CHAPYER SIX Industrial Organization in Different Markets

1. CHAPYER SIXIndustrial Organization in Different Markets Prof. Mohamed I. Migdad Professor in Economics

2. Major Market Forms • Perfect Competition • The market consists of a very large number of small firms producing product in the same domain. No one, whether a consumer or a producer, can affect the price in the perfect competition market.

3. Monopolistic Competition It is when there are a large number of somewhat independent firms, but the number is lower than in the case of the perfect competition.

4. Oligopoly • A market is dominated by a small number of sellers, this number is smaller than the number in the case of the monopolistic competition firms. In this case, the sellers can affect and control prices using different ways.

5. Oligopsony • A market dominated by many sellers and few buyers. So it is the case of buyer's oligopoly. In this case the buyers can affect and control prices using different ways.

6. Monopoly • It is when there is only one provider of a product or service. So the monopolistic firm can determine either prices or quantities in the market, and is able to make higher profit than other types of market such as the perfect competition firms.

7. Natural monopoly • A monopoly in which economies of scale causes efficiency to increase continuously with the size of the firm. This will happen in the case of the natural resources or new technology.

8. Monopsony • It is what we call when there is only one buyer in a market. This will happen if only one firm is the illegible firm to by the good or the service. This is clear if the government is the only buyer for the service, or if only one firm buys the raw materials from so many sellers.

10. The perfect competition market Analyzing firms under perfect competition

11. Perfect competition • Perfect competition is a model in economic theory. It describes a hypothetical market form in which no producer or consumer has the market power to influence prices in the market. This would lead to an outcome which is efficient, according to the standard definition in economics (Pareto efficiency).

12. Perfect competition • The analysis of perfectly competitive markets provides the foundation of the theory of supply and demand

13. Conditions for perfect competition • Perfect competition would require: • Atomicity, there are a large number of small producers and consumers on a given market, each so small that its actions have no significant impact on others, firms are price takers. • Goods and services are perfect substitutes -- they are homogeneous.

14. conditions • Perfect and complete information: all firms and consumers know the prices set by all firms. • Equal access, all firms have access to production technologies, and resources (including information) are perfectly mobile.

15. conditions • Free entry, any firm may enter or exit the market as it wishes. • Transaction costs are zero. • The price is determined at the level that equates supply and demand.

16. Price in the perfect competition • In such a market, the price would move instantaneously to equilibrium. • And in the perfect competition the firm is a price takers and can not affect the price of a good .

17. The Equilibrium in the Short Run in the Perfect Competition Market • The Totals Approach (TR and TC) • We reach the equilibrium point at a production level where the difference between the total revenue and the total cost, is maximum. The total profit in this case equals total revenue minus total cost. • Profit = TR - TC

18. Cont. • The equilibrium point will be clear in the following figure, were we reach the profit maximizing point. • It is clear that the TR curve increases at increasing rate, due to the constant price level in the perfect competition market. So the TR curve takes the strait line shape upward to the right. But the MC curve takes another shape and cuts the MR curve twice.

19. Cont. • The condition for reaching the equilibrium in this case is; the slope of total cost = the slope of total revenue. This means that; the marginal cost equals the marginal revenue (MC=MR).  • It is clear that before the equilibrium point (B), the MR is higher than the MC, so it is good for the company to continue working. And after the point (B) the MR is lower than the MC so the firm has to reduce production.

20. Profit Maximization (Totals Approach)

21. Output Decisions: Revenues,Costs, and Profit Maximization • The perfectly competitive firm faces a perfectly elastic demand curve for its product.

22. Total Revenue (TR) andMarginal Revenue (MR) • Total revenue (TR) is the total amount that a firm takes in from the sale of its output.

23. Total Revenue (TR) andMarginal Revenue (MR) • Marginal revenue (MR) is the additional revenue that a firm takes in when it increases output by one additional unit. • In perfect competition, P = MR.

24. Comparing Costs andRevenues to Maximize Profit • The profit-maximizing level of output for all firms is the output level where MR = MC. • In perfect competition, MR = P, therefore, the firm will produce up to the point where the price of its output is just equal to short-run marginal cost. • The key idea here is that firms will produce as long as marginal revenue exceeds marginal cost.

