CHARACTERISTIC MONO- OLIGO- MONO- COM- POLY POLY POLIS- PETI- TIC C. TION STRUCTURE # firms? differentiated? entry is: market power? CONDUCT: interdependece? Marginal Cost Pricing? PERFORMANCE: High prices? Economic Profits? Efficient capacity util? Efficient investment? Allocatively Efficient? One Few Many Many Unique ? Yes No Blocked Impeded Easy Easy YES YES YES NO NO YES NO NO NO NO NO YES Yes Yes Yes No Yes Yes No No No No Under Yes No No No Yes

MARKET BOUNDARIES BUYER POINT OF VIEW: No potential seller exists outside of the market boundaries (within a reasonable price range) SELLER POINT OF VIEW: No potential buyer exists outside of the market boundaries (within a reasonable price range) BOTH POINTS OF VIEW MUST HOLD CROSS PRICE ELASTICITY measures

MARKET BOUNDARIES X X X X X O O O X represents buyers O represents sellers

TYPE OF MARKET PRD DIFF. SELLERS BUYERS MONOPOLY OLIGOPOLY MONOPOLISTIC COMPETITION MONOPSONY OLIGOPSONY BILATERAL MONOPOLY BILATERAL OLIGOPOLY UNIQUE ONE MANY - FEW MANY PRD DIFF. MANY MANY STANDARD MANY MANY - MANY ONE - MANY FEW - ONE ONE ONE FEW - FEW ONE FEW FEW

TYPE OF MARKET OBJECTIVE P Q PRO- EFFI FIT CIENT MONOPOLY OLIGOPOLY Interdependence MONOPOLISTIC COMPETITION MONOPSONY OLIGOPSONY BILATERAL MONOPOLY BILATERAL OLIGOPOLY S.Run Profit Large Not Mkt. Share Med. Not Horizontal W A R Customer None Exc. Loyalty Cap. Min Cost Lowest Highest None Yes Min Price Yes Not Max Share ? Vertical of Profit W A R Max Share ? Vertical of Profit W A R

Copiers per month (000’s) Price ($/copier) 4 COPIER PRODUCING PLANTS LRAC (envelope) #4 #3 #2 #1 Most Efficient Investment (lowest point)

Copiers per month Price ($/copier) 4 COPIER PRODUCING PLANTS LRAC LRMC

1000s Copiers per month Price ($/copier) LRAC LRMC DEMAND MR MR=MC PROFIT MAXIMIZATION

CHARACTERISTIC MONO- OLIGO- MONO- COM- POLY POLY POLIS- PETI- TIC C. TION STRUCTURE # firms? differentiated? entry is: market power? CONDUCT: interdependece? Marginal Cost Pricing? PERFORMANCE: High prices? Economic Profits? Efficient capacity util? Efficient investment? Allocatively Efficient? One Few Many Many Unique ? Yes No Blocked Impeded Easy Easy YES YES YES NO NO YES NO NO NO NO NO YES Yes Yes Yes No Yes Yes No No No No Under Yes No No No Yes

Copiers per month Price ($/copier) LRAC LRMC DEMAND MR MR=MC PROFIT MAXIMIZATION TC TOTAL COST

Copiers per month Price ($/copier) LRAC LRMC DEMAND MR MR=MC PROFIT MAXIMIZATION TR

Copiers per month Price ($/copier) LRAC LRMC DEMAND MR MR=MC PROFIT MAXIMIZATION TC TOTAL COST PRO- FIT

Copiers per month Price ($/copier) DEMAND MR MR=MC OTHER EFFICIENCIES? MIN SRAC MIN LRAC P=LRMC

Copiers per month Price ($/copier) DEMAND MR MR=MC OTHER EFFICIENCIES? MIN SRAC MIN LRAC P=LRMC NOT EFFICIENT INVESTING INEFFICIENT CAPACITY UTILIZATION (ALLOCATIVELY INEFFICIENT) NONE!!

MONOPOLY HIGH PRICES (P>SRAC) HIGH LONG RUN PROFITS (P>LRAC) INEFFICIENT CAPACITY (SRAC NOT THROUGH MIN OF LRAC) INEFFICIENT CAPACITY UTILIZATION (NOT AT MIN SRAC) INEFFICIENT ALLOCATION OF RESOURCES (P>MC)

1000s Copiers per month Price ($/copier) OLIGOPOLY MODELS 4X 3X { { { { { { { { { 1X Average Explicit Cost Long Run Average Cost Demand american choice european choice japanese choice

OLIGOPOLY HIGH PRICES (P>SRAC) HIGH LONG RUN PROFITS (P>LRAC) INEFFICIENT CAPACITY (SRAC NOT THROUGH MIN OF LRAC) INEFFICIENT CAPACITY UTILIZATION (NOT AT MIN SRAC) INEFFICIENT ALLOCATION OF RESOURCES (P>MC)

Copiers per month (000s) Price ($/copier) LRMC MONOPOLISTIC COMPETITION MR Demand LRAC Long Run Profit Maximizing Output

