1 Basic Market Concepts Shutdown Rule P > AC, making a  AVC < P < AC, SR loss, maybe OK P < AVC,shutdown. Profit Maximizing Quantity where MC = MR Market.

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Presentation transcript:

1 Basic Market Concepts Shutdown Rule P > AC, making a  AVC < P < AC, SR loss, maybe OK P < AVC,shutdown. Profit Maximizing Quantity where MC = MR Market Power ability to set the market price HH Index (Sum of squares of Market Share)

2 Factors that determine Market Structure Number of Buyers and Sellers Barriers to Entry / Exit Regulation (patent etc.) Sole Ownership Scale Economies (Natural Monopolies) Are the Products Homogenous / Differentiated

3 4 Market Structures PCMCOM AgentsMany FewOne BarriersNone Yes ProductHomogenousDifferentiatedEither --

4 Characteristics of the 4 Market Structures TYPEDESCRIPTIONPRICE Perfect Competition Many, Mobility, Free Entry LR Econ Profit =0 P = LAC = MC MonopolyMarket suppiled by 1 Firm Barriers to entry exist. P set by Q* at MR = MC Monopolistic Competition Firms compete to create little niche markets P set by Q* at MR = MC OligopolyFew sellers. Cournot (Q-fix) Bertrand (P-fix) Strategic interaction

5 Oligopoly: Strategic Behavior Barriers to entry that can lead to oligopoly. The prisoner’s dilemma model. Game theory analyzes behavior of oligopolists. Equilibrium may differ in games with repeated plays played only once. Explicit and implicit collusion. Why and when cheating is likely in a cartel. Forces operating to restrict and reduce the extent of oligopoly in the economy.

6 A Summary of Market Structures