Industrial Organization: from the Fundamentals of Microeconomic Principles OUTLINE Perfect Competition Monopoly Monopolistic Competition Oligopoly

Perfect Competition & Monopoly Definitions Perfect Competition – A market structure characterized by a large number of buyers and sellers of an identical product. Monopoly – A market structure characterized by a single seller of a highly differentiated (unique) product.

Price Taker vs. Price Maker Price Taker – Buyers and sellers whose individual transactions are so small that they do not affect market prices. Price Maker – Buyers and sellers whose large transactions affect market prices. NOTE: Being a price maker does not mean you can charge any price you like.

Perfect Competition Characteristics Large number of buyers and sellers. Product homogeneity. Free entry and exit. Perfect dissemination of information.

Perfect Competition Short Run vs. Long Run In the short-run economic profit (or loss) is possible. In the long-run, competitive pressures will cause the typical firm to earn zero economic profits. NOTE: UNDERSTAND THE MATHEMATICS OF PERFECT COMPETITION IN THE SHORT-RUN AND THE LONG-RUN.

Monopoly Characteristics A single seller. Unique product. Blockaded entry and exit. Imperfect dissemination of information. NOTE: UNDERSTAND THE MATHEMATICS OF MONOPOLY IN THE SHORT-RUN AND THE LONG-RUN.

Monopolistic Competition and Oligopoly Monopolistic Competition – A market structure characterized by a large number of sellers of differentiated products. Oligopoly – A market structure characterized by few sellers and interdependent price/output decisions.

Monopolistic Competition Characteristics Large number of buyers and sellers. Product heterogeneity. Free entry and exit. Perfect dissemination of information.

Monopolistic Competition Short Run vs. Long Run In the short-run economic profit (or loss) is possible. In the long-run, competitive pressures will cause the typical firm to earn zero economic profits.

More on Monopolistic Competition Although economic profit is zero (P=ATC), price is still greater than marginal cost. Product differentiation results in a downward sloping demand curve. Consequently, price exceeds marginal revenue. WHY? To profit maximize MR = MC, therefore price exceeds marginal cost.

Even More on Monopolistic Competition If P = ATC and P > MC, then ATC > MC. What does this mean? A firm in monopolistic competition does not produce at capacity (i.e. it is not as efficient as perfect competition). Is this a social cost? Is product differentiation worth inefficient production? NOTE: UNDERSTAND THE MATHEMATICS OF MONOPOLISTIC COMPETITION IN THE SHORT-RUN AND THE LONG-RUN.

Oligopoly Characteristics Few sellers Homogenous or unique product. Barriers to entry and exit. Imperfect dissemination. Key: Price and output decisions are interdependent. THIS WILL BE THE PRIMARY SUBJECT MATTER OF THIS COURSE.