1. Table 10.1 Characteristics of Market Types
Market structure
Examples
Number of producers
Type of product
Power of firm over price
Barriers to entry
Non-price competition
Perfect competition
Parts of agriculture are reasonably close
Many
Standardized
None
Low
Monopolistic competition
Retail trade
Differentiated
Some
Advertising and product differentiation
Oligopoly
Computers, oil, steel
Few
Standardized or differentiated
High
Monopoly
Public utilities
One
Unique product
Consider-able
Very high
Advertising

2. What is the market structure?
Competition, market structures and business decisions
Market structures
What is the market structure?
The competitive environment in the market for any product is the market structure faced by the firm
Is measured in terms of
the number of the actual buyers and sellers plus potential entrants
Barriers to entry and exit
Capital requirements
Price vs Non-price competition
Etc
Potential entrants pose a sufficiently credible threat of entry to affect price/output decisions of incumbents

3. Factors that Shape the Competitive Environment
Competition, market structures and business decisions
Market structures
Factors that Shape the Competitive Environment
Product Differentiation
R&D, innovation, and advertising are important in many markets.
Production Methods
Economies of scale can preclude small-firm size.
Entry and Exit Conditions
Barriers to entry and exit can shelter incumbents from potential entrants.
Buyer Power
Powerful buyers can limit seller power.

4. Perfect competition Monopoly Oligopoly Monopolistic competition
Competition, market structures and business decisions
Market structures
The firm in competitive markets
Non-perfect competition
Perfect competition
Monopoly
Oligopoly
Monopolistic competition

5. Very small share of the market Price-taker
Competition, market structures and business decisions
Market structures
“Perfect competition” – competitive markets
Profit maximiser
Identical product
Very small share of the market
Price-taker
Produces a homogeneous product
Perfect information
No barriers to entry (legal, technological, or resource)
No technical progress
No investment lag - Immediate implementation of production decisions)
Homogeneous goals of the owners and managerial staff

6. Examples of Competitive Markets
Competition, market structures and business decisions
Market structures
“Perfect competition” – competitive markets
Examples of Competitive Markets
Agricultural commodities.
Some prominent markets for intermediate goods and services.
Unskilled labor market.

7. Profit Maximization Imperative
Competition, market structures and business decisions
Market structures
“Perfect competition” – competitive markets
Profit Maximization Imperative
Normal profit is return necessary to attract and maintain capital investment.
Efficient firms can earn normal profit.
Inefficient firms suffer losses.
Role of Marginal Analysis
Set Mπ = MR – MC = 0 to maximize profits.
MR=MC when profits are maximized.

8. Profit maximization in a perfectly competitive market
(see book)
P = MC
Marginal cost curve left of shutdown level (min. variable cost) is supply curve
P = MR = MC = AC
Firm produces at minimum of average costs! (optimal outcome for industry)
In a constant-cost industry increase in supply will lead in the long term to constant prices (i.e. horizontal supply curve)

9. Marginal Cost and Firm Supply
Competition, market structures and business decisions
Market structures
“Perfect competition” – competitive markets
Marginal Cost and Firm Supply
Short-run Firm Supply
Competitive market price (P) is shown as a horizontal line because P=MR.
Firm’s marginal-cost curve shows the amount of output the firm would be willing to supply at any market price.
Marginal cost curve is the short-run supply curve so long as P > AVC .

10. Competition, market structures and business decisions
“Perfect competition” – competitive markets
Long-run Firm Supply
Marginal cost curve is the long-run supply curve so long as P > ATC.
In long run, firm must cover all necessary costs of production and earn a normal profit.

11. Long Run Normal Profit Equilibrium
Competition, market structures and business decisions
Market structures
“Perfect competition” – competitive markets
Long Run Normal Profit Equilibrium
With a horizontal market demand curve, MR=P.
P=MR=MC=ATC.
There are no economic profits.
All firms earn a normal rate of return.

