1. More Economics of Competition and Competitive Strategies
Unit 8
More Economics of Competition and Competitive Strategies

2. Key Topics Alternative market structures Barriers to entry
Perfect competition
Imperfect competition
Barriers to entry
Revenue concepts for a price-taking firm (review)
P = AR MR TR

3. Key Topics (cont’d) 4. Operating decisions for a price-setting firm
TR max ($ sales max)
Π max
Rent-seeking actions
Price discrimination
5. Revenue concepts and operating decisions for a P-setting firm
6. Monopolies and roles of government
Restrict market power
Grant & regulate ‘natural’ monopolies

4. Characteristics of ‘perfectly’ competitive markets
Many firms each relatively small compared to the size of the entire market or industry.
Firms produce ‘homogeneous’ products.
Relative ease of firm entry in to or exit out of the market.
Information about prices and production costs widely available.
Firms have no control over prices and are price ‘takers’.
In long run, product price = minimum average cost = marginal cost (i.e. no excess profits or losses).

5. Perfect Competition The industry A representative firm S P=MR
Price per unit ($)
P*=5
P*=5 D
Units of output, Q
Units of output, q

6. Characteristics of ‘imperfectly’ competitive markets
Limited number of firms so each has a relatively significant share of total output for the industry or market.
Firms produce ‘heterogeneous’ products.
Relative difficulty of firm entry in to or out of the market.
Information about prices and production costs NOT widely available.
Firms have some control over prices charged for their products and are price ‘setters’.
In long run, product price > average cost and price > marginal cost.

7. General types of imperfectly competitive markets
Monopolistic competition
Many firms selling slightly differentiated products
Oligopoly
Few firms selling products with varying degrees of differentiation
Monopoly
ONE firm selling product that has no (or few) close substitutes

8. Barriers to entry
Government franchises = exclusive licenses to sell product/services
Why?
- Economies of scale (i.e. greater efficiency  lower production costs)
- Greater governmental control (e.g. alcohol)
Patents = exclusive right to sell a product or use a process to the inventor (for 20 years)
- To promote research, scientific progress

9. Barriers to entry (cont’d)
High capital costs (e.g. production, marketing)
Ownership of scarce factor of production

10. Prices charged by imperfectly competitive firms
They are a choice decision, not given (or taken)
They are constrained by consumer demand for the firm’s product (i.e. can set either P or Q, but NOT both).

11. Demand Curve ‘Constraint’P
D curve facing P-setting firm
(shows max P & Q combinations) a
Not possible Pa q qa

12. Recall, P = MR for P-taking (competitive firm)$
P = MR = AR q
However, MR < P for P-setting firm

13. MR for P-setting firm of lowering P to sell 1 more Q (graph){ P1 ΔP -$ P2 +$ q q1 {
(q1+1)
Δq = 1

14. Marginal Revenue Example, Imperfect Competition
Quantity
Price
Total Revenue
Marginal Revenue
$11 -- 1 10
$10 2 9 18 8 3 24 6 4 7 28 5 30 -2 -4

15. MR and TR max vs π max MR = slope of TR TR max = $ sales max  MR = 0
(= D curve mid point)
Π max  MR = MC

16. TR max vs π max (graph)
MR=0
 TR max $ TC
MR=MC
 π max TR q

17. More Monopoly Questions, Issues
Can you show with a graph:
A monopolist maximizing its profits, yet still losing money?
The consumer surplus impacts of monopoly (vs competition)?
The impact on a monopolist’s profit of offering a price discount on large quantity purchases?

18. Monopoly (vs Perfect Competition)
Profits can persist LR (entry blocked)
Output less & price higher ( loss of consumer surplus)
May act to preserve profits (= rent-seeking behavior) (e.g. lobbying, advertising, build entry barriers)

19. Price Discrimination
= charging different prices to different groups of buyers (i.e. different markets)
Examples:
Airlines, movie theatres, golf courses, restaurants, telephone companies, utility companies

20. Price Discrimination (graph)$ $ PB Pa
MC = ATC dA
MRa
MRB dB q q
Mkt B
Mkt A

21. Monopolies and the Roles of Government
Promote competition/restrict market power
 antitrust laws
- Sherman Antitrust Act, 1890 (restraint of trade illegal)
- Clayton Act, 1914 (anticompetitive mergers and tying
contracts illegal)
- Federal Trade Commission Act, 1914 (established FTC as regulatory agency and made ‘unfair methods of competition illegal)
Other legality issues: rule of reason vs. per se; conduct vs structure; remedies = consent decrees, treble damages, etc.

22. Monopolies and the Roles of Government
2. Grant monopolies (natural) and regulate so consumers benefit from economies of scale

23. Monopoly Regulation Alternatives
Require P = MC not practical as P < ATC
Require P = ATC (or P = ATC+)
- Little incentive to minimize costs
Incentive pricing 
- set prices for number of yrs into future & allow firms to keep profits