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Perfect Competition

Pure Monopoly. Perfect Competition. Monopolistic Competition. Oligopoly. Concentration Ratios . One measure the degree of competition in an industry is its concentration ratio. An industry’s concentration ration is the percentage market share of the top firms in the industry.

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Perfect Competition

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  1. Pure Monopoly Perfect Competition Monopolistic Competition Oligopoly

  2. Concentration Ratios • One measure the degree of competition in an industry is its concentration ratio. • An industry’s concentration ration is the percentage market share of the top firms in the industry. • The concentration ratio of the “n” top firms is: Total Sales of the top “n” Firms CRn = 100 Total Industry’s Sales

  3. An Example Four-firm and eight-firm concentration ratios are more commonly used, concentration ratios can be calculated for any number of top firms. 20 and 50-firm concentration ratios are particularly useful when comparing industries with larger number firms. • In the US there are 48 manufacturers of breakfast cereal with the total sales of $9099 million. The top 4 companies sales amount to $7543 million. The 4-firm concentration ratio for this industry is (7543/9099).100= 82.9 (See Table 11.5, page 447< in the book.)

  4. Monopolistic Competition • Many firms producing producing differentiated products • Each firm would face a downward-sloping demand curve • The 15-minute fame • To maximize profit the firm set its estimated MR equal to its MC • The firm may enjoy a short-run profit • In the long run due to the emergence of substitutes the demand starts to shrink

  5. A Monopolistically competitive Firm’s Market Share $ P1 P2 MS` MS Q Q1 Q2 Q3

  6. MS1 $ A Monopolistically Competitive Firm’s Demand Curve MS2 MS3 MS4 MS5 a p1 c p2 b d p3 e p4 f p5 d Q 0 q1Qo q2 q2 q3 q4 MR`

  7. $ MS SMC a P b d Q 0 Q1 Q2 MR

  8. $ Short-Run Equilibrium: A Monopolistically Competitive Firm MS SMC SATC Pe a b c d` Q 0 Qe MR`

  9. Long-Run Equilibrium: A Monopolistically Competitive Firm LMC $ LAC P=LAC Pe d Q o qe MR

  10. Oligopolies • A market with a few firms each large enough to have an effect on the price • Interdependence among firms • Each firm would try to guess its competitor’s reaction to its pricing strategy • Relative price stability • Different Oligopoly models • The Kinked Demand Curve Model • The Game Theory

  11. $ d` The Kinked Demand Curve a Pe MC4 MC3 MC2 d MC1 D Q 0 Qe MR

  12. $ A Duopoly with a Superior Firm Pb MCb Pa MCa D` D Q o Qb Qa QT MR`

  13. $ Sf , MCf MCL a Pb e Pe DL h Pf Dm g MRL Qm QL Qes Qem QeL 0 Market Demand and Small Firms’ Supply Leader

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