12. Competition, market structures and business decisions
Perfect competition
Breakeven point
Price, cost
per unit
Poff peak – break even price off peak. At this price the firm expects to return only variable costs and can produce quantity Qoff peak
Ppeak- break even price at peak. This is when the firm expects to return both fixed and variable costs producing quantity Qpeak MC
ATC
AVC
Ppeak D B
Poff peak
Q peak
Qoff peak
Output per time period

13. Competitive Market Supply Curve
Competition, market structures and business decisions
Market structures
“Perfect competition” – competitive markets
Competitive Market Supply Curve
Market Supply With a Fixed Number of Competitors
Supply is the sum of competitor output.
Market Supply With Entry and Exit
Entry results in more firms, increased output, a rightward shift in the supply curve, and drives down prices and profits.
Exit reduces the number of firms, decreases the quantity of output, shifts the supply curve leftward, and allows prices and profits to rise for remaining competitors.

14. Market price determination
Competition, market structures and business decisions
Market structures
Perfect competition
Market price determination
Negatively sloped demand curve
Positively sloped supply curve 10 8 6 4 2
Supply 50
100
150
200
250
300
350
400
Price per
unit ($) P = –
$ $ Q
= $40
$0.0001
Demand
Quantity per time period (millions)

15. Competition, market structures and business decisions
Monopoly
Basic Properties
One firm in industry
Profit-maximiser
Faces market demand curve
One product
No close substitutes
Price-maker
No restrictions on resources
Blockaded entry and/or exit
Imperfect dissemination of information
Opportunity for economic profits in long-run equilibrium.

16. Competition, market structures and business decisions
Monopoly
Examples of Monopoly
Electricity utilities,
Gas
Water
Public Tramsport
Telecommunications

17. Monopoly graph

18. Profit Maximization in Monopoly Markets
Competition, market structures and business decisions
Market structures
Monopoly
Profit Maximization in Monopoly Markets
Price/Output Decisions
A monopoly firm is the market.
Market and firm demand curve slopes downward.
Monopoly demand curve is always above the marginal revenue curve, P = AR > MR.
Monopoly position allows above-normal profits.
P > AC in long-run equilibrium.
Set Mπ = MR - MC = 0 to maximize profits.
MR=MC at optimal output.

19. Social Costs of Monopoly
Competition, market structures and business decisions
Market structures
Monopoly
Social Costs of Monopoly
Monopoly Underproduction
Monopolists produce too little output.
Monopolists charge prices that are too high.
Deadweight Loss from Monopoly
Monopoly markets creates a loss in social welfare due to the decline in mutually beneficial trade activity.
There is also a wealth transfer problem associated with monopoly.
Under monopoly, consumer surplus is transferred to producer surplus.

20. Social Benefits From Monopoly
Competition, market structures and business decisions
Market structures
Monopoly
Social Benefits From Monopoly
Economies of Scale
Monopoly is sometimes the natural result of vigorous competitive forces.
In natural monopoly, LRAC declines continuously and one firm is most efficient.
Some real-world monopolies are government-created or government-maintained.
Invention and Innovation
Public policy sometimes confers explicit monopoly rights to spur productivity.

21. Competition, market structures and business decisions
Monopoly
Monopoly Regulation
Dilemma of Natural Monopoly
Monopoly has the potential for efficiency.
Unregulated monopoly can lead to economic profits and underproduction.
ECW3830 COMPETITION AND REGULATION

22. Monopolists produce less, price higher than firms in competitive equilibrium
MR = P(1 + 1/h)
Situation is inefficient, insofar as the sum of consumer and producer surplus is concerned
What is producer and consumer surplus?
Monopolist has to take demand conditions explicitly into account
Why is no other firm entering the market???

23. Other aspects of monopoly
“Natural monopoly” if minimum of average cost occurs only at very high output level (minimum efficient scale) ==> there is only place for one firm in the market!
Measure of monopoly power (markup of price over cost):

24. Sources of monopoly power
Natural monopoly (public utilities best example, railway tracks), economies of scale,
Capital requirements on production or big sunk costs on entry
Patents (17 years), trade secrets (Coke)
Exclusive or unique assets (minerals, talent)
Locational advantage (popcorn shop in cinema – but in general you pay rent for these advantages)
Regulation (TV, taxi, telephone in the past)
Collusion by competitors

25. Competition, market structures and business decisions
In the “real life”
A “real” firm in a market place
(compare to the “ideal” one):
A typical firm, if it is not a small one, is not owner-managed
Separation of ownership, long-term strategic and short-run current control (shareholders, board of directors, brunch managers) implies the segregation of objectives;
Natural, economic and legal barriers
Diversification (non-homogenous product, more than one kind of activity)
Technical progress
Different criteria for different time horizons (short-run operation vs long-run planning.
Price-making
Price/marketing strategies
Imperfect information
Investment lag

