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Market Structure By Group #1: Silvia Luque Kyoungoung Min Jasung Park Charlie Li Qian Samantha Rodriguez.

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Presentation on theme: "Market Structure By Group #1: Silvia Luque Kyoungoung Min Jasung Park Charlie Li Qian Samantha Rodriguez."— Presentation transcript:

1 Market Structure By Group #1: Silvia Luque Kyoungoung Min Jasung Park Charlie Li Qian Samantha Rodriguez

2 Five Types of Market Structure Perfect Competition Monopolistic Competition OligopolyOligopsonyMonopoly

3 Perfect Competition Economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices.

4 Description of Perfect Competition Efficient outcome Foundation of the theory of supply and demand Market equilibrium Resources and allocated and used efficiently Collective social welfare is maximazed

5 Requirements Atomicity > Small producers & consumers Homogeneity Goods & services are substitutes = no product differentiation Perfect &complete info. Firms & consumers know the prices set by all firms Equal access Production technologies & resources perfectly mobile Free entry Any firm may enter or exit the market Individual buyers and sellers act independently No scope for groups to change price

6 Why does a Perfect Competition firms demand curve is also its marginal revenue curve? For a perfectly competitive firm with no market control, the marginal revenue curve is a horizontal line. Because a perfectly competitive firm is a price taker and faces a horizontal demand curve, its marginal revenue curve is also horizontal and coincides with its average revenue (and demand) curve.

7 Perfect Competition Graph

8 Example of Perfect Competition Example of Perfect Competition eBay auctions can be often be seen as perfectly competitive. There are very low barriers to entry (anyone can sell a product, provided they have some knowledge of computers and the Internet), many sellers of common products and many potential buyers. In the eBay market competitive advertising does not occur, because the products are homogeneous and this would be redundant. However, generic advertising (advertising which benefits the industry as a whole and does not mention any brand names) may occur.

9 Free Software: Example of Perfect Competition Free software works along lines that approximate perfect competition. Anyone is free to enter and leave the market at no cost. All code is freely accessible and modifiable, and individuals are free to behave independently.

10 Monopolistic Competition

11 Characteristics: –A large number of firms- it is like perfect competition – Entry easy – few barriers to entry and exit, so it is unlike monopoly –Differentiated products– they are therefore closed, but not perfect, substitutes so, they have market power(it means each firm has a unique product)

12 Monopolistic Competition The strategies for Differentiated products Fast-food market Mac Donald's, Taco-Bell, and Wendy’s Brand Name Brand Name Starbucks Starbucks

13 Monopolistic Competition Price MC ATC MR Q1 P1P1 C=ATC Quantity Abnormal Profit In the Short Run A monopolistically competitive firm faces a Downward-sloping demand curve. The firm maximizes profit by producing Q1, where MR=MC, and charging a price, P1, given by the demand curve above Q1. Profit is the rectangle CBAP1. Demand Implications for the diagram: Above-Normal Profit Above-Normal Profit

14 Monopolistic Competition Implications for the diagram: Normal Profit Price MC ATC MR Q1Q1 AR(D) MR Q2Q2 P Demand Notice that the existence of more substitutes makes the new AR (D) curve more price elastic. The firm reduces output to a point where MC = MR (Q2). At this output AR = AC and the firm will make normal profit. Quantity

15 Monopolistic Competition Price MC ATC D Q1Q1 MR Because there is relative freedom of entry and exit into the market, new firms will enter encouraged by the existence of abnormal profits. New entrants will increase supply causing price to fall. As price falls, the MR curves shift inwards as revenue from each sale is now less. Quantity P1P1 C=ATC Implications for the diagram: Economic Loss Loss

16 Monopolistic Competition Implications for the diagram: Entry and Normal Profit Price MC ATC D2 MR Q2Q2 D 2 =ATC This is the long run equilibrium position of a firm in monopolistic competition. In a monopolistically competitive industry, entering firms produce a close substitute, not an identical or standardized product. Quantity D1

17 Perfect and Monopolistic Competition Compared Price MC ATC QpcQpc D mc MR mc Q mc P mc Quantity P pc MR pc =D pc The perfectly completive firm produces at the point where the price line, the horizontal MR curve, intersects the MC curve. This is the bottom of the ATC curve in the long run, quantity Q pc at price P pc. The monopolistically competitive firm means that the quantity produced, where MR=MC. The downward- sloping demand curve faced by monopolistically competitive firm means that the quantity produced, Qmc is less than the quantity produced by the perfectly competitive firm, Qpc. The price charged by the monopolistically competitive firm is also higher than that charged by the perfectly competitive firm, Pmc versus Ppc. In both cases, however, the firms earn only a normal profit.

18 Monopolistic Competition In each case there are many firms in the industry Each can try to differentiate its product in some way Entry and exit to the industry is relatively free Consumers and producers do not have perfect knowledge of the market – the market may indeed be relatively localised.

19 Monopolistic Competition Restaurants Plumbers/electricians/local builders Private schools Plant hire firms Insurance brokers Health clubs Hairdressers Estate agents Damp proofing control firms

20 An OLIGOPOLY is a market form in which a market or industry is dominated by a small number of sellers(Oligopolists)

21 Example of Oligopoly around our life in U.S.A.

22 Fast foods McDonalds, Burger King, KFC McDonalds, Burger King, KFC

23 Bookstores Amazon, Barnes & Noble

24 Oils Shell, ExxonMobil

25 Electrical goods SONY, Dell

26 Mobile phone networks Verizon, AT&T

27 Characteristics of Oligopoly Product Branding Entry barriers Interdependent decision-making Non-price competition

28 Oligopsony A market dominated by many sellers and a few buyers

29 Definition of Oligopsony An oligopsony is a market form in which the number of buyers is small while the number of sellers in theory could be large. This typically happens in market for inputs where a small number of firms are competing to obtain factors of production. It contrasts with an oligopoly, where there are many buyers but just a few sellers. An oligopsony is a form of imperfect competition.

