Market structure

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Market structure
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Market structureobjectives

• Students should be able to
• Differentiate among the four archetypal market
  structures
• Distinguish between price takers and price
  searchers

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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

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Market structure

• Perfect competition ? ?
• Monopoly ? ?
• Monopolistic competition ? ?
• Oligopoly ? ?

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Perfect competitioncharacteristics

• Many buyers and sellers
• Product homogeneity
• Low cost and accurate information
• Free entry and exit

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Firm demand curveperfect competition
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Firm supply

• Short run
• Long run

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The firms short-run supply curve
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The firms long-run supply curve
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Competitive equilibrium
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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

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Monopoly

• Strong barriers to entry ? single supplier
• Profit maximization
• faces market demand and sets MRMC
• Unexploited gains from trade

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Monopolist faces market demand
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Monopolistic competition

• Multiple firms produce similar products
• Firms face downsloping demand curves
• Profit maximization occurs where MCMR
• In the limit, firms compete away economic profits

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Monopolistic competitor in the long run
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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

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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 rivals response
• Nash equilibrium occurs when each firm does the
  best it can given rivals actions

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Determining the Nash equilibrium
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The Cournot model

• Duopolists A and B face industry demand
• P100-Q, QQAQB
• Each firm takes the others output as fixed
• E.g., PA(100-QB)-QA
• Marginal revenue for A is
• MRA(100-QB)-2QA
• If MC0, profit is maximized if
• QA50-.5QB, which is reaction function

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Cournot equilibrium
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Comparison of prices and outputamong different
equilibria
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The classic prisoners dilemma
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The cartels dilemma