Firm and Market Structures Flashcards
What Market Structure?
Number of Sellers- Many Firms
Barriers to Entry - Very Low
Nature of Substitute Profits - Very good substitutes
Nature of competition - Price only
Pricing Power - None
Ex.’s - Burger King vs. McDonalds vs. Wendys
Perfect Competition
What Market Structure?
Number of Sellers- Many Firms
Barriers to Entry - Low
Nature of Substitute Profits - Good substitutes, but differentiated
Nature of competition - Price, marketing features
Pricing Power - Some
Ex.’s - Ford vs. Chevy vs. GM
Monopolistic Competition
What Market Structure?
Number of Sellers- Few Firms
Barriers to Entry - High
Nature of Substitute Profits - Very good substitutes or differentiated
Nature of competition - Price, marketing structures
Pricing Power - Some to Significant
Ex.’s - Coke vs. Pepsi
Oligopoly
What Market Structure? Number of Sellers- Few Firms Barriers to Entry - Very High Nature of Substitute Profits - No good substitutes Nature of competition - Advertising Pricing Power - Significant Ex.'s - Electric
Monopoly
In perfect competition, producer firms have no influence on pricing.
Market Supply and Demand determine pricing
*Individual demand schedule is perfectly elastic (horizontal when graphed)
The increase in total revenue from selling one more unit of a good/service.
Marginal Revenue
In perfect competition, MR = price
Profit Maximizing firms produces quantity Q* when MC=MR = P = ATC
LR equilibrium output level for perfectly competitive firms is where MR=MC=ATC
@ which economic cost = 0 at this point
In Short Run, Market demand increases, price and quantity increase
…
A permanent change in demand leads to the entry of firms to, or exit of firms from, an industry.
…
Total Revenue - (explicit costs + implicit costs)
Economic Profit
Firm structure where,
P > MC
ATC /= minimum for quantity produced
P* is slightly higher than perfect competition
Monopolistic Competition
4 Models for oligopoly price and quantity
- Kinked Demand Curve Model
- Cournot Duopoly
- Nash Equilibrium
- Stackelberg Dominant Firm
Model for oligopoly that is based on the assumption that an increase in firms product price will not be followed by its competitors, but a decrease in price will.
Kinked Demand Curve Model
* the quantity at the kink in them model is profit maximizing
Model for oligopoly that considers 2 firms and a constant MC. Firms determine quantities periodically and simultaneously changing until equal.
Cournot Duopoly
Model where the equilibrium is reach when the choices of all firms are such that there is not other choice that makes any firm better off (collusion).
Nash Equilibrium
Model where a dominant firm runs the price and quantity of the product, and the competing firms alter accordingly
Dominant Firm Model
Firm structure that are price searchers with imperfect information. The firm must determine price and quantity combination that will maximize profits.
Monopoly
- To maximize profits, MR = MC.
- Inefficient
Charging different customers different prices for the same product/service.
Price Discrimination
Monopolistic firm will produce less goods at higher prices than a competitively firm.
…
When factors of production lead to a single firm supplying the entire market demand for the product.
Natural Monopoly
Under perfect competition structure, the supply function …
has MC curve above its AVC curve. Sum the quantities supplied at each price across all firms in the market
In oligopoly, monopoly and monopolistic competition structure, supply functions…
are not well defined. Quantities depend on firms MC, demand and MR.
Pricing Strategy under each market structure
Perfect Competition – product quantity where P = MC = MR
Monopoly – Q @ MR = MC < P (price searchers)
Monopolistic Competition Produce Q @ MR=MC
Oligopoly depends on the model used
The sum or percentage market shares of the largest N-firms in a market
N-firm concentration ratio
Sum of the squares of the market shares of the largest firms in the market.
* barriers to entry aren’t considered in either option
Herfindahl-Hirschman Index
