Market Structures

1. Market Structures

2. The Degree of Competition • Classifying markets • number of firms • freedom of entry to industry • nature of product • nature of demand curve • The four market structures • perfect competition • monopoly • monopolistic competition • oligopoly

3. Features of the four market structures

4. Features of the four market structures

5. Features of the four market structures

6. Features of the four market structures

7. Features of the four market structures

8. Features of the four market structures

9. The Degree of Competition • Classifying markets • number of firms • freedom of entry to industry • nature of product • nature of demand curve • The four market structures • perfect competition • monopoly • monopolistic competition • oligopoly • Structure  conduct  performance

10. Perfect Competition • Assumptions • firms are price takers • freedom of entry • identical products • perfect knowledge • Short-run equilibrium of the firm • price, output and profit

11. R MC AC S D = AR Pe AR = MR AC D O Q (thousands) (b) Firm Short-run equilibrium of industry and firm under perfect competition P O Qe Q (millions) (a) Industry

12. AC MC AC D1 = AR1 P1 AR1 = MR1 Qe Loss minimising under perfect competition P R S D O O Q (thousands) Q (millions) (a) Industry (b) Firm

13. Perfect Competition • Assumptions • firms are price takers • freedom of entry • identical products • perfect knowledge • Short-run equilibrium of the firm • price, output and profit • The short-run supply curve of the firm

14. S MC a P1 b P2 c P3 D1 D2 D3 Deriving the short-run supply curve P R = S D1 = MR1 D2 = MR2 D3 = MR3 O O Q (thousands) Q (millions) (a) Industry (b) Firm

15. Perfect Competition • Long-run equilibrium of the firm • all supernormal profits competed away • LRAC = AC = MC = MR = AR

16. S1 Se LRAC P1 AR1 D1 PL ARL DL D Long-run equilibrium under perfect competition Profits return to normal Supernormal profits New firms enter P R O O QL Q (thousands) Q (millions) (a) Industry (b) Firm

17. (SR)MC (SR)AC LRAC DL AR = MR LRAC = (SR)AC = (SR)MC =MR= AR Long-run equilibrium of the firm under perfect competition R O Q

18. Perfect Competition • Incompatibility of economies of scale with perfect competition • Benefits of perfect competition • price equals marginal cost • prices kept low • firms must be efficient to survive

19. Monopoly • Defining monopoly • Barriers to entry • economies of scale • economies of scope • product differentiation and brand loyalty • lower costs for an established firm • ownership/control of key factors • ownership/control over outlets • legal protection • mergers and takeovers • aggressive tactics • intimidation

20. Monopoly • The monopolist’s demand curve • downward sloping • MR below AR • Equilibrium price and output • Equilibrium output, where MC = MR

21. MC MR Profit maximising under monopoly R Qm O Q

22. Monopoly • The monopolist’s demand curve • downward sloping • MR below AR • Equilibrium price and output • Equilibrium output, where MC = MR • Equilibrium price, found from demand curve

23. AC AR AC AR Profit maximising under monopoly R MC MR Qm O Q

24. Monopoly • The monopolist’s demand curve • downward sloping • MR below AR • Equilibrium price and output • Equilibrium output, where MC = MR • Equilibrium price, found from demand curve • Profit • Measuring profit

25. Total profit AC AR AC AR Profit maximising under monopoly R MC MR Qm O Q

26. Monopoly • The monopolist’s demand curve • downward sloping • MR below AR • Equilibrium price and output • Equilibrium output, where MC = MR • Equilibrium price, found from demand curve • Profit • Measuring profit • Supernormal profit can persist in long run

27. Monopoly • Disadvantages of monopoly • high prices / low output: short run

28. MC AR = D MR Equilibrium of industry under perfect competition and monopoly: with the same MC curve R Monopoly P1 Q1 O Q

29. P2 Equilibrium of industry under perfect competition and monopoly: with the same MC curve R MC ( = supply under perfect competition) Comparison with Perfect competition P1 AR = D MR Q1 Q2 O Q

30. Monopoly • Disadvantages of monopoly • high prices / low output: short run • high prices / low output: long run

31. Monopoly • Disadvantages of monopoly • high prices / low output: short run • high prices / low output: long run • lack of incentive to innovate

32. Monopoly • Disadvantages of monopoly • high prices / low output: short run • high prices / low output: long run • lack of incentive to innovate • X-inefficiency

33. Monopoly • Disadvantages of monopoly • high prices / low output: short run • high prices / low output: long run • lack of incentive to innovate • X-inefficiency • Advantages of monopoly

34. Monopoly • Disadvantages of monopoly • high prices / low output: short run • high prices / low output: long run • lack of incentive to innovate • X-inefficiency • Advantages of monopoly • economies of scale

35. Equilibrium of industry under perfect competition and monopoly: with different MC curves R MCmonopoly P1 AR = D MR O Q1 Q

36. Equilibrium of industry under perfect competition and monopoly: with different MC curves MC ( = supply)perfect competition R MCmonopoly P2 P1 x P3 AR = D MR Q2 Q3 O Q1 Q

37. Monopoly • Disadvantages of monopoly • high prices / low output: short run • high prices / low output: long run • lack of incentive to innovate • X-inefficiency • Advantages of monopoly • economies of scale • profits can be used for investment

38. Monopoly • Disadvantages of monopoly • high prices / low output: short run • high prices / low output: long run • lack of incentive to innovate • X-inefficiency • Advantages of monopoly • economies of scale • profits can be used for investment • high profits encourage risk taking

39. Monopoly • Contestable markets • importance of potential competition • a perfectly contestable market • contestable markets and natural monopolies • importance of costless exit • Contestable markets and the public interest

40. Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm • short run

41. MC AC AR =D MR Short-run equilibrium of the firmunder monopolistic competition R Ps ACs O Qs Q

42. Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm • short run • long run

43. LRMC LRAC ARL=DL MRL Long-run equilibrium of the firmunder monopolistic competition R PL O QL Q

44. Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm • short run • long run • underutilisation of capacity in the long run

45. P2 DLunder perfect competition Long run equilibrium of the firm under perfect andmonopolistic competition R LRAC P1 DLunder monopolistic competition O Q1 Q2 Q

46. Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm • short run • long run • underutilisation of capacity in the long run • Non-price competition

47. Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm • short run • long run • underutilisation of capacity in the long run • Non-price competition • The public interest

48. Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm • short run • long run • underutilisation of capacity in the long run • Non-price competition • The public interest • comparison with perfect competition

49. Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm • short run • long run • underutilisation of capacity in the long run • Non-price competition • The public interest • comparison with perfect competition • comparison with monopoly

50. Oligopoly • Key features of oligopoly • barriers to entry • interdependence of firms • Competition versus collusion • Collusive oligopoly: cartels • equilibrium of the industry