Competition And Market Structure

1. Competition And Market Structure

2. Types Of Market Structure Monopolistic Competition: - Many firms produce differentiated products. - Sold the products to many buyers. - Such as: local physicians market, local markets for video rental, dry cleaning.

3. Monopolistic Competition • Maximizes its profit at the point at which its marginal revenue equals marginal cost. MR = MC • Monopolistic competition different from a differentiated products oligopoly: - monopolistically competitive markets are characterized by free entry.

4. Monopolistic Competition (continued) • Figure 13.13 Page 510 Profit Maximization Monopolistic Competition.

5. Types Of Market Structure: Oligopoly 1. Homogeneous Products Oligopoly. 2. Differentiated Products Oligopoly.

6. Types Of Market Structure: Oligopoly (continued) Homogeneous Products Oligopoly: Markets in which a small number of firms sell products that have virtually the same: -- attributes, -- performance characteristics, -- image, -- price.

7. Types Of Market Structure: Oligopoly (continued) Differentiated Products Oligopoly Markets: Markets in which a small number of firms sell products that are substitutes for each other but also differ from each other: -- attributes, -- performance characteristics, -- image, -- price.

8. The Cournot Model of Oligopoly: • Homogenous products of oligopoly. • Considered a duopoly market (a market in which there are just two firm).

9. Example: • The firms: 1. Samsung. 2. LG. • Their product is DRAM Chips (identical product from Samsung and LG). • Their MC is identical. • Both firms will charge the same price. • Without colluding with each other. • No knowledge of each other’s plan. • How much to produce by each firm?

10. Example (continued): • The market price is not known until both firms have made their output choice. • Each firm will make the output choice that maximizes its profit based on its expectation of the other firm’s output choice.

11. Example (continued): Figure 13.1. Page 485. • Suppose Samsung expects LG to produce 50 units of output. • Suppose Samsung expects LG to produce 20 units of output.

12. Equilibrium In Cournot Market Figure 13.2. Page 486. Rs = Samsung’s reaction function. Rlg = LG’s reaction function. A = Samsung produces 20 units based information LG will produce 50 units. B = Samsung produces 35 units based information LG will produce 20 units. The Cournot Equilibrium at E = Samsung produces 30 units and LG produces 30 units.

13. The Cournot Equilibrium VS Monopoly Equilibrium And Perfectly Competitive Equilibrium • Figure 13.4. - If Samsung and LG behave as profit maximizing Cartel (Monopoly), They will produce a total 45 units (22.5 units by Samsung, and 22.5 units by LG). The Cartel (Monopoly) equilibrium point is M (22.5 units Samsung, 22.5 units LG), where Cournot Oligopoly equilibrium is at E (30 units Samsung, 30 units LG).

14. The Cournot Equilibrium VS Monopoly Equilibrium And Perfectly Competitive Equilibrium (continued): Suppose that a market consists N identical firms, that the market demand curve is: P = a – bQ P = price of output. a = intercept. b = coefficient (slope). Q = output With MC is c

15. The Cournot Equilibrium VS Monopoly Equilibrium And Perfectly Competitive Equilibrium (continued): • Monopoly Market Structure: Price = (0.5 a) + (0.5 c) Market quantity: 0.5 {(a-c)/b} a = intercept b = coefficient c = MC

16. The Cournot Equilibrium VS Monopoly Equilibrium And Perfectly Competitive Equilibrium (continued): • Cournot Duopoly Market Structure: Price = {(1/3) a} + {(2/3) c} Market quantity: (2/3) {(a-c)/b} a = intercept b = coefficient c = MC

17. The Cournot Equilibrium VS Monopoly Equilibrium And Perfectly Competitive Equilibrium (continued): • Perfect Competition Market Structure: Price = c Market quantity: {(a-c)/b} a = intercept b = coefficient c = MC