26. Sources of monopoly power
Natural monopoly (public utilities best example, railway tracks), economies of scale,
Capital requirements on production or big sunk costs on entry
Patents (17 years), trade secrets (Coke)
Exclusive or unique assets (minerals, talent)
Locational advantage (popcorn shop in cinema – but in general you pay rent for these advantages)
Regulation (TV, taxi, telephone in the past)
Collusion by competitors

27. What can a monopolist do? Erect strategic entry barriers
Excessive patenting and copyright
Limit pricing (set price below monopoly price)
Extensive advertising to create brand name to raise cost of entry
Create intentionally excess capacity as a warning for a price war

28. Franchising „McFood“
A Franchiser (mother company) gets a fixed percentage of sales,
The franchisee is the residual claimant
What are the incentives for the two partners?
Other problems like number of shops in a region…
Other examples??

30. Contrast Between Monopolistic Competition and Oligopoly
Competition, market structures and business decisions
Market structures
Oligopoly and Monopolistic Competition
Contrast Between Monopolistic Competition and Oligopoly
Monopolistic Competition
Large number of sellers that offer differentiated products.
Normal profit opportunity in long-run equilibrium.
Oligopoly
Few sellers.
Economic profits are possible in long-run equilibrium.
Dynamic Nature of Competition
Timely market structure information is required for managerial investment decisions

31. The market consists of n mono-product firms;
Competition, market structures and business decisions
Market structures
Мonopolistic competition
The market consists of n mono-product firms;
The products are viewed by the buyers as close though not perfect substitutes for one another;
Therefore, each of the sellers is a monopolist of its particular product variant with a limited degree of monopoly power.
Such a monopolist is enjoying a monopoly power and making economic profit during only a short period of time
from the introduction of an unique product or technology
until such a technology becomes available to rivals, or
until a new “more innovative” product is introduced by a rival.

32. Short-run Monopoly Equilibrium Monopolistically competitive firms take
Competition, market structures and business decisions
Market structures
Мonopolistic competition
Price
Costs MC AC
Pmc
Demand MR Q
Qmc
Quantity
Short-run Monopoly Equilibrium
Monopolistically competitive firms take
full advantage of short-run monopoly.

33. Entry of new firms offering
Competition, market structures and business decisions
Market structures
Мonopolistic competition
Price
Costs
Price
Costs
Quantity MC AC
Pmc
Qmc MR D MC AC D1 D2
MR1
Quantity
MR2
Long-run equilibrium same costs, lower demand and excess capacity – low output high price decision With differentiated products, P=AC at a point above minimum LRAC.
P > MR = MC.
Entry of new firms offering
product substitutes shifts the demand and MR curves)

34. Price Costs Price Costs MC AC MC AC Pmc Pac D1 D D2 MR MR1 Quantity
Competition, market structures and business decisions
Market structures
Мonopolistic competition
Price
Costs
Price
Costs MC AC MC AC
Pmc
Pac D1 D D2 MR
MR1
Quantity
Qac
Qmc
Quantity
MR2
Long-run equilibrium same costs, lower demand and excess capacity – low output high price decision
With differentiated products, P=AC at a point above minimum LRAC.
P > MR = MC.
Long-run equilibrium– high output low price decision (corresponds to perfect
Competition)
With homogenous products, P=AC at minimum LRAC.
This is a competitive market equilibrium with homogeneous production.

35. Competition, market structures and business decisions
Oligipoly
Oligopoly Market Characteristics
Few sellers.
Homogenous or unique products.
Blockaded entry and exit.
Imperfect dissemination of information.
Opportunity for above-normal (economic) profits in long-run equilibrium.
Examples of Oligopoly
National markets for aluminum, cigarettes, electrical equipment, filmed entertainment, ready-to-eat cereals, etc.
Local retail markets for gasoline, food, specialized services, etc.