25. Profit Maximization The Average Approach (P and AR)

26. Comparing Costs andRevenues to Maximize Profit

27. Comparing Costs andRevenues to Maximize Profit • The profit-maximizing output is q*, the point at which P* = MR =AR because it is constant. • The general equilibrium condition is MR =MC. • So the equilibrium condition in the perfect competition is: P = MC

28. Profit Analysis for a Simple Firm

29. The Short-Run Supply Curve

30. Profit Maximization (The Marginal Approach for Min. Economic Loses)

31. The Short-Run Supply Curve • At any market price, the marginal cost curve shows the output level that maximizes profit. Thus, the marginal cost curve of a perfectly competitive profit-maximizing firm is the firm’s short-run supply curve.

32. Imperfect competition And monopoly

33. Monopoly • In economics, a monopoly (from the Greekmonos, one + polein, to sell) is defined as a persistent market situation where there is only one provider of a kind of product or service.

34. Caracteristics of Monopoly • Monopolies are characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods. • The following are primary characteristics of a monopoly

35. 1. SingleSeller • A pure monopoly is an industry in which a single firm is the sole producer of a good or the sole provider of a service. This is usually caused by a blocked entry

36. 2. NoCloseSubstitutes • The product or service is unique in ways which go beyond brand identity, and cannot be easily replaced (a monopoly on water from a certain spring, sold under a certain brand name, is not a true monopoly; neither is Coca-Cola, even though it is differentiated from its competition in flavor(

37. 3. Price Maker • In a pure monopoly a single firm controls the total supply of the whole industry and is able to exhert a significant degree of control over the price, by changing the quantity supplied.

38. continue • In subtotal monopolies (for example diamonds or petroleum at present) a single organization controls enough of the supply that even if it limits the quantity, or raises prices, the other suppliers will be unable to make up the difference and take significant amounts of market share.

39. 4. Blocked Entry • The reason a pure monopolist has no competitors is that certain barriers keep would be competitors from entering the market. Depending upon the form of the monopoly these barriers can be economic, technological, legal (basic patents on certain drugs), or of some other type of barrier that completely prevents other firms from entering the market

40. Monopsony • Monopoly should be distinguished from monopsony, in which there is only one buyer of the product or service; it should also, strictly, be distinguished from the (similar) phenomenon of a cartel.

41. Oligopoly • In a monopoly a single firm is the sole provider of a product or service; in a cartel a centralized institution is set up to partially coordinate the actions of several independent providers (which is a form of oligopoly).

42. An oligopoly • An oligopoly is a market form in which a market is dominated by a small number of sellers (oligopolists). • The word is derived from the Greek for few sellers. Because there are few participants in this type of market, each oligopolist is aware of the actions of the others.

43. continue • Oligopolistic markets are characterised by interactivity. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by oligopolists always involves taking into account the likely responses of the other market participants.

44. Oligopsony • Oligopsony is a market form in which the number of buyers are small while the number of sellers in theory could be large. • This typically happens in market for inputs where a small number of firms are competing to obtain factors of production. • This also involves strategic interactions but of a different nature than when competing in the output market to sell a final output.

45. continue • Oligopoly refers to the market for output while oligopsony refers to the market where these firms are the buyers and not sellers (eg. a factor market). A market with a few sellers (oligopoly) and a few buyers (oligopsony) is referred to as a bilateral oligopoly. • The terms monopoly (one seller), monopsony (one buyer), and bilateral monopoly have a similar relationship.

46. Forms of monopoly Legal monopoly • A monopoly based on laws explicitly preventing competition is a legal monopoly or de jure monopoly. When such a monopoly is granted to a private party, it is a government-granted monopoly; (eg. Jawal) • When it is operated by government itself, it is a government monopoly or state monopoly.

47. A government monopoly • A government monopoly may exist at different levels of government (eg. just for one region or locality); • a state monopoly is specifically operated by a national government.

48. Natural monopoly • A natural monopoly is a monopoly that arises in industries where economies of scale are so large that a single firm can supply the entire market without exhausting them. • In these industries competition will tend to be eliminated as the largest (often the first) firm develops a monopoly through its cost advantage.

49. Natural monopoly • In these industries monopoly may be more economically efficient than competition, although because of potential dynamic efficiencies this is not necessarily clear-cut.

50. Natural monopoly • Natural monopoly arises when there are large capital costs relative to variable costs, which arises typically in network industries such as electricity and water.