econ

MARKET

STRUCT

URE

S

Prepared by:Abayan, Axiel Chris

Dansalan, Gladys Joycedela Torre, Childeen Nova

Ngo, Sarah MaePalacio, Dorie Jane

Plana, Debby GilsylYap, Jennifer Joyce

BSA-2DECON 222 | TTH | J205 | 4:10 - 5:40

MONOPOLY

Pure Monopoly An industry with a single firm that produces a product for which there are no close substitutes and in which significant barriers to entry prevent other firms from entering the industry to compete for profits.

Natural Monopoly An industry that realizes such large economies of scale in producing its product that single-firm production of that good or service is most efficient.

Characteristics of a Monopoly

Single seller• The firm is the industry.

Unique good with no close substitutes

Price maker• The firm can change the price by

changing the quantity it produces. High barriers to entry

• New firms cannot enter the market• No immediate competitors

Some “non-price” competition

Drawing Monopolies

MR is below DemandP

Q

$100

80

60

40D

WHY IS MR LESS THAN DEMAND?

MR IS LESS THAN PRICE

P Qd TR MR

$11 0 - -

$10 1 10 10

$9 2 18 8

$8 3 24 6

$7 4 28 4

$6 5 30 2

$5 6 30 0

$4 7 28 -2

$10

$9 $9

$8 $8 $8

$7 $7 $7

$6 $6 $6 $6

$7

$6

$5$5 $5 $5 $5 $5

$4 $4 $4 $4 $4 $4 $4

Monopolies and Efficiency

Charge a higher price Under produce

• Not allocate efficient Produce at higher costs

• No productive efficiency Have little incentive to

innovate

Monopolies are inefficient because they…

Q

INEFFICIENCY OF PURE MONOPOLYP

DMR

S = MC

Pc

Pm

QcQm

At MR=MCA monopolist will sell less

units at a higher price than in competition

D

MC

MR

Q

200

175

150

125

100

75

50

25

0 1 2 3 4 5 6 7 8 9 10

Pri

ce,

costs

, an

d r

even

ue

Are Monopolies Productively Efficient? Does Price = Min ATC?

ATC

No. They are not producing at the lowest cost (min ATC)

D

MC

MR

Q

200

175

150

125

100

75

50

25

0 1 2 3 4 5 6 7 8 9 10

Pri

ce,

cost

s, a

nd

rev

enu

eDo Monopolies Have Allocative

Efficiency? Does Price = MC?

ATC

No. Price is greater. The monopoly is under producing.

Price Discrimination Charging different prices to different buyers.

Conditions for Price Discrimination

Firm must have monopoly power

Firm must be able to segregate the market

Consumers must not be able to resell product

Types of Price Discrimination

Personal Discrimination Separate price is charged from each buyer

according to the intensity of his desire or according to the size of his pocket.

Trade Discrimination It may take place when a monopolist

charges different prices according to the uses to which the commodity is put.

Place Discrimination It occurs when a monopolist charges

different prices for the same commodity at different places.

Degree of Price Discrimination

First Degree Price Discrimination This involves charging consumers

the maximum price that they are willing to pay.

Second Degree Price Discrimination This involves charging different

prices depending upon the quantity consumed.

Third Degree Price Discrimination This involves charging different

prices to different groups of people.

Examples of Price Discrimination

Retail price discrimination

Travel industry Coupons Premium pricing Segmentation by age

group Discounts Incentives for buyers

Financial aid in education

Haggling International price

discrimination Academic pricing Dual pricing Wage discrimination

The purpose of price discrimination

is generally to capture the

market's consumer surplus.

MONOPOLISTIC COMPETITION

Monopolistic Competition A common form of market structure characterized by a large number of firms, none of which can influence market price by virtue of size alone. Some degree of market power is achieved by firms producing differentiated products. New firms can enter and established firms can exit such an industry with ease.

Characteristics of Monopolistic Competition

Relatively large number of seller

Differentiated products Some control over price Easy entry and exit Non-price competition

(advertising)

Monopolistic Competition and Efficiency

No Productive Efficiency• Minimum ATC

No allocative efficiency• Price MC

Firm has excess capacity

Role of advertising

Firms produce differentiated products Face downward sloping demand curves Build up brand loyalty Gives them some influence over price

Engage in heavy advertising to

maintain brand loyalty

Concentration ratios are measures of the total output that is produced in an industry by a given number of firms in the industry. Concentration ratios are usually used to show the extent of market control of the largest firms in the industry and to illustrate the degree to which an industry is oligopolistic.

Low concentration ratios No concentration: 0% means perfect competition or at the very least

monopolistic competition. If for example CR4=0 %, the 4 largest firm in the industry would not have any significant market share.

Total concentration: 100% means an extremely concentrated oligopoly. If for example CR1= 100%, we talk of a monopoly.

Low concentration: 0% to 50%. This category ranges from perfect competition to oligopoly.

Medium concentration: 50% to 80%. An industry in this range is likely an oligopoly.

High concentration: 80% to 100%. This category ranges from oligopoly to monopoly.

