BU-224 Micro Economics – Week 8 Seminar Welcome to

Overview  Welcome  Review of Week 7 Material  Questions  Unit 8 Material  Questions  Preview of Unit 9  End

 Market Structure  Monopoly  Oligopoly  Monopolistic Competition  Perfect Competition Unit 7 Material

Market Structures Monopoly Oligopoly Monopolistic competition Perfect competition

Market Structures Monopoly Oligopoly Monopolistic competition Perfect competition

Monopoly

Oligopoly There are just a handful of firms. They usually compete on price and service. If they don't compete, they can be called a cartel. Examples OPEC Coca Cola and Pepsi Boeing and Airbus

Oligopoly

Monopolistic Competition Monopolistic competition involves dozens of similar firms. They compete on price and services. Each firm's product is slightly different from the products of other firms. Examples

Monopolistic Competition

Perfect Competition Pure competition involves hundreds or thousands of firms. Homogeneous product Easy entry/exit of firms They don't compete on price – they are price takers. Perfect information The firm's products are identical to one another. Examples Agriculture (wheat/corn)

Perfect Competition

Questions

Overview  Welcome  Review of Week 7 Material  Questions  Unit 8 Material  Questions  Preview of Unit 9  End

 Oligopoly Market Structure  Product Differentiation  Market Concentration Ratios Unit 8 Material

Oligopoly There are just a handful of firms. They usually compete on price and service. If they don't compete, they can be called a cartel. Examples OPEC Coca Cola and Pepsi Boeing and Airbus

Oligopoly

Oligopoly (cont'd) Strategic Dependence A situation in which one firm’s actions with respect to price, quality, advertising, and related changes may be strategically countered by the reactions of one or more other firms in the industry Such dependence can exist only when there are a limited number of firms in an industry.

Oligopoly

Oligopoly (cont'd) Why oligopoly occurs Economies of scale Barriers to entry Mergers Vertical mergers Horizontal mergers

Oligopoly (cont'd) Vertical Merger The joining of a firm with another to which it sells an output or from which it buys an input Horizontal Merger The joining of firms that are producing or selling a similar product

Oligopoly (cont'd) Measuring industry concentration Concentration Ratio The percentage of all sales contributed by the leading four or leading eight firms in an industry Sometimes called the industry concentration ratio

Measures of seller concentration  The concentration ratio is the percentage of total market sales accounted for by an absolute number of the largest firms in the market.  The four-firm concentration ratio (CR 4 ) measures the percent of total market sales accounted for by the top four firms in the market.  The eight-firm concentration ratio (CR 4 ) measures the percent of total market sales accounted for by the top eight firms in the market.

Concentration Ratios: Very Concentrated Industries Source: U.S. Bureau of the Census, Census of Manufacturers

Concentration Ratios: Less Concentrated Industries Source: U.S. Bureau of the Census, Census of Manufacturers

Oligopoly (cont'd)

E-Commerce Example: Market Concentration in the Computer Printer Industry The computer printer industry generated $50 billion in revenues in a recent year, and four firms had a high market share. Of the four: Hewlett-Packard earned $24 billion, Lexmark $9.7 billion, Dell $6.9 billion and Epson $5.2 billion. These figures imply a concentration ratio of 91.6%. Thus, the printer industry is very concentrated.

Oligopoly, Inefficiency, and Resource Allocation To the extent oligopolists have market power—the ability to individually affect the market price for the industry’s output—they lead to resource misallocations, just as monopolies do. But if oligopolies occur because of economies of scale, consumers might actually end up paying lower prices. All in all, there is no definite evidence of serious resource misallocation in the United States because of oligopolies.

Oligopoly

Problem 1 Dr. Fine and Dr. Feelgood are the only two medical doctors offering immediate walk-in medical services in the town of Springfield. That is, they operate in a duopoly. Each doctor can charge either a high price or a low price for a standard medical visit. The accompanying matrix shows their payoffs, in profits per patient (in dollars), for any choice that the two doctors can make. Week 8 Assignment

Suppose the two doctors play a one-shot game—that is, they interact only once and never again. What will be the Nash (non-cooperative) equilibrium in this one-shot game? Now suppose the two doctors play this game twice. Also, suppose each doctor can play one of two strategies: it can play either “always charge the low price” or “tit for tat”— that is, it starts off charging the high price in the first period, and then in the second period it does whatever the other doctor did in the previous period. Write down the payoffs to Dr. Fine from the following four possibilities: Dr. Fine plays “always charge the low price” when Dr. Feelgood also plays “always charge the low price.” Week 8 Assignment

Discuss the role of advertising in product differentiation and the intent of advertising in altering the firm’s demand curve. Discussion

Thank you for attending. I look forward to seeing you next week!