Managerial economics and organizational architecture 5e ch006

Managerial Economics and Organizational Architecture, 5eChapter 6: Market Structure Copyright © 2009 by The McGraw-Hill Companies, Inc.. • All firms and individuals willing and able to

Managerial Economics and Organizational Architecture, 5e

Chapter 6:

Market Structure

Copyright © 2009 by The McGraw-Hill Companies, Inc All Rights Reserved McGraw-Hill/Irwin

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

6-2

Perfect Competition

Characteristics

• Many buyers and sellers

• Product homogeneity

• Low cost and accurate information

• Free entry and exit

• Best regarded as a benchmark

6-4

Firm Demand Curve Perfect Competition

– Long-run marginal cost curve

above long-run average cost

6-6

The Firm’s Short-Run Supply Curve

The Firm’s Long-Run Supply Curve

• Licenses and patents

• Learning-curve effects

• Pioneering brand advantages

6-10

• Single seller in an industry

• Strong barriers to entry

• Profit maximization

– faces market demand and sets MR=MC

• Unexploited gains from trade

6-11

Monopolist Faces Market Demand

6-12

Monopolistic Competition

• Multiple firms produce similar products

• Firms face downward sloping demand

curves

• Profit maximization occurs where MC=MR

• With free entry and exit, firms compete away economic profits

• Examples – toothpaste, shampoo,

• A few firms produce most market output

• Products may or may not be differentiated

• Effective entry barriers protect firm

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 rival’s response

• Nash equilibrium occurs when each firm

does the best it can given rival’s actions

6-16

Determining the Nash Equilibrium

High

Price

High Price

TuInc

WonCo

6-17

The Cournot Model

• Duopolists A and B face industry demand

Cournot Equilibrium

Quantity of output by Firm A

Firm A’s reaction curve

6-19

Among Different Equilibria

MC = 0 0

33.34 50 100

Quantity

Collusio n

The Classic Prisoners’ Dilemma

• Occur when firms agree to set price and

output levels

• Generally illegal in the U.S

• Self interest results in failure of the cartel

• Repeated interaction increase the

incentives to cooperate

6-22

The Cartel’s Dilemma