Competition And Market Structure

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.

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.

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

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

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.

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.

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

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?

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.

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.

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.

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).

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

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

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

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