1. Price-Searcher Markets With Low Entry Barriers
Micro Chapter 10
Price-Searcher Markets With Low Entry Barriers

3. 4 Learning Goals
Characterize and explain the output decisions of competitive price-searcher markets.
Bring out the role of the entrepreneur in decision making and firm organization.
Determine the costs and benefits of this market structure
Justify the practice of price discrimination

4. Competitive Price-Searcher Markets

5. These markets are also called monopolistic competition because they have characteristics similar to other types of markets:
Many sellers
Low entry barriers
Sell differentiated but similar products

6. Class Activity: Can you name at least two firms or industries that match these characteristics?

8. These firms have to work very hard to convince you to buy their products
Not exactly like this guy, but…

10. Video:

12. Clicker Question Next

13. Q10.1 What was the sales difference for the bookstore from the previous year?
$200 more
$200 less
$1,200 more
$1,200 less
$2,000 more
$2,000 less

14. The same decision rules apply:
(1) Close if:
MR < AVC, or
TR < TVC
(2) Keep producing as long as MR > MC
But now the firm has some control over price

15. Output in the Short Run:
If profit exists, new firms will enter and “steal” some of your customers
Your demand curve will shift left
If losses exist, some existing firms will exit and you will gain customers
Your demand curve will shift right

17. Another example of fighting over customers:

19. Graph of SR profits:

21. Graph of SR losses:

23. Another example of fighting over customers:

25. 2 Clicker Questions Next

26. Q10.2 If firms in a competitive price-searcher market are currently experiencing economic profits, then over time,
new firms will enter the market, and the current firms will experience a decrease in demand for their products.
new firms will enter the market, and the current firms will experience an increase in demand for their products.
some existing firms will exit the market, and the remaining firms will experience an increase in demand for their products.
some existing firms will exit the market, and the remaining firms will experience a decrease in demand for their products.

27. Q10.3 The fact that barriers to entry are low in competitive price-searcher markets means that if current firms are making economic losses,
these losses will remain in the long run because no firms can exit the market.
current firms will exit the market, causing the demand curves that face the remaining firms to increase.
new firms will enter the market, causing the demand curves that face the existing firms to decrease.
new firms will enter the market, causing no change in the demand curves that face the existing firms in the market.

28. Some advertising:

30. More advertising:

34. Output in the Long Run:
As firms exit and enter the industry, the firm demand curve shifts until zero profit exists
At zero profit – no more entry or exit

35. Graph of LR:

37. Key Point:
Since each firm produces a differentiated product, we don’t speak of a market supply or demand curve but only of a firm supply and demand curve

41. Class Activity: Economics is Everywhere 12.18

42. A local grocery store has a truly immense array of famous brands of beer from all over the world, with lots of examples of microbrews from all regions on the United States. How can a small brand stand out from the shelves against all this competition? In other words, how can the manufacturer practice product differentiation and get the customer’s attention? These companies have no national advertising budgets; they are not sponsoring the Super Bowl. The trick appears to be some clever eye-catching name. Years ago we saw Black Dog and Pete’s Wicked Ale. Today we have Arrogant Bastard Ale, a fairly heavy brew whose label tells the customer that he or she probably isn’t tough enough to drink this bottle and should instead buy one of the wimpy standard brands with a multi-million-dollar advertising budget. That is a clever name and a clever challenge. While I didn’t buy a bottle, it has stuck in my mind and probably will win me over the next time I shop.
Q: Think up a name for a brand of beer that you will create. The only requirements are that your brand name cannot be unprintable in a family newspaper and must be the best possible name to sell more of the beer.

43. Here are some from prior students:

44. Toilet hugger lager
Lover’s lager
Infamous Scallywag Ale
Flying Monkey Lager
Beer Domination
Shipface Beer
Pint O’ Paradise
Liquid Bread
Hairy Brew
Seminale
Great White Wh”ale”
Morning Glory
Fist of Fury

46. Infamous scallywag ale Flying Monkey Lager Beer domination
Toilet hugger lager
Lover’s lager
Infamous scallywag ale
Flying Monkey Lager
Beer domination
Shipface Beer
Pint O’ paradise
Liquid bread
Hairy brew
Seminale
Great White Wh”ale”
Morning glory
Fist of fury
Chuck Norris’ Beer

48. Toilet Hugger Lager
Lover’s Lager
Infamous Scallywag Ale
Flying Monkey Lager
Beer Domination
Shipface Beer
Pint O’ Paradise
Liquid Bread
Hairy Brew
Seminale
Great White Wh”ale”
Morning Glory
Fist of Fury
Chuck Norris’ Beer
Smack Yo Mama
Fugly Duck
Sweet Wheat
Nighttime Slorry
1, 2, 3, Floor
He-Brew
Twelve Gauge Stout
Make You Pale Ale
Calhoun Crunk
Fear the Beer
Dirty Rotten Scoundr“ale”
Drunken Pumpkin

49. 2 Clicker Questions Next

50. Q10.4 When a competitive price-searcher market is in long-run equilibrium, the firms will
earn economic profit.
operate at an output level that minimizes long-run average total cost.
charge a price that is equal to average total cost.
operate at an output level where price is equal to marginal cost.