Under MC concentration ratio tends to be

low so many firms operating in the market. A price change by one will have negligible effects on the demand for rival products

Drawing Monopolistic Competition

D

MR

$4

ATCP

rice

an

d C

ost

s

Q1

Short-RunEconomic

Profits

What Happens?

PRICE AND OUTPUT INMONOPOLISTIC COMPETITION

$2

MC

Quantity

$4

$2

D

MR

ATCP

rice

an

d C

ost

s

Q1

New Firms Enter

Quantity

MC

Short-RunEconomic

Profits


D

MR

$4

ATCP

rice

an

d C

ost

s

Q1

Normal Profit

$2

MC

$1

LONG- RUN EQUILIBRIUM

Quantity

D

MR

$7

Pri

ce a

nd

Co

sts

Q1

Short-RunEconomic

Loss

What happens? MC

$1


ATC

Quantity

D

MR

MC

ATCP

rice

an

d C

ost

s

Q3

Quantity

Long-Run EquilibriumNormalProfitOnly


$7

OLIGOPOLY

Oligopoly A form of market structure characterized by a few dominant firms. Products may be homogenous or differentiated. The behavior of any one firm in an oligopoly depends to a great extent on the behavior of others.

Characteristics of Oligopoly

A few large producers Identical or differentiated

products Mutual interdependence

• Firms use strategic pricing High entry barriers

COLLUDING OLIGOPOLY

Cartel (Collusion Model) A group of firms that gets together and makes joint price and output decisions to maximize joint profits.

Cournot Model A model of duopoly in which a series of output adjustment decisions leads to a final level of output between the output that would prevail if the market were organized competitively and the output that would be set by a monopoly.

A cartel is a group of producers that create a formal agreement to fix prices high.

Cartel = Colluding Oligopoly

CARTELS AND COLLUSION

1. Cartels set price and output at an agreed upon price

2. Firms require identical or highly similar demand and costs

3. Cartel must have a way to punish cheaters

4. Together they act as a monopoly

Colluding Oligopolists WillSplit the Monopoly Profits.

D

MC

ATC

MR

EconomicProfit

MR = MC

Pri

ce a

nd

co

sts

Q0

P0

A0

CARTELS AND OTHER COLLUSION

Assumptions of Cournot Model There are just two firms in the

industry- a duopoly.

Each firm takes the output of the other as given.

Both firms maximize profits.

NON COLLUDING OLIGOPOLY

Kinked Demand Curve Model A model of oligopoly in which the demand curve facing each individual firm has a “kink” in it. The kink results from the assumption that competitor firms will follow if a single firm cuts price but will not follow if a single firm raises price.

1. Match price- If one firm cuts it’s prices, then the other firms follow suit causing inelastic demand

Kinked Demand Curve ModelNoncollusive firms are likely to react to

competitor’s pricing in two ways:

2. Ignore change- If one firm raises prices, others maintain same price causing elastic demand

D1

MR1Quantity

KINKED DEMAND THEORY:

Pri

ce

The demand and MR curves if other firms match lower pricing

If this firm lowers its price and

others follow, Qd will increase

mildly

MR2

D2

Quantity

KINKED DEMAND THEORY:

Pri

ce

The demand and MR curves if other firms ignore higher pricing

If this firm increases its price and others ignore it, Qd for this firm will decrease significantly

MR2D1

D2

MR1Quantity

Two sets of curves based on the pricing decisions of other firms

Pri

ce

The firm’s demand andmarginal revenue curves

MR2D1

D2

MR1Quantity

Pri

ce

Rivals tend tofollow a price cut


MR2D1

D2

MR1Quantity

Pri

ce

Rivals tend tofollow a price cut

or ignore aprice increase


MR2D1

D2

MR1Quantity

Effectively creatinga kinked demand curve

Pri

ce


D

Quantity

Effectively creatinga kinked demand curve

Pri

ce


MR2D1

D2

MR1Quantity

What about MR?

Pri

ce


D

MR1Quantity

Since we use sections of both MR curves, the MR has a

vertical gap. P

rice MR2


D

Quantity

Profit maximizationMR = MC occurs

at the kink.

KINKED DEMAND THEORY:NONCOLLUSIVE OLIGOPOLY

Pri

ce MR2

MR1

Kinked Demand Curve Assumption

The elasticity of demand in response to an increase in price is different from the elasticity of demand in response to a price cut.

Price Leadership Model A form of oligopoly in which one dominant firm sets prices and all the smaller firms in the industry follow its pricing policy.

Assumptions of Price Leadership Model

The industry is made up of one large firm and a number of smaller competitive firms.

The dominant firm maximizes profit subject to the constraint of market demand and subject to the behavior of the smaller and competitive firm.

The dominant firm allows allow the smaller firms to sell all they want at the price the leader has set.

Perfectly Contestable Market

A market in which entry and exit are costless.

Assumptions of Perfectly Contestable Market

Model The freedom of entry eliminates any

excess economic profits.

Inefficient enterprises cannot survive in a perfectly contestable industry because cost inefficiencies invite replacement of the existing firms by entrants that can provide the same outputs at lower cost and lower prices.

