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Managerial Economics and Organizational Architecture, Chapter 6
Market structure
Managerial Economics and Organizational Architecture, Chapter 6
Market structureobjectives
Students should be able to
• Differentiate among the four archetypal market structures
• Distinguish between price takers and price searchers
Managerial Economics and Organizational Architecture, Chapter 6
Market structure
• What is a market?– All firms and individuals willing and able to
buy or sell a particular product
• What is market structure?– Defined by attributes of the market
environment
Managerial Economics and Organizational Architecture, Chapter 6
Market structure
• Perfect competition • Monopoly • Monopolistic competition • Oligopoly
Managerial Economics and Organizational Architecture, Chapter 6
Perfect competitioncharacteristics
• Many buyers and sellers
• Product homogeneity
• Low cost and accurate information
• Free entry and exit
Managerial Economics and Organizational Architecture, Chapter 6
Firm demand curveperfect competition
Managerial Economics and Organizational Architecture, Chapter 6
Firm supply
• Short run
• Long run
Managerial Economics and Organizational Architecture, Chapter 6
The firm’s short-run supply curve
Managerial Economics and Organizational Architecture, Chapter 6
The firm’s long-run supply curve
Managerial Economics and Organizational Architecture, Chapter 6
Competitive equilibrium
Managerial Economics and Organizational Architecture, Chapter 6
Barriers to entry
Incumbent reactions• Specific assets• Economies of scale• Excess capacity• Reputation effects
Incumbent advantages• Precommitment
contracts• Licenses and patents• Learning-curve effects• Pioneering brand
advantages
Managerial Economics and Organizational Architecture, Chapter 6
Monopoly
• Strong barriers to entry single supplier
• Profit maximization– faces market demand and sets MR=MC
• Unexploited gains from trade
Managerial Economics and Organizational Architecture, Chapter 6
Monopolist faces market demand
Managerial Economics and Organizational Architecture, Chapter 6
Monopolistic competition
• Multiple firms produce similar products
• Firms face downsloping demand curves
• Profit maximization occurs where MC=MR
• In the limit, firms compete away economic profits
Managerial Economics and Organizational Architecture, Chapter 6
Monopolistic competitor in the long run
Managerial Economics and Organizational Architecture, Chapter 6
Oligopoly
• A few firms produce most market output
• Products may or may not be differentiated
• Effective entry barriers protect firm profitability
• Firm interdependence requires strategic thinking
Managerial Economics and Organizational Architecture, Chapter 6
The Nash equilibrium
• An oligopolist does the best it can, given expectations of rival behavior
• Behaviors are noncooperative
• Duopolists considering a low price or a high price must consider rival’s response
• Nash equilibrium occurs when each firm does the best it can given rival’s actions
Managerial Economics and Organizational Architecture, Chapter 6
Determining the Nash equilibrium
Managerial Economics and Organizational Architecture, Chapter 6
The Cournot model• Duopolists A and B face industry demand
P=100-Q, Q=QA+QB
• Each firm takes the other’s output as fixed
E.g., PA=(100-QB*)-QA
• Marginal revenue for A is
MRA=(100-QB*)-2QA
• If MC=0, profit is maximized if
QA=50-.5QB, which is reaction function
Managerial Economics and Organizational Architecture, Chapter 6
Cournot equilibrium
Managerial Economics and Organizational Architecture, Chapter 6
Comparison of prices and outputamong different equilibria
Managerial Economics and Organizational Architecture, Chapter 6
The classic prisoners’ dilemma
Managerial Economics and Organizational Architecture, Chapter 6
The cartel’s dilemma