36. Competition, market structures and business decisions
Oligipoly
Cartels and Collusion
Overt and Covert Agreements
Cartels operate under formal agreements.
Powerful cartels function as a monopoly.
Collusion exists when firms reach secret, covert agreements.
Enforcement Problem
Cartels are typically rather short-lived because coordination problems often lead to cheating.
Cartel subversion can be extremely profitable.
Detecting the source of secret price concessions can be extremely difficult.

37. Competition, market structures and business decisions
Oligipoly
Cartels and Collusion

38. Oligopoly Output-Setting Models
Competition, market structures and business decisions
Market structures
Oligipoly
Oligopoly Output-Setting Models
Cournot Oligopoly
Cournot equilibrium output is found by simultaneously solving output-reaction curves for both competitors.
Cournot equilibrium output exceeds monopoly output but is less than competitive output.

39. Stackelberg Oligopoly
Competition, market structures and business decisions
Market structures
Oligipoly
Stackelberg Oligopoly
Stackelberg model posits a first-mover advantage.
Price wars severely undermine profitability for both leading and following firms.
Price signaling can reduce uncertainty in oligopoly markets.
Price leadership occurs when firms follow the industry leader’s pricing policy.

40. Stackelberg Oligopoly
Competition, market structures and business decisions
Market structures
Oligipoly
Stackelberg Oligopoly
Price leader sets the price at P2
Profit is maximised at Q1.
The follower(s) will supply the combined output of Q4-Q1
At P3- Follows will supply everything
At P1 – the leader will supply everything at no economic profit

41. Oligopoly Price-Setting Models
Competition, market structures and business decisions
Market structures
Oligipoly
Oligopoly Price-Setting Models
Bertrand Oligopoly: Identical Products
The Bertrand model focuses upon the price reactions.
The Bertrand model predicts a competitive market price/output solution in oligopoly markets with identical products.

42. Oligopoly Price-Setting Models
Competition, market structures and business decisions
Market structures
Oligipoly
Oligopoly Price-Setting Models
Bertrand Oligopoly: Identical Products
The Bertrand model focuses upon the price reactions.
The Bertrand model predicts a competitive market price/output solution in oligopoly markets with identical products.

43. Competition, market structures and business decisions
Game Theory Basics
Types of Games
Zero-sum game: offsetting gains/losses.
Positive sum game: potential for mutual gain.
Negative-sum game: potential for mutual loss.
Cooperative games: joint action is favored.
Role of Interdependence
Sequential games: moves in succession.
Simultaneous-move game: coincident moves.
Strategic Considerations

44. Competition, market structures and business decisions
Game Theory Basics
Prisoner’s Dilemma
Classic Riddle
Rational behavior can give suboptimal result.
Rationality can hamper beneficial cooperation.
Business Application
Dominant strategy gives best result regardless of moves by other players.
Secure strategy gives best result assuming the worst possible scenario.
Broad Implications

45. Competition, market structures and business decisions
Game Theory Basics
Nash Equilibrium
Nash Equilibrium Concept
Neither player can improve their payoff through a unilateral change in strategy.
Nash equilibrium concept is broader than the concept of a dominant strategy equilibrium.
Every dominant strategy equilibrium is also a Nash equilibrium.
Nash equilibrium can exist where there is no dominant strategy equilibrium.
Nash Bargaining

46. Infinitely Repeated Games
Competition, market structures and business decisions
Market structures
Game Theory Basics
Infinitely Repeated Games
Role of Reputation
Infinitely repeated games occur over and over again without boundary or limit.
Firms receive sequential payoffs that shape current and future strategies.
Reputations for high quality give consumers confidence for repeat transactions.
Product Quality Games
In a one-shot game, poor quality can fool customers.
In an infinitely repeated game, poor quality is shunned by customers.

47. Finitely Repeated Games
Competition, market structures and business decisions
Market structures
Game Theory Basics
Finitely Repeated Games
Uncertain Final Period
Finitely repeated games have limited duration.
With end point uncertainty, a finitely repeated game mirrors an infinitely repeated game.
End-of-game Problem
Enforcing end-of-game performance is difficult.
Solution: simply extend the game!
First-mover Advantages
Benefits earned by the player able to make the initial move in a sequential move or multistage game.

48. Competition, market structures and business decisions
Competitive strategies in Imperfectly competitive markets
Not all industries offer the same potential for sustained profitability;
Not all firms are equally capable of exploring the profit potential that is available.
An effective competitive strategy in imperfectly competitive markets must be founded on the firms competitive advantage.