30 Cocoa: Example of Oligopsony

31 Three Buyers of Cocoa Bean Three firms buy the vast majority of world cocoa bean production, mostly from small farmers in third-world countries.

32 Tobacco in US: Example of Oligopsony

33 Three Major Buyers of Tobacco in US Three companies (Altria, Brown & Williamson, and Lorillard Tobacco Company) buy almost 90% of all tobacco grown in the US.

34 Characteristics of Oligopsony The buyers have a major advantage over the sellers. –They can play off one supplier against another, thus lowering their costs. –They can also dictate exact specifications to suppliers, for delivery schedules, quality, and (in the case of agricultural products) crop varieties. –They also pass off much of the risks of overproduction, natural losses, and variations in cyclical demand to the suppliers.

35 What is a Monopoly? A monopoly is a market structure in which there is a single supplier of a product. “Monopoly" is a term from economics that refers to a situation where only a single company is providing an irreplaceable good or service.

36 How do Monopolies Occur? This was a side effect of being the inventor of a product for which there is high demand but no preexisting supply. Other monopolies occur when consolidation across industries results in a single supplier. This was the case with the company Standard Oil, which had to be broken up by the government in 1911.

37 Description of a Monopoly One firm that produces a good that is desired by customers The firm in question is the only place where the good or service can be found, they have the ability to charge whatever they want, to the damage of market competition that is the foundation of a healthy economy.

38 Advantages of a Monopoly Research and Development. Supernormal Profit can be used to fund high cost capital investment spending. Successful research can be used for improved products and lower costs in the long term. Economies of scale. Increased output will lead to a decrease in average costs of production. These can be passed on to consumers in the form of lower prices.

39 Disadvantages of a Monopoly Price and Lower Output than under Perfect Competition. This leads to a decline in consumer surplus and a deadweight welfare loss A monopoly is productively inefficient because it is not the lowest point on the Average Cost curve

40 Disadvantages of a Monopoly (Continued) A Monopolist makes Supernormal Profit leading to an unequal distribution of income. A Monopolist makes Supernormal Profit leading to an unequal distribution of income. A monopoly may use its market power and pay lower prices to its suppliers.

41 Graphing a Monopoly

42 Example of a Monopoly A recent example of a monopoly would be that of the pharmaceutical giant Pfizer over the drug Viagra®, which at the time of its release had no substitutes or competitors. Microsoft; settled anti-trust litigation in the U.S. in 2001; fined by the European Commission in 2004, which was upheld for the most part by the Court of First Instance of the European Communities in The fine was 1.35 Billion USD in 2008 for incompliance with the 2004 rule

43 Monopolistic Competition

44 Characteristics: – –A large number of firms- it is like perfect competition – – Entry easy – few barriers to entry and exit, so it is unlike monopoly – –Differentiated products– they are therefore closed, but not perfect, substitutes so, they have market power(it means each firm has a unique product)

45 The strategies for Differentiated products Fast-food market Mac Donald's, Taco-Bell, and Wendy’s Brand Name Starbucks

46 Price MC ATC MR Q1 P1P1 C=ATC Quantity Abnormal Profit In the Short Run A monopolistically competit ive firm faces a Downward-s loping demand curve. The fi rm maximizes profit by prod ucing Q1, where MR=MC, an d charging a price, P1, give n by the demand curve abo ve Q1. Profit is the rectangl e CBAP1. Demand Implications for the diagram: Above-Normal Profit

47 Implications for the diagram: Normal Profit Price MC ATC MR Q1 AR(D) MR Q2 P Demand Notice that the existence o f more substitutes makes t he new AR (D) curve more price elastic. The firm redu ces output to a point wher e MC = MR (Q2). At this out put AR = AC and the firm w ill make normal profit. Quantity

48 Price MC ATC D Q1 MR Because there is relativ e freedom of entry and exit into the market, ne w firms will enter enco uraged by the existenc e of abnormal profits. N ew entrants will increas e supply causing price to fall. As price falls, th e MR curves shift inwar ds as revenue from eac h sale is now less. Quantity P1P1 C=ATC Implications for the diagram: Economic Loss Loss

49 Implications for the diagram: Entry and Normal Profit Price MC ATC D2 MR Q2 D 2 =ATC This is the long run equilibrium position of a firm in monopolistic competition. In a monopolistically competitive industry, entering firms produce a close substitute, not an identical or standardized product. Quantity D1

50 Price MC ATC Q pc D mc MR mc Q mc P mc Quantity P pc MR pc =D pc The perfectly completive firm produce s at the point where the price line, the horizontal MR curve, intersects the M C curve. This is the bottom of the ATC curve in the long run, quantity Q pc at p rice P pc. The monopolistically competi tive firm means that the quantity prod uced, where MR=MC. The downward-s loping demand curve faced by monop olistically competitive firm means that the quantity produced, Qmc is less th an the quantity produced by the perfe ctly competitive firm, Qpc. The price c harged by the monopolistically comp etitive firm is also higher than that ch arged by the perfectly competitive fir m, Pmc versus Ppc. In both cases, ho wever, the firms earn only a normal pr ofit.

51 In each case there are many firms in the industry Each can try to differentiate its product in some way Entry and exit to the industry is relatively free Consumers and producers do not have perfect knowledge of the market – the market may indeed be relatively localised.

52 Restaurants Plumbers/electricians/local builders Private schools Plant hire firms Insurance brokers Health clubs Hairdressers Estate agents Damp proofing control firms

53 References


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