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Lecture notes, lecture - market structure

Economics for Business (University of Technology, Sydney)

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Perfect Competition

No single buyer or seller is able to influence

market price, because:
o
Many, mobile, buyers
o
Many sellers

Product is standardised

No room for non-price competition

Monopolistic Competition

Price differences are minimal because

competition is mainly non-price
o
Many buyers
o
Many sellers

Differentiated Products

High degree of non-price competition

Barriers to
Entry

No Barriers to Entry

No Barriers to Entry

Normal
Profit in the
Long Run

None
This is because no barriers to entry allow other
firms to enter when economic profit occurs,
increasing industry supply, thus reducing market
price and eroding economic profits
The converse (economic losses) is also true

None

Assumptions
/ Definition

Oligopoly

Each firm can influence the market price

o
Limited sellers
o
Limited enough that reaction to price
changes are predictable
o
High concentration ratios

Product is either homogenous or differentiated

o
Substitutable, but not perfect substitutes

High non-price competition

High Barriers to entry based on:

o
Legal barriers

Patents

Government licences

Public franchise
o
Natural barriers

Economies of scale/scope

Control of raw materials

Requisite start-up costs/capital

Sunk costs
o
Strategic behaviour of market participants

Other market participants are

willing to reduce profits or even
go into losses in order to drive
new entrants out of business

Small

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Monopoly

Full control over market price

1 seller

As in oligopoly
o
Legal barriers
o
Natural barriers
o
Strategic behaviour of other market
participants

Unless barriers to entry erode, they can be

quite large

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Perfect Competition

Demand for the industry is down sloping, as,

when cheaper, the product is more attractive

Monopolistic Competition

Demand for the firm is down sloping as

products are differentiated

Industry Demand in
Perfect Competition

Oligopoly

The model for demand in an Oligopoly is slightly more

complex: the kinked demand curve

Monopoly

Demand for the firm is down sloping as product

is unique

Demand in Monopolistic
Competition

Demand in an Oligopoly

Demand in a Monopoly

Price

Price

Price

Price

P1

De
ma

em

nd

Price elastic

an

an

em

Price inelastic

Quantity

Quantity

Demand for an individual firm is perfectly price

elastic, since products are perfectly substitutable,
if the firm raises Price above the market price,
Quantity will fall to zero

Firms Demand in
Perfect Competition

Price

Demand

Quantity
o
o

This model assumes an equilibrium price of

P1
When P is greater than P1 (i.e. a price rise),
it is assumed that competitors (other firms
in the industry) will not raise prices as well
(based on game theory responses). Thus,
price rises are highly price elastic, since the
consumer would be better off buying from
a firm that did not raise prices.
When P is greater than P1 (i.e. a price fall),
it is assumed that competitors will follow
the price fall, and thus, price falls are
highly inelastic, and wont increase Q sold
by much since the price differential
(against market price) will be small or null.

Demand

Quantity

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Quantity

em

an

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Perfect Competition

In perfect competition, Supply for each firm is

discontinuous, whereby if the price is lower than
the Marginal cost, greater losses occur than if the
firm is shut-down

Monopolistic Competition

Monopolistically competitive firms short run

supply curve is represented MC directly above
the intersection of MC and AVC.

Oligopoly

As monopolistic

P=AVC
Marginal
Revenue
(=AR = Price)

Market price varies

Average Variable
Cost

Price

Marginal Cost

Supply from a firm in

perfect competition

Quantity

p
Su

ply

Price

Supply

Quantity
o
o

When P lies above the MC curve,

Supply acts as normal
When P lies below the MC curve, MR
is smaller than MC, and more money
is lost if the firm is running
Thus, the supply curve is
discontinuous about the minimum AC
point.

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Monopoly

As monopolistic

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Price

g
ar

gi
ar

na

lC

lC

os

os

t2

Average Total
Cost

Marginal Cost
(= Supply)

a
in

Maximum Profit in a
Monopoly

t1

Marginal Cost
(=Supply)

Maximum Profit in an
Oligopoly

Maximum Profit in
Monopolistic Competition

Price

Average Total
Cost

Monopoly

MR=MC

Market Price

Marginal Cost

Maximum Profit in Pure

Competition

Oligopoly

MR=MC+

Price

Monopolistic Competition

MR=MC

Average Total
Cost

Perfect Competition

MR=MC (=AC)

Price

Profit
Maximisatio
n

Profit

Marginal
Revenue
(=AR = Price)

Demand
(=Average Revenue)

Demand
Marginal Revenue (=Average Revenue)

Demand
Marginal Revenue (=Average Revenue)

Marginal Revenue

As monopoly, but because of ease of entry,

Profit is non-existent and maximum
Why is marginal revenue tangential to ATC in profit
maximisation of monopoly, and demand tangential to
ATC in profit maximisation of Monopolistic
Competition?

Quantity

Quantity

Quantity

Quantity

Profit Maximisation occurs where MC = MR

When MC is in the discontinuous part of MR, price
changes but output quantity does not

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The profit maximisation quantity is set where

marginal revenue=marginal costs
The price is the point along the quantity derived
above which intersects with demand
The rectangle highlighted (the cumulative
difference between price and average total
cost) is profit
If the monopolist price discriminates, then the
profit segment would extend, like a triangle, to
the demand curve