51. Q10.5 If a price searcher is producing at a level of output such that its marginal cost is $5 and its marginal revenue is $3, the firm should
increase output in order to reduce per-unit costs.
decrease the price of its product and expand output.
increase price and reduce its rate of output.
reduce both price and output.

52. Now I want you to discuss your answer with your neighbor and convince that person your answer is correct.

53. Q10.6 If a price searcher is producing at a level of output such that its marginal cost is $5 and its marginal revenue is $3, the firm should
increase output in order to reduce per-unit costs.
decrease the price of its product and expand output.
increase price and reduce its rate of output.
reduce both price and output.

54. Examples of Monopolistic Competition:
Network television, Fox enters the market
SUVs
Reality TV shows

58. Complex Decision Making and the Entrepreneur

59. Here are a few illustrations of entrepreneurs:

65. Here’s my all-time favorite entrepreneur!

67. Read this section carefully on your own
Main points:
(1) An entrepreneur is someone who makes decisions based upon uncertainty, discovery, and business judgment.
(2) These decisions cannot be graphed or modeled

68. Another way to think about an entrepreneur:
He or she puts together resources in ways never tried before
Think of shuffling a deck of cards
The value of 52! is incredibly large. It's a 68-digit number:
80,658,175,170,943,878,571,660,636,856,403,766,975,289,505,440,883,277,824,000,000,000,000
That’s 80 unvigintillion

69. Imagine you could shuffle the deck 1000 times per second
Imagine you could shuffle the deck 1000 times per second. Everyone on Earth (all 6 billion people) has their own deck of cards, and they're all shuffling them too, 1000 times each second. Now imagine everyone continues to do this for the next 10 billion years.
In all those shuffles you wouldn't have rearranged the cards even a fraction of the total number of possible ways!

70. "The important thing is not being afraid to take a chance
"The important thing is not being afraid to take a chance. Remember, the greatest failure is to not try. Once you find something you love to do, be the best at doing it.“

71. Clicker Question Next

72. Q10.7 Which of the following people said that?
Henry Ford
Steve Jobs
President Obama
Debbi Fields
Oprah Winfrey
Donald Trump
John Rockefeller

73. "The important thing is not being afraid to take a chance
"The important thing is not being afraid to take a chance. Remember, the greatest failure is to not try. Once you find something you love to do, be the best at doing it.“
Debbi Fields, founder of Mrs. Fields Cookies

74. “Failure is simply the opportunity to begin again more intelligently.”

75. Clicker Question Next

76. Q10.8 Which of the following people said that?
Henry Ford
Steve Jobs
President Obama
Debbi Fields
Oprah Winfrey
Donald Trump
John Rockefeller

77. “Failure is simply the opportunity to begin again more intelligently.”
Henry Ford

78. Clicker Question Next

79. Q10.9 In order to be successful in a competitive market economy, an entrepreneur must
provide buyers at least as much satisfaction per dollar spent as the buyer could get elsewhere.
supply consumers with goods and services valued less highly than the resources necessary to produce them.
take resources from other producers, thus reallocating wealth but not creating new wealth.
gain government grants and subsidies.

83. Entrepreneurship and Economic Progress

84. Read this section carefully on your own

85. Main Points:
Entrepreneurs play a vital role in economic progress by discovering new products and services that create wealth
Market forces provide incentives (and signals) for entrepreneurs to try new ideas

86. Here’s one entrepreneur:

88. Clicker Question Next

89. Q10.10 Which company did Steve Wozniak work part-time for that had first chance at anything he invented?
IBM
Xerox
Digital Equipment Corp.
The federal government
Hewlett-Packard

90. Example:
"There is no reason anyone would want a computer in their home.“
Ken Olson, chairman/founder of Digital Equipment Corp., 1977.

91. Example: Yale University Senior Project Grade Remark:
"The concept is interesting and well-formed, but in order to earn better than a 'C,' the idea must be feasible.”
Fred Smith (FedEx)

92. Example:
Would you invest in this group?

93. Example:
Would you invest in this group?
Microsoft Corporation, 1978

94. Here’s the critical piece of the Microsoft story:

96. Clicker Question Next

97. Q10.11 Economic analysis suggest that in a competitive market economy, when an entrepreneur has made a large profit,
consumer benefits must have been reduced by at least the amount of the profit.
other producers have lost profits of the same size.
economic progress for society as a whole has normally been enhanced.
luck or chance, rather than productive activity, has nearly always been the largest factor.

102. Evaluating Competitive Price-Searcher Markets

103. What’s good and bad about this kind of market structure?
Clicker Question Next

104. Q10.12 (MA) Compared to the outcome when the firms are price takers, competitive price-searcher markets will result in
a wider variety of products.
less product variety.
lower prices.
higher prices.

