∆Qd/%∆Inc

cross elasticity of demand

percentage change in qty demanded of good X that results from a 1% change in price of product Y

%∆Qx/%∆Py

marginal utility

the addition to utility that results from consuming one more unit of a good

MU = ∆TU/∆Q

average utility

the utility per unit of a

AU = TU/Q

marginal revenue

the addition to revenue that results from producing one more unit of a good

MR = ∆TR/∆Q

notes after Q - before Q %∆Qd = ----------------average Q (similarly for %∆P)

good If a firm is perf comp in product mkt, MR = price of product

term

definition

formula

notes

marginal cost

the addition to cost that results from producing one more unit of a good

MC = ∆TC/∆Q

average fixed cost

the fixed cost per unit of a good

AFC = TFC/Q

average variable cost

the variable cost per unit of a good

AVC = TVC/Q

average total cost

the total cost per unit of a good

ATC = TC/Q

four-firm concentration ratio

the sum of the shares of the CR = s1+s2+s3+s4 4 largest firms in the industry

Herfindahl index

the sum of the squares of the shares of all firms in the industry

H = s12+s22+...+sn2

marginal physical product

the additional output that results from hiring one more unit of an input

MPP = ∆Q/∆L

marginal revenue product

the additional revenue that results from hiring one more unit of an input

MRP=∆TR/∆L=(MR)(MPP)

ATC = AFC + AVC

monopoly H=10,000

term

definition

formula

marginal resource cost

the additional cost that results from hiring one more unit of an input

MRC = ∆TC/∆L

value of the marginal product

the additional output from hiring one more unit of an input multiplied by the price of the output

VMP = (P)(MPP)

real interest rate

rate of interest adjusted for inflation

real i = money i minus infl rate

present value (one time period)

current value of income received in the future

PV = Rt/(1+i)t

notes

If firm is perf comp in product mkt, MRP = VMP

present value current value of income (multi-time period) received in the future

PV = R1/(1+i)1+ R2/(1+i)2+...+ Rn/(1+i)n

balance of trade on goods & serv. imports

Exports - Imports

excess of exports over imports

trade deficit means more than exports

Name of the Person Prof. Marshall

Sweezy Paul Sweezy,R,L Hall,C J Hitch Herbert A. Simon Prof Leontief Baumol Marris

Theories Theory Hold that supply conditions vary with regard to the length of the period. He distinguished 3 periods to analyse price determination 1. Market Period or very short run 2. Short Run 3. Long run Kinky Demand curve Empirical findings brought 2 striking features of oligopoly industry 1. Price rigidity 2. Price Leadership 2 cocepts of administrative Model 1. Bounded rationality 2. satisfying Input Output Analysis (Forecasting)

Williansom

Model Model Trade Model

of Sales Maximization of Managerial Enterprise off between growth and profit of Managerial Discussion

A. A. Cournot.

The economist who first specified the MR = MC rule for profit maximization