Slide 1

Chapter 8Managing in Competitive, Monopolistic, and Monopolistically Competitive MarketsCopyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Chapter OutlinePerfect competitionDemand at the market and firm levelsShort-run output decisionsLong-run decisionsMonopolyMonopoly powerSources of monopoly powerMaximizing profitsImplications of entry barriersMonopolistic competitionConditions for monopolistic competitionProfit maximizationLong-run equilibriumImplications of product differentiationOptimal advertising decisions

8-2Chapter Overview2IntroductionChapter 7 examined the nature of industries, and saw that industries differ with respect to their structures, conducts and performances.This chapter focuses on how managers determine the optimal price, quantity and advertising decisions in the following market environments:Perfect competition.Monopoly.Monopolistic competition.8-3Chapter Overview3Key ConditionsPerfectly competitive markets are characterized by:The interaction between many buyers and sellers that are small relative to the market.Each firm in the market produces a homogeneous (identical) product.Buyers and sellers have perfect information.No transaction costs.Free entry into and exit from the market.The implications of these conditions are:a single market price is determined by the interaction of demand and supplyfirms earn zero economic profits in the long run.8-4Perfect Competition4Demand at the Market and Firm Levels In Action8-5Perfect CompetitionMarket output0PriceDPriceFirmsoutputSMarketFirm5Short-Run Output DecisionsThe short run is a period of time over which some factors of production are fixed.To maximize short-run profits, managers must take as given the fixed inputs (and fixed costs), and determine how much output to produce by changing the variable inputs.8-6Perfect Competition6Short-Run Profit Maximization: Revenue-Cost Approach In Action8-7Perfect CompetitionFirms output$0ABEMaximum profits7Competitive Firms Demand8-8Perfect Competition8Short-Run Profit Maximization In Action8-9Perfect CompetitionFirms output$0Profit9Competitive Output Rule8-10Perfect Competition10Competitive Output Rule In Action8-11Perfect Competition11Short-Run Loss Minimization In Action8-12Perfect CompetitionFirms output$0 Loss12The Shut-Down Case In Action8-13Perfect CompetitionFirms output$0Fixed CostLoss if produceLoss if shut down13Short-Run Output Decision8-14Perfect Competition14Short-Run Firm Supply Curve In Action8-15Perfect CompetitionFirms output$0Short-run supply curve for individual firm15Firms Short-Run Supply Curve8-16Perfect Competition16Market Supply Curve In Action8-17Perfect CompetitionMarket outputP01$10$12Market supply curveIndividual firms supply curve500S17Long-Run Decisions: Entry and Exit In Action8-18Perfect CompetitionMarket output0PriceDPriceFirmsoutput0ExitEntry18Long-Run Competitive Equilibrium In Action8-19Perfect CompetitionFirms output$0Long-run competitive equilibrium19Long-Run Competitive Equilibrium8-20Perfect Competition20Monopoly and Monopoly PowerA market structure in which a single firm serves an entire market for a good that has no close substitutes.Sole seller of a good in a market gives that firm greater market power than if it competed against other firms.Implication: market demand curve is the monopolists demand curve.However, a monopolist does not have unlimited market power.8-21Monopoly21Monopolists Demand In Action8-22MonopolyOutputPrice0ABMonopolists power is constrained by the demand curve.22Sources of Monopoly PowerEconomies of scaleEconomies of scopeCost complementarityPatents and other legal barriers8-23Monopoly23Elasticity of Demand and Total Revenues In Action8-24MonopolyQ0RevenuePriceFirmsoutput0UnitaryUnitaryElasticInelasticInelasticElasticMRDTotal RevenueCurve24Marginal Revenue and Elasticity8-25Monopoly25Marginal Revenue and Linear Demand8-26Monopoly26Marginal Revenue In Action8-27Monopoly27Output Rule8-28Monopoly28Costs, Revenues, and Profit In Action8-29MonopolyOutput$0Maximum profit29PriceQuantityDemandMRMCATCProfitsProfit Maximization In ActionMonopoly8-30Pricing Rule8-31Monopoly31Monopoly In Action8-32Monopoly32Absence of a Supply Curve8-33Monopoly33Multiplant Decisions8-34Monopoly34Multiplant Output Rule8-35Monopoly35Implications of Entry BarriersA monopolist may earn positive economic profits, which in the presence of barriers to entry prevents other firms from entering the market to reap a portion of those profits.Implication: monopoly profits will continue over time provided the monopoly maintains its market power.Monopoly power, however, does not guarantee positive profits.8-36Monopoly36PriceQuantityDemandMRMCATCZero-Profit Monopolist In ActionMonopoly8-37Deadweight Loss of MonopolyThe consumer and producer surplus that is lost due to the monopolist charging a price in excess of marginal cost.

8-38Monopoly38PriceQuantityDemandMRMCDeadweight Loss of Monopolist In ActionMonopoly8-39Deadweight lossMonopolistic Competition: Key ConditionsAn industry is monopolistically competitive if:There are many buyers and sellers.Each firm in the industry produces a differentiated product.There is free entry into and exit from the industry.A key difference between monopolistically competitive and perfectly competitive markets is that each firm produces a slightly differentiated product.Implication: products are close, but not perfect, substitutes; therefore, firms demand curve is downward sloping under monopolistic competition.8-40Monopolistic Competition40PriceQuantityDemandMRMCATCProfit-Maximizing Monopolistically Competitive Firm In ActionMonopolistic Competition8-41ProfitsProfit-Maximization Rule8-42Monopolistic Competition42Long-Run EquilibriumIf firms in monopolistically competitive markets earn short-run profits, additional firms will enter in the long run to capture some of those profits.losses, some firms will exit the industry in the long run.

8-43Monopolistic Competition43PriceQuantity of Brand XDemand0MR0MCATCEntry in Monopolistically Competitive Market In ActionMonopolistic Competition8-44Demand1MR1Due to entry of new firms selling other brandsPriceQuantity of Brand XMCATCLong-Run Monopolistically Competitive Equilibrium In ActionMonopolistic Competition8-45Demand1MR1Long-run monopolistically competitive equilibriumLong-Run and Monopolistic Competition8-46Monopolistic Competition46Implications of Product DifferentiationThe differentiated nature of products in monopolistically competitive markets implies that firms in these industries must continually convince consumers that their products are better than their competitors.Two strategies monopolistically competitive firms use to persuade consumers:Comparative advertisingNiche marketing

8-47Monopolistic Competition47Optimal Advertising Decisions8-48Optimal Advertising Decisions48Conclusion8-4949