49. Competition, market structures and business decisions
Competitive strategies in Imperfectly competitive markets
A competitive advantage is a unique or rare ability to create, distribute or service valued by customers.
It is a business-world analogue to what economists call comparative advantage or when one nation or region of the country is better suited to the production of one product than to the production of some other product
Above-normal rate of return require a competitive advantage that cannot easily be copied
In production;
In distribution; or
In marketing

50. Reasons for competitive advantage:
Competition, market structures and business decisions
Competitive strategies in Imperfectly competitive markets
Reasons for competitive advantage:
Access to a unique resource
(Exclusive) Access to a mineral deposit
(Exclusive) Access to a material
Efficient energy source
Unique climatic condition
Unique technology
Unique (specially qualified or very talented) labour force; or
Access to a unique market
A university bookshop
The rice market in Japan
etc

51. Product differentiation
Competition, market structures and business decisions
Non-price competition.
Product differentiation
Product differentiation
refers to the increase in time of the number of product categories suppled and the number of items in each category
Historically, a step from oligopolistic to monopolistic competition

52. A simple model of the reason for product differentiation
Competition, market structures and business decisions
Non-price competition.
Product differentiation
A simple model of the reason for product differentiation
Price
Considers constant quantity as well as non-changing AC and MC corresponding to this quantity
Producing a little bit different product a firm might hope to charge a higher price P* P Q
Quantity

53. Absolute cost advantages: Ability of established firms to
Competition, market structures and business decisions
Non-price competition.
Barriers to entry
Price
Absolute cost advantages:
Ability of established firms to
produce any given level of output
at lower unit costs than potential
entrants
LAC* P*
LAC P
Quantity Q* Q

54. Price LAC P D Q* Quantity Economies of scale:
Competition, market structures and business decisions
Non-price competition.
Barriers to entry
Economies of scale:
Ability of established firms
* To produce any given level of output
greater than a certain level Q* at
lower unit costs and
* To restrict potential entrants who are
not able to invest in that level of
production
Price
LAC P D Q*
Quantity

55. Price LAC P* D1 D2 D2 Q* Quantity Product differentiation advantages:
Competition, market structures and business decisions
Non-price competition.
Barriers to entry
Product differentiation
advantages:
Variety of demand curves
and common LAC.
Some firms have advantage of
technology or specialisation and
are facing demand curves to the
right of the critical one.
Price
LAC P* D1 D2 D2 Q*
Quantity

56. Ability to affect prices and
Competition, market structures and business decisions
Non-profit-maximising competition.
Appear as the result of
Ability to affect prices and
Separation of ownership and managerial control
Managers’ aim at stability and increase in salaries
Stability may be achieved through the increase in the scale of operations
Increase in sales (not in profit) affects manager’s remuneration
Banks and retailers would prefer to deal with firms increasing the volume of sales

57. P, Cost MC AC D MR Q Profit maximising decision
Competition, market structures and business decisions
Non-profit-maximising competition.
P, Cost MC AC D MR Q
Profit
maximising
decision

58. Competition, market structures and business decisions
Non-profit-maximising competition.
P, Cost
Increasing sales, the firm is moving to the right and downward the demand curve and, therefore, decreases price,
The limitation is AC curve. Some profit should be earned anyway D MR Q
Profit
maximising
decision
Sales
maximising
decision

59. P, Cost MC AC D MR Q Profit maximising decision
Competition, market structures and business decisions
Non-profit-maximising competition.
P, Cost MC AC D MR Q
Profit
maximising
decision

60. P, Cost MC AC D MR Q Old sales maximising decision is a profit
Competition, market structures and business decisions
Non-profit-maximising competition.
P, Cost MC
Old sales maximising decision is a profit
maximising decision at a new level
of average cost AC D MR Q
Old profit
maximising
decision
New profit
maximising
decision

61. Seller concentration Measurement of concentration
Competition, market structures and business decisions
Measurement of market structures
Seller concentration
Seller concentration
refers to the degree to which production for a particular market or or in a particular industry
is concentrated in the hand of few large firms
Measurement of concentration
number of firms in the market
size distribution of firms in the market

