market structure.ppt
TRANSCRIPT
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 1
Managerial Economics in a Global Economy, 5th Edition
byDominick Salvatore
Chapter 8
Market Structure: Perfect Competition, Monopoly,
Monopolistic Competition and Oligopoly
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2
Market Structure
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
Mor
e C
ompe
titiv
eLess C
ompetitive
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3
Perfect Competition
• Many buyers and sellers
• Buyers and sellers are price takers
• Product is homogeneous
• Perfect mobility of resources
• Economic agents have perfect knowledge
• Example: Stock Market
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 4
Monopolistic Competition
• Many sellers and buyers
• Differentiated product
• Perfect mobility of resources
• Example: Fast-food outlets
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 5
Oligopoly
• Few sellers and many buyers
• Product may be homogeneous or differentiated
• Barriers to resource mobility
• Example: Automobile manufacturers
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6
Monopoly
• Single seller and many buyers
• No close substitutes for product
• Significant barriers to resource mobility– Control of an essential input– Patents or copyrights– Economies of scale: Natural monopoly– Government franchise: Post office
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 7
Perfect Competition:Price Determination
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 8
Perfect Competition:Price Determination
625 5QD P 175 5QS P QD QS
625 5 175 5P P
450 10P
$45P
625 5 625 5(45) 400QD P
175 5 175 5(45) 400QS P
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 9
Perfect Competition:Short-Run Equilibrium
Firm’s Demand Curve = Market Price
= Marginal Revenue
Firm’s Supply Curve = Marginal Cost
where Marginal Cost > Average Variable Cost
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 10
Perfect Competition:Short-Run Equilibrium
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 11
Perfect Competition:Long-Run Equilibrium
Price = Marginal Cost = Average Total Cost
Quantity is set by the firm so that short-run:
At the same quantity, long-run:
Price = Marginal Cost = Average Cost
Economic Profit = 0
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 12
Perfect Competition:Long-Run Equilibrium
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 13
Competition in theGlobal Economy
Domestic Supply
Domestic Demand
World Supply
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 14
Competition in theGlobal Economy
• Foreign Exchange Rate– Price of a foreign currency in terms of the
domestic currency
• Depreciation of the Domestic Currency– Increase in the price of a foreign currency
relative to the domestic currency
• Appreciation of the Domestic Currency– Decrease in the price of a foreign currency
relative to the domestic currency
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 15
Competition in theGlobal Economy
Demand for Euros
Supply of Euros
R = Exchange Rate = Dollar Price of Euros/€
€
€
€
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 16
Monopoly
• Single seller that produces a product with no close substitutes
• Sources of Monopoly– Control of an essential input to a product– Patents or copyrights– Economies of scale: Natural monopoly– Government franchise: Post office
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 17
MonopolyShort-Run Equilibrium
• Demand curve for the firm is the market demand curve
• Firm produces a quantity (Q*) where marginal revenue (MR) is equal to marginal cost (MR)
• Exception: Q* = 0 if average variable cost (AVC) is above the demand curve at all levels of output
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 18
MonopolyShort-Run Equilibrium
Q* = 500
P* = $11
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 19
MonopolyLong-Run Equilibrium
Q* = 700
P* = $9
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 20
Social Cost of Monopoly
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 21
Monopolistic Competition
• Many sellers of differentiated (similar but not identical) products
• Limited monopoly power
• Downward-sloping demand curve
• Increase in market share by competitors causes decrease in demand for the firm’s product
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 22
Monopolistic CompetitionShort-Run Equilibrium
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 23
Monopolistic CompetitionLong-Run Equilibrium
Profit = 0
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Monopolistic CompetitionLong-Run Equilibrium
Cost without selling expenses
Cost with selling expenses
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 25
Oligopoly
• Few sellers of a product
• Nonprice competition
• Barriers to entry
• Duopoly - Two sellers
• Pure oligopoly - Homogeneous product
• Differentiated oligopoly - Differentiated product
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 26
Sources of Oligopoly
• Economies of scale
• Large capital investment required
• Patented production processes
• Brand loyalty
• Control of a raw material or resource
• Government franchise
• Limit pricing
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 27
Measures of Oligopoly• Concentration Ratios
– 4, 8, or 12 largest firms in an industry
• Herfindahl Index (H)– H = Sum of the squared market shares of
all firms in an industry
• Theory of Contestable Markets– If entry is absolutely free and exit is entirely
costless then firms will operate as if they are perfectly competitive
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 28
Kinked Demand Curve Model• Proposed by Paul Sweezy
• If an oligopolist raises price, other firms will not follow, so demand will be elastic
• If an oligopolist lowers price, other firms will follow, so demand will be inelastic
• Implication is that demand curve will be kinked, MR will have a discontinuity, and oligopolists will not change price when marginal cost changes
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 29
Kinked Demand Curve Model
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 30
Cartels• Collusion
– Cooperation among firms to restrict competition in order to increase profits
• Market-Sharing Cartel– Collusion to divide up markets
• Centralized Cartel– Formal agreement among member firms to
set a monopoly price and restrict output– Incentive to cheat
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 31
Centralized Cartel
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 32
Price Leadership
• Implicit Collusion
• Price Leader (Barometric Firm)– Largest, dominant, or lowest cost firm in
the industry– Demand curve is defined as the market
demand curve less supply by the followers
• Followers– Take market price as given and behave as
perfect competitors
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 33
Price Leadership
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 34
Efficiency of Oligopoly• Price is usually greater than long-run
average cost (LAC)
• Quantity produced usually does correspond to minimum LAC
• Price is usually greater than long-run marginal cost (LMC)
• When a differentiated product is produced, too much may be spent on advertising and model changes
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 35
Sales Maximization Model• Proposed by William Baumol
• Managers seek to maximize sales, after ensuring that an adequate rate of return has been earned, rather than to maximize profits
• Sales (or total revenue, TR) will be at a maximum when the firm produces a quantity that sets marginal revenue equal to zero (MR = 0)
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 36
Sales Maximization Model
MR = 0 whereQ = 50
MR = MC whereQ = 40
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Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 37
Global Oligopolists
• Impetus toward globalization– Advances in telecommunications and
transportation– Globalization of tastes– Reduction of barriers to international trade