Game Theory Analyzes oligopolistic behavior as a complex series of strategic moves and reactive countermoves among rival firms. In game theory, firms are assumed to anticipate rival reactions.

Key Elements of a game

Players: Who is interacting? Strategies: What are their

options? Payoffs: What are their

incentives? Information: What do they

know? Rationality: How do they think?

Nash Equilibrium In game theory, the result of all players’ playing their best strategy given what their competitors are doing.

i.e.

Each firm has the knowledge about other firm’s strategy

Their actions are dependent on each other. (like in oligopoly)

Nash Equilibrium

example: Firm 2 (y)

Firm 1 (x)

(x, y) No price change

Price Increse

No price change 10, 10 100, -30

Price Increase -20, 30 140, 35

Here, no price changes is an equilibrium because neither firm can benefit by increasing its price if other firm does not.

Maximin Strategy In game theory, a strategy chosen to maximize the minimum gain that can be earned.

This strategy is based on the fact that sometimes it is more prudent to maximize the minimum gains achievable in a gaming situation.

Maximin Strategy

In this example, Businessman M loves selling Meat, and Businessman P loves selling potatoes. As a consequence, let's assume they have the following payoff matrix (the number before the comma is the payoff in dollars for Businessman M and the number after the comma is the payoff in dollars for Businessman P):

(x, y) Businessman P (y)

Businessman M (x)

Sells Meat Sells Potatoes

Sells Meat 150000, 80000 200000, 120000

Sells Potatoes 130000, 100000 110000, 20000

As you can see, businessman M has a dominant strategy of selling meat. Why? Because irrespective of what P sells, M comes out ahead by selling meat. If M sells potatoes, he can mor $110,000. Both these amounts are less than $150,000 (and $200,000) which M can make by selling M. However, P does not have a dominant strategy; his fortunes are tied to what M does.

Let's first consider the Nash Equilibrium for this game. If P assumes that M is rational and will maximize his profits by pursuing the dominant strategy of selling meat, P will respond by selling potatoes.

So the top right-hand quadrant is the Nash Equilibrium here; both M and P maximize their profits. M can make $200,000 and P can make $120,000.

The whole concept of Nash Equilibrium is based on the fact that both M and P behave rationally. However, can P always count on M being rational? Suppose M starts following a Guru, who convinces M that he should not only give up eating meat, but he should stop selling it as well. Even though not rational, if M starts selling potatoes; if P has the strategy of selling potatoes, it can be extremely costly for P. Why? Because M will make $110,000; where as P will make only $20,000.

Let's further assume that P lives in a nice home and makes a mortgage payment of $3000 per month. With $20,000 yearly profit, P can't pay that mortgage, and will be foreclosed. So, CAN P TAKE THE RISK OF SELLING POTATOES, IF HE IS CONSERVATIVE AND AFRAID THAT M MAY NOT BEHAVE RATIONALLY? No.

So, what does P do?

So, what does P do?

P will sell meat, for he is assured of making at least $80,000. In this scenario, P is pursuing a Maximin Strategy of maximizing the minimum gains that can be earned.

Please note that even though it is not a profit-maximizing strategy, the Maximin strategy ensures that P will not be on the streets!

Prisoners’ Dilemma A game in which the players are prevented from cooperating and in which each has a dominant strategy that leaves them both worse off than if they could cooperate.

Prisoner’s Dilemma

Situation

There are two prisoners whose aim is to minimize the years of imprisonment. They have committed a crime jointly.

Each prisoner is interviewed separately and there are not any contacts whatsoever between them.

They decide individually to confess or deny the crime taking into account possible decisions of the other prisoner (strategic game).

Each prisoner chooses his dominant strategy, that is the behavior giving the best result regardless of the decision of the other prisoner.

Two prisoners are interrogated separately, they have no idea whether the other prisoner will confess or not.

Dominant Strategy In game theory, a strategy that is best no matter what the opposition does.

One firm will be in dominant position in terms of changes in strategy.

Dominant Strategy(x, y)

Student 2 (y)

Student 1 (x)STRATEGY Study Don’t Study

Study A, A B, D

Don’t Study D, B F, F If student 1 goes first and chooses to study, student 2 will also choose to study. This gives student 2 an A rather than the D they would have received if they did not study.

If student 1 chooses to not study, student 2 will choose to study so they get a B instead of an F. Student 2 obviously has a dominant strategy - to study.

If this game is played again with student 2 leading, student 1 would also have the dominant strategy of studying.

This dominant strategy also marks this game's Nash equilibrium, or the "set of strategies in which no player can improve her payoff by unilaterally changing her own strategy, given the other players' strategies" (Baye, 357).

http://www.slideshare.net/sarir19/game-theory-presentation-presentation

http://www.authorstream.com/Presentation/Darshak89-264364-game-theory-economics-eco-mix-straregy-strategy-competition-education-ppt-powerpoint/

http://mba651fall2007.wikispaces.com/dominant+strategy

http://www.franteractive.net/maximin.html











econ

Education

Transcript of econ