MONOPOLISTIC COMPETITION HIGH PRICES (P>SRAC) NO LONG RUN PROFITS (P=LRAC) INEFFICIENT CAPACITY (SRAC NOT THROUGH MIN OF LRAC) UNDERUTILIZED CAPACITY (AT LOWER OUTPUT THAN MIN SRAC) INEFFICIENT ALLOCATION OF RESOURCES (P>MC)

Copiers per month Price ($/copier) Copiers per month 0 1 BILL 2 BILL 3BILL Price ($/copier) COMPETITION DEMAND LRAC LRMC SUPPLY MARKET FIRM POINT OF VIEW

1000s Copiers per month Price ($/copier) Copiers per month 0 1 BILL 2 BILL 3BILL Price ($/copier) COMPETITION DEMAND SRAVC SUPPLY MARKET FIRM POINT OF VIEW SRMC SRAC A B SHUT DOWN PRICE

Copiers per month Price ($/copier) Copiers per month 0 1 BILL 2 BILL 3BILL Price ($/copier) COMPETITION DEMAND LRAC LRMC SUPPLY MARKET FIRM POINT OF VIEW PROFIT

Copiers per month Price ($/copier) Copiers per month 0 1 BILL 2 BILL 3BILL Price ($/copier) ENTRY DUE TO PROFIT DEMAND LRAC LRMC SUPPLY MARKET FIRM POINT OF VIEW SHIFT LOSS

1000s Copiers per month Price ($/copier) Copiers per month 0 1 BILL 2 BILL 3BILL Price ($/copier) COMPETITIVE EQUILIBRIUM: THROUGH NATURAL MARKET FORCES DEMAND LRAC LRMC SUP PLY MARKET FIRM POINT OF VIEW

PERFECT COMPETITION LOWEST PRICES (P= MIN SRAC) NO LONG RUN PROFITS (P=LRAC) EFFICIENT CAPACITY (SRAC THROUGH MIN OF LRAC) FULLY UTILIZED CAPACITY (AT SAME OUTPUT AS MIN SRAC) EFFICIENT ALLOCATION OF RESOURCES (P=MC)

PORTER’S INDUSTRY STUDY STRUCTURAL ANALYSIS (# of firms, product differentiation, barriers to entry, government involvement, cost conditions, supply and demand conditions, global,etc CONDUCT: Analysis of competitive behavior, interdependence, industry strategies, PERFORMANCE: Price, Profitability, Efficiency, Quality, etc.

FIRM’S STRATEGY COVERS: COST REDUCTION RATE OF SUBSTITUTION (switching cost, segmentation, complements) VERTICAL STRATEGIES: buyers, sellers HORIZONTAL STRATEGIES: entry deterrence, competitor analysis, INFORMATION & SIGNALLING STRATEGIES GAME THEORETIC STRATEGY.

STRATEGIC INSTRUMENTS (LONG RUN) CAPACITY EXPANSION- domestic, global VERTICAL INTEGRATION ENTRY SPINOFFS (DIVESTMENT) COALITIONS (TRADE ASSNS., ETC.) JOINT VENTURES & OTHER COOPERATIVE VENTURES.

TACTICAL INSTRUMENTS (SHORT RUN) RATE OF PRODUCTION (eg shut down) PRICING PURCHASING MANAGEMENT (inventories, labor contracting, etc.) ADVERTISING & MARKETING FINANCIAL & ACCOUNTING MANAGEMENT

DATA SOURCES Product Lines Buyers and their behavior Complementary products Substitute products Growth (rate, patterns) Technology (Pdcn Fcn.) - substitutability, Economies, marginal productivity - technological change Markets (segments, practices) Suppliers Competitors Social Political Economic Stakeholders Environment

NUMBER OF FIRMS N PRICE MONOPOLY PRICE COMPETITIVE PRICE COURNOT CHAMBERLAIN BERTRAND

PAYOFF MATRIX FOR THE PRISONER’S DILEMMA DON’T TELL TELL DON’T TELL BOTH Hunt-jail FREE Liddy-free & write bk Liddy-jail BOTH IN Hunt-free JAIL & writes bk HUNTHUNT LIDDY

SOLUTION TO PRISONER’S DILEMMA EXCHANGE INFORMATION ENFORCEMENT (ALTER PAYOFF MATRIX) REPETITION

PAYOFF MATRIX FOR THE PRISONER’S DILEMMA: LOWERING PRICES FIRM I F I R M II DON’T LOWER CHANGE PRICE DON’T CHANGE LOWER PRICE Both gain II broke profits I gains monopoly I broke II gains No Profit monopoly

PAYOFF MATRIX FOR THE PRISONER’S DILEMMA: RAISING PRICES FIRM I F I R M II RAISE DON’T PRICE CHANGE RAISE PRICE DON’T CHANGE Both gain II broke profits I gains monopoly I broke II gains No Profit monopoly

Copiers per month Price ($/copier) Copiers per month 0 1 BILL 2 BILL 3BILL Price ($/copier) COMPETITION DEMAND LRAC LRMC SUPPLY MARKET FIRM POINT OF VIEW