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Chapter 6: Market Structure
Brickley, Smith, and Zimmerman, Managerial Economics and
Organizational Architecture, 4th ed.
Market structureobjectives
• Students should be able to
• Differentiate among the four standard market structures
• Distinguish between price takers and price searchers
Market structure
• What is a market?• All firms and individuals willing and able to
buy or sell a particular product
• What is market structure?• Defined by attributes of the market
environment
Market structures
• Perfect competition
• Monopoly
• Monopolistic competition
• Oligopoly
Perfect competitioncharacteristics
• Many buyers and sellers
• Product homogeneity
• Low cost and accurate information
• Free entry and exit
Firm demand curveperfect competition (Figure 6.1)
Firm supply
• Short run– Marginal cost curve above average
variable cost
• Long run– Long-run marginal cost curve
above long-run average cost
The firm’s short-run supply curve(Figure 6.2)
The firm’s long-run supply curve(Figure 6.3)
Shut-down Analysis
• If Price (P) > Average Cost (AC)• Stay Open (this applies to both
short run and long run)• What if Price (P) < Average Cost
(AC)?• Then we need to do more
analysis
Shut-down Analysis
• If Price (P) < Average Variable Cost (AVC)
• Shut down immediately
Shut-down Analysis
• What if Average Total Cost (ATC)> Price (P) > Average Variable Cost (AVC)?
• Short run: stay in business
• Long run: shut down
Competitive equilibrium(Figure 6.4)
Barriers to entry
Incumbent reactions
• Specific assets• Economies of scale• Excess capacity• Reputation effects
Incumbent advantages• Precommitment
contracts• Licenses and patents• Learning-curve effects• Pioneering brand
advantages
Monopoly
• Strong barriers to entry single supplier
• Profit maximization– faces market demand and sets MR=MC
• Unexploited gains from trade
Monopolistic competition
• Multiple firms produce similar products
• Firms face downsloping demand curves
• Profit maximization occurs where MC=MR
• In the limit, firms compete away economic profits
Oligopoly
• A few firms produce most market output
• Products may or may not be differentiated
• Effective entry barriers protect firm profitability
• Firm interdependence requires strategic thinking
The Nash equilibrium
• An oligopolist does the best it can, given expectations of rival behavior
• Behaviors are noncooperative• Duopolists considering a low price or a
high price must consider rival’s response
• Nash equilibrium occurs when each firm does the best it can given rival’s actions
Determining the Nash equilibrium
The classic prisoners’ dilemma
The cartel’s dilemma