1. Spectrum of Market Competition
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
Most competitive
Least competitive

2. Perfect Competition

3. Conditions for Pure Competition
1.Many buyers and sellers
2. No one buyer or seller has the ability to influence price
3. Products are homogenous (very similar)

4. Conditions for Pure Competition
4. Free exit or entry (no barriers to entry)
5. Perfect knowledge
6. Perfect mobility of resources

5. 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.

6. The Purely Competitive firm maximizes profit where MC=MR
Profit Maximization
The Purely Competitive firm maximizes profit where MC=MR

7. Monopoly Single seller of a product Product has no close substitutes
Single seller is only seller in market, so IS the market.

8. Monopoly can be formed by:
Barriers to Entry
Monopoly can be formed by:
Natural Barriers; distance, population, economies of scale

9. Barriers (cont’d) A monopoly can also be formed by artificial barriers
Legal: patents, copyright, tariffs, licenses, franchise
Illegal: predatory pricing, violence

10. Profit Maximization A monopoly maximizes profit where MC=MR
A monopoly must search for the price on the AR curve
See examples on board

11. Consumer Surplus
The difference between what a consumer was willing to pay and the market clearing price they had to pay.

12. Costs of Monopoly

13. Price Discrimination
A monopoly can charge different customers different prices, taking away Consumer Surplus
Airplane example

14. 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

15. 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

16. 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

17. Controlling a monopoly
Government can require “marginal cost pricing” or “average cost pricing” See board
Government could also tax or charge a licensing fee

18. Break up a monopoly
Create competing firms out of the monopoly: Standard Oil, Bell Telephone… Microsoft?

19. Monopolistic Competition
Many firms competing with products which are perceived to be different

20. Conditions of MONOCOMP
1. Many firms
2. Differentiated product, perceived to be different
3. Easy entry to market by competitors

21. Importance of Elasticity of Demand
See the board

22. How to get Inelastic Demand
Achieve Product differentiation
Price competition
Non price competition
Advertising
Colors
Any edge

23. Oligopoly A market with only a few firms
Pure Oligopoly homogenous product with a single price
Differentiated Oligopoly goods are perceived to be different, so you end up with “price clusters”

24. Price Clusters
Autos: GM, Ford, Daimler/Chrysler compete at different price levels
Chevy Ford Dodge $
Pontiac Mercury Chrysler $$
Cadillac Lincoln Mercedes $$$$$

25. Price Clusters Beer Anheiser Busch, Coors, Miller
Busch, Keystone, Strohs $
Bud, Miller, Coors
Michelob, MGD, Fat Tire

26. Concentration Ratios Measure the degree of concentration in a market
A four firm concentration ratio greater than 40%, is considered an oligopoly

27. Examples Beverages Tobacco Cars Coca Cola Philip Morris GM 45% 49% 29%
Pepsi
RJR
Ford
31%
24%
25%
Schweppes
B&W
Chrysler
14%
15%
16%
From page 252 in text

28. Cooperation vs. Competition
“People of the same trade seldom meet together… but the conversation ends in… some conspiracy to raise prices” Adam Smith

29. 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)

30. Game Theory
Decision Grid on board

31. Kinked Demand Curve
On board

32. Consequences of Price Fixing
1. Consent Decree, to stop illegal activity
2. Treble Damages (3X the losses)
3. Fines and jail time

33. 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