Spectrum of Market Competition Perfect Competition Monopolistic Competition Oligopoly Monopoly Most...
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Transcript of Spectrum of Market Competition Perfect Competition Monopolistic Competition Oligopoly Monopoly Most...
Spectrum of Market Competition
Perfect Competition
Monopolistic Competition
OligopolyMonopoly
Most competitive
Least competitive
Perfect Competition
Conditions for Pure Competition
1.Many buyers and sellers2. No one buyer or seller has
the ability to influence price3. Products are homogenous
(very similar)
Conditions for Pure Competition
4. Free exit or entry (no barriers to entry)
5. Perfect knowledge6. Perfect mobility of
resources
Price Takers
Both buyers and sellers are “price takers”; both must take the market price
No one buyer or seller can change the price by not buying or producing.
Profit Maximization
The Purely Competitive firm maximizes profit where MC=MR
Monopoly
Single seller of a productProduct has no close
substitutesSingle seller is only seller
in market, so IS the market.
Barriers to Entry
Monopoly can be formed by:
Natural Barriers; distance, population, economies of scale
Barriers (cont’d)
A monopoly can also be formed by artificial barriersLegal: patents, copyright, tariffs, licenses, franchise
Illegal: predatory pricing, violence
Profit Maximization
A monopoly maximizes profit where MC=MR
A monopoly must search for the price on the AR curve
See examples on board
Consumer Surplus
The difference between what a consumer was willing to pay and the market clearing price they had to pay.
Costs of Monopoly
Price Discrimination
A monopoly can charge different customers different prices, taking away Consumer Surplus
Airplane example
Other Costs of Monopoly
Dead weight loss is the loss to consumers from the higher prices and lower production from a monopoly, in the graph
Costs: Rent Seeking“Rent seeking” is the term for
what the monopoly spends to become and stay a monopoly.
We could also include the money spent by government, or would be competitors, to fight the monopoly
X-inefficiency
This is the term given to monopoly waste; since they have no competition, the monopoly has no reason to stay “lean and mean”
3 supervisors, 2 teachers
Controlling a monopoly
Government can require “marginal cost pricing” or “average cost pricing” See board
Government could also tax or charge a licensing fee
Break up a monopoly
Create competing firms out of the monopoly: Standard Oil, Bell Telephone… Microsoft?
Monopolistic Competition
Many firms competing with products which are perceived to be different
Conditions of MONOCOMP
1. Many firms2. Differentiated product,
perceived to be different3. Easy entry to market by
competitors
Importance of Elasticity of Demand
See the board
How to get Inelastic Demand
Achieve Product differentiationPrice competitionNon price competition
AdvertisingColorsAny edge
Oligopoly
A market with only a few firmsPure Oligopoly homogenous
product with a single priceDifferentiated Oligopoly goods
are perceived to be different, so you end up with “price clusters”
Price Clusters
Autos: GM, Ford, Daimler/Chrysler compete at different price levelsChevy Ford Dodge $Pontiac Mercury Chrysler $$Cadillac Lincoln Mercedes $$$$$
Price Clusters
BeerAnheiser Busch, Coors, Miller
Busch, Keystone, Strohs $Bud, Miller, CoorsMichelob, MGD, Fat Tire
Concentration Ratios
Measure the degree of concentration in a market
A four firm concentration ratio greater than 40%, is considered an oligopoly
Examples
From page 252 in text
Beverages Tobacco Cars
Coca ColaPhilip Morris GM
45% 49% 29%
Pepsi RJR Ford
31% 24% 25%
Schweppes B&W Chrysler
14% 15% 16%
Cooperation vs. Competition
“People of the same trade seldom meet together… but the conversation ends in… some conspiracy to raise prices” Adam Smith
Types of Cooperation
Price Matching: ensures high prices, not low.
Price Leadership: all firms look to one firm (biggest) to set prices matched by others
Price Fixing: Collusive price setting, or cartel (illegal)
Game Theory
Decision Grid on board
Kinked Demand Curve
On board
Consequences of Price Fixing
1. Consent Decree, to stop illegal activity
2. Treble Damages (3X the losses)
3. Fines and jail time
Music CD agreement
Music CD agreement$480 million overcharge - $67.4 million refunds - $74.7 million in free cds to schools=$338 million in profit due to price fixing