Industrial Organization AG BM 102. Introduction Willard’s Mistake Competitive Environment Relevant...
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Transcript of Industrial Organization AG BM 102. Introduction Willard’s Mistake Competitive Environment Relevant...
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Industrial Organization
AG BM 102
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Introduction
• Willard’s Mistake
• Competitive Environment
• Relevant Market
• Market power
• Market structure – Market Conduct-Market performance
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Market Structure – those characteristics of the market that significantly affect the behavior and interaction of buyers and sellers
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Tyson22%
Sanderson's6%
Pilgrim's Pride19%
Perdue7%
Rest46%
Share of Chicken Market, 2011
Source: Watt Poultry, USA
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Tyson21%
Cargill22%
Swift21%
National Beef10%
Other26%
Share of Beef Market, 2010
Source: Cattle Buyers Weekly
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Tyson17%
Smithfield28%
Swift11%
Cargill9%
Hormel8%
Other27%
Share of Pork Market, 2009
Source: National Pork Board
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Market Conduct – a firm’s policies toward its market and toward the moves made by its rivals in that market
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Market Performance – how well does an industry do what society might reasonably expect it to do
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Market – a collection of firms, each of which is supplying products that have some degree of substitutability, to the same potential buyers
• Common buyers for sellers
• Common sellers for buyers
• Relatively homogeneous product
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Industry- sellers of a particular product or closely competing products
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Relevant market – the portion of the total market that a participant views as including his or her direct competitors and customers (or suppliers)
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Some market models
• Pure competition
• Monopoly – a single seller
• Monopsony – a single buyer
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Marginal RevenueThe change in total revenue from expanding sales by one
more unit
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Marginal revenue
Quantity Price Total Revenue
Marginal Revenue
1 11 11
9
2 10 20
7
3 9 27
5
4 8 32
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Calculating Marginal Revenue
Q = 12 - P
TR = PQ
P = 12 - Q
TR = (12 - Q) Q = 12Q - Q2
MR = D(TR)/D(Q) = 12 - 2Q
MC = MR
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Calculating Marginal Revenue
• Solve the demand function for P
• P = 12 –Q
• Take the coefficient of Q and double it
• MR = 12 – 2Q
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Monopoly
Quantity Demand
Price
Marginal
Revenue
Marginal
Cost
1 11 10 1
2 10 8 2
3 9 6 3
4 8 4 4
5 7 2 5
6 6 0 6
7 5 -2 7
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For Monopoly, find where MC =MR
and then go up to the price on the demand curve
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Marginal Factor CostThe change in total factor cost from buying one additional unit
of an input
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Marginal Factor Cost
Quantity Price Total Expenditure
Marginal
Expenditure
1 1 1
3
2 2 4
5
3 3 9
7
4 4 16
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Calculating Marginal Factor Cost
P = Q
TC = PQ = Q2
MFC = D(TC)/D(Q) = 2Q
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Calculating Marginal Factor Cost
• Solve the Supply curve for P
• P = Q
• Double the coefficient of Q
• MFC = 2Q
• Ordinarily the line doesn’t run through the origin
• The process is the same – solve for P – double the coefficient of Q
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Monopsony
Quantity Supply Price Marginal
Factor Cost
Marginal Value Product
1 1 2 11
2 2 4 10
3 3 6 9
4 4 8 8
5 5 10 7
6 6 12 6
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For Monopsony, find where MFC =MVP
and then go down to the price on the supply curve
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Concluding Comments
• Where does a 500 pound gorilla sit?
• Market power is important
• Understanding it helps you understand market behavior