62. The Australian Bureau of Statistics
Competition, market structures and business decisions
Measurement of market structures
Seller concentration
The Australian Bureau of Statistics
Industry Concentration Statistics

63. C2542 - Paint Manufacturing in Australia Table: Market Share
Competition, market structures and business decisions
Measurement of market structures
Seller concentration
C Paint Manufacturing in Australia
KEY COMPETITORS (
MAJOR PLAYERS
Table: Market Share
Major Player
Market Share Range
Orica Limited
22.00% % (2004)
Wattyl Limited
17.00% % (2004)
Barloworld Australia Pty Limited
9.00% % (2004)
Akzo Nobel Industries Limited
7.00% % (2003)

64. Measurement of concentration
Competition, market structures and business decisions
Measurement of market structures
Seller concentration
Measurement of concentration

65. Census Measures of Market Concentration
Concentration Ratios
Group market share data are called concentration ratios.
CRi = ∑ Xi, where Xi is market share of the ith leading firm.
CRi = 100 for monopoly.
CRi ≈ 0 for a perfectly competitive industry.
Herfindahl-Hirschmann Index
Calculated in percentage terms, the HHI is the sum of squared market shares for all competitors.
HHI = ∑ Xi2, where Xi2 is squared market share of the ith firm.
HHI = 10,000 for monopoly.
HHI ≈ 0 for a perfectly competitive industry.
Limitations of Census Information
Slow reports hinder usefulness.
National statistics obscure local markets.

66. Diagrammatic approach
Competition, market structures and business decisions
Measurement of market structures
Seller concentration
Measurement of concentration
Diagrammatic approach
100%
The curve of real (not
equal distribution
The curve of equal
distribution of shares
of the market among
firms
Cumulative % of output
This distance measures
concentration N
No of firms cumulated from the largest

67. Competition, market structures and business decisions
Multinational companies. Vertical and horizontal coordination.
Diversification
Vertical coordination
Multinational company

68. Invest in production facilities to produce Buys shares of a product D
Competition, market structures and business decisions
Multinational companies. Vertical and horizontal coordination.
Diversification
Invest in production
facilities to produce
a product D
Buys shares of
a firm Y producing
a good B
A firm X
producing
a good A
Invents a new
product C

69. A firm X producing a good A
Competition, market structures and business decisions
Multinational companies. Vertical and horizontal coordination.
Vertical coordination
A firm X
producing
a good A

70. facilities or buys shares of or coordinate activities
Competition, market structures and business decisions
Multinational companies. Vertical and horizontal coordination.
Vertical coordination
A firm X
producing
a good A
Invest in production
facilities or buys shares
of or coordinate activities
with a firm producing an
input D

71. facilities or buys shares of or coordinate activities
Competition, market structures and business decisions
Multinational companies. Vertical and horizontal coordination.
Vertical coordination
A firm X
producing
a good A
Invest in production
facilities or buys shares
of or coordinate activities
with a firm producing an
input D
Invest in facilities or buys shares of or coordinate activities with a firm providing professional training for employees

72. facilities or buys shares of or coordinate
Competition, market structures and business decisions
Multinational companies. Vertical and horizontal coordination.
Vertical coordination
Invest in production
facilities or buys shares
of or coordinate
activities with a firm using
A as an input
A firm X
producing
a good A
Invest in production
facilities or buys shares
of or coordinate activities
with a firm producing an
input D
Invest in facilities or buys shares of or coordinate activities with a firm providing professional training for employees

73. facilities or buys shares of or coordinate
Competition, market structures and business decisions
Multinational companies. Vertical and horizontal coordination.
Vertical coordination
Invest in production
facilities or buys shares
of or coordinate
activities with a firm using
A as an input
Invest in or buys shares
of or coordinate activities
with a firm specialising in
the selling of product A
A firm X
producing
a good A
Invest in production
facilities or buys shares
of or coordinate activities
with a firm producing an
input D
Invest in facilities or buys shares of or coordinate activities with a firm providing professional training for employees

74. Undertake vertical coordination measures abroad
Competition, market structures and business decisions
Multinational companies. Vertical and horizontal coordination.
Multinational company
Undertake vertical coordination measures abroad
Establishes branches in other countries
A firm producing
a good A in a home country
Buys share of
analogous firms
in other countries
Conduct diversification
practices abroad