105. What’s good and bad about this kind of market structure?
A tradeoff exists –
with fewer firms the ATC is lower (good) but product variety is also lower (bad)
with more firms the ATC is higher (bad) but variety is also higher (good)
ATC is higher mainly due to brand promotion
Like this

107. Clicker Question Next

108. Q10.13 Some economists argue that competitive price-searcher markets are inefficient because
the firms earn economic profits in the long run.
the firms' marginal costs and marginal revenues are not always equal.
firms do not produce the output rate that would minimize their average total costs.
barriers to entry are high.

109. Evaluating these kinds of markets & economic progress
Here are two different interpretations:
Recall the short-run dynamics: positive profits, new firms enter, existing firms lose customers
What if new firms expand the size of the market so that existing firms also grow?
Why do similar stores and restaurants open close to each other?

110. Evaluating these kinds of markets & economic progress
If this was the geographical area of your market, where would you put your business?

111. Evaluating these kinds of markets & economic progress
Alternative analysis: positive profits, new firms enter, new and existing firms attract customers, both demand curves shift right

112. Evaluating these kinds of markets & economic progress
Recall the long-run equilibrium: zero profit, no entry or exit
No entrepreneur will want to settle for this
As the market conditions begin to reach this point, the entrepreneur must then get creative to keep positive profits
Innovation and invention will keep markets away from long-run equilibrium
Driven by the profit motive, entrepreneurs continually drive economic progress

113. Evaluating these kinds of markets & economic progress
Examples:
Chick-fil-A Spicee Chicken & milkshakes
Smartphones
Willis (Sears) Tower skydeck

115. Evaluating these kinds of markets & economic progress
Examples:
Chick-fil-A Spicee Chicken & milkshakes
Smartphones
Willis (Sears) Tower skydeck
Any “new and improved” product

118. More advertising:

120. Clicker Question Next

121. Q10.14 What is the price of the Manslater?
7 easy payments of $99.99
5 easy payments of $29.99
2 easy payments of $9.99
$59.99
$19.99

122. A Special Case: Price Discrimination

123. What is price discrimination?
The practice of selling the same good to two or more groups of people at different prices
Class Activity: Economics is Everywhere 13.1

124. Disney World offers tourists a three-day pass that costs several hundred dollars. But Floridians can obtain the same pass for a bit more than $100. This is a great example of demand-based price discrimination. The cost to Disney of letting a Floridian or an out-of-stater into the park is the same. But the out-of-staters, having traveled to Florida, often with the sole purpose of visiting Disney World, have a very inelastic demand, while the Floridians have lots of other ways they can spend time while at home. Their demand is more elastic. It is easy for Disney to separate the two markets. All it needs to do is to ask those people seeking to purchase the cheap tickets to show a Florida driver’s license.
Q: Is there any way you can get around Disney’s clever way of separating the markets for these discount passes?

125. Who can price discriminate?
Any firm that
(1) has a downward-sloping demand curve
(2) can separate its customers into at least two groups
(3) can prevent customers from re-trading the product

126. Why do firms price discriminate?
To increase the number of sales and profits

127. How do firms price discriminate?
By setting a relatively high price for those customers with inelastic demand and a relatively low price for those customers with elastic demand

128. Graph: See handout “discrimgraphs.pdf”
Class Activity: Economics is Everywhere 13.4

129. As you approach Los Angeles International Airport by car, the price of regular gasoline changes dramatically. The stations near the freeway exit charge about 30 cents a gallon less than does the last gas station before the car rental return offices. If you go farther beyond the airport, prices again drop off quickly. The stations are price discriminating to take advantage of the customers’ different price elasticities of demand. Customers who have waited until just before the rental office face the choice of gassing up for $2.35 or of letting the rental company charge them over $5 per gallon to fill up. The station’s only competition is the rental company; and the $5 price limits what the nearby station can charge. Markets are neatly separated- you won’t drive back to a cheaper station once you’re near the rental office, and you can’t buy gasoline from some sidewalk peddler who has gotten it cheaper.
Q: If this is true, why doesn’t the gas station nearest the car rental offices charge $5 per gallon?

132. Examples:
Airlines – Saturday night stay usually indicates vacation traveler (more elastic) while non-Saturday indicates business traveler (more inelastic)
Grocery stores – coupons and saver cards; those who cut coupons and have saver cards are usually more elastic demanders
Universities – in-state versus out-of-state tuition; in-state students are usually more elastic demanders

133. 2 Clicker Questions Next

134. Q10.15 If a movie theater is going to gain by charging students a dollar less than other customers,
the demand of students must be more elastic than that of other customers
the demand of students must be less elastic than that of other customers
students must have higher incomes than other customers.
other customers must enjoy movies more than students.

135. Q10.16 (MA) Which of the following are necessary conditions for effective price discrimination?
The firm must face a downward-sloping demand curve.
There must be at least two distinguishable groups of consumers.
The producer must be a pure monopolist.
The seller must be able to prohibit buyers from easily reselling the product to other potential buyers.

140. 4 Learning Goals
Characterize and explain the output decisions of competitive price-searcher markets.
Bring out the role of the entrepreneur in decision making and firm organization.
Determine the costs and benefits of this market structure
Justify the practice of price discrimination

141. One final commercial: