Alternative Market Structures Classifying markets by degree of competitionClassifying markets by degree of competition –number of firms –freedom of entry to industry –nature of product –nature of demand curve The four market structuresThe four market structures –perfect competition –monopoly –monopolistic competition –oligopoly Structure  conduct  performanceStructure  conduct  performance

Features of the four market structures

Alternative Market Structures Classifying markets by degree of competitionClassifying markets by degree of competition –number of firms –freedom of entry to industry –nature of product –nature of demand curve The four market structuresThe four market structures –perfect competition –monopoly –monopolistic competition –oligopoly Structure  conduct  performanceStructure  conduct  performance

Perfect Competition AssumptionsAssumptions –firms are price takers –freedom of entry –identical products –perfect knowledge Distinction between short and long runDistinction between short and long run Short-run equilibrium of the firmShort-run equilibrium of the firm –P = MC –possible supernormal profits

Short-run equilibrium of industry and firm under perfect competition OO S D (a) Industry P£ Q (millions)

Short-run equilibrium of industry and firm under perfect competition OO S D (a) Industry P£ PePe Q (millions)

Short-run equilibrium of industry and firm under perfect competition OO S D (a) Industry P£ PePe (b) Firm AR D = AR = MR Q (millions) Q (thousands)

Short-run equilibrium of industry and firm under perfect competition OO S D (a) Industry P£ Q (millions) PePe (b) Firm AR D = AR = MR MC QeQe Q (thousands)

Short-run equilibrium of industry and firm under perfect competition OO S D (a) Industry P£ Q (millions) PePe (b) Firm AR D = AR = MR MC QeQe AC Q (thousands)

Short-run equilibrium of industry and firm under perfect competition OO S D (a) Industry P£ Q (millions) PePe (b) Firm AR D = AR = MR MC QeQe AC Q (thousands)

Perfect Competition AssumptionsAssumptions –firms are price takers –freedom of entry –identical products –perfect knowledge Distinction between short and long runDistinction between short and long run Short-run equilibrium of the firmShort-run equilibrium of the firm –P = MC –possible supernormal profits –short-run supply curve of firm

Short-run supply curve of industryShort-run supply curve of industry Long-run equilibrium of the firmLong-run equilibrium of the firm –all supernormal profits competed away Perfect Competition

Long-run equilibrium under perfect competition OO D (a) Industry P£ Q (millions) P1P1 (b) Firm LRAC AR 1 S1S1 D1D1 Q (thousands)

Long-run equilibrium under perfect competition OO S1S1 D (a) Industry P£ Q (millions) P1P1 (b) Firm AR 1 LRAC PLPL AR L QLQL SeSe D1D1 DLDL Q (thousands)

Long-run equilibrium of the firm under perfect competition £ Q O AR = MR (SR)AC LRAC (SR)MC DLDL

Long-run equilibrium of the firm under perfect competition £ Q O AR = MR (SR)AC LRAC (SR)MC DLDL LRAC = (SR)AC = (SR)MC = MR = AR

Short-run supply curve of industryShort-run supply curve of industry Long-run equilibrium of the firmLong-run equilibrium of the firm –all supernormal profits competed away –long-run industry supply curve Perfect Competition

Short-run supply curve of industryShort-run supply curve of industry Long-run equilibrium of the firmLong-run equilibrium of the firm –all supernormal profits competed away –long-run industry supply curve Incompatibility of economies of scale with perfect competitionIncompatibility of economies of scale with perfect competition Perfect Competition

Short-run supply curve of industryShort-run supply curve of industry Long-run equilibrium of the firmLong-run equilibrium of the firm –all supernormal profits competed away –long-run industry supply curve Incompatibility of economies of scale with perfect competitionIncompatibility of economies of scale with perfect competition Does the firm benefit from operating under perfect competition?Does the firm benefit from operating under perfect competition? Perfect Competition

MonopolyMonopoly Defining monopolyDefining monopoly Barriers to entryBarriers to entry –economies of scale –product differentiation and brand loyalty –lower costs for an established firm –ownership/control of key factors or outlets –legal protection –mergers and takeovers –aggressive tactics

MonopolyMonopoly The monopolist's demand curveThe monopolist's demand curve –downward sloping –MR below AR Equilibrium price and outputEquilibrium price and output –MC = MR

Profit maximising under monopoly £ Q O MC QmQm MR

Profit maximising under monopoly £ Q O MC AR QmQm MR AR a

MonopolyMonopoly The monopolist's demand curveThe monopolist's demand curve –downward sloping –MR below AR Equilibrium price and outputEquilibrium price and output –MC = MR –measuring level of supernormal profit

Profit maximising under monopoly £ Q O AC MC AR AC QmQm MR AR a b

£ Q O AC MC AR AC QmQm MR AR Profit maximising under monopoly

MonopolyMonopoly The monopolist's demand curveThe monopolist's demand curve –downward sloping –MR below AR Equilibrium price and outputEquilibrium price and output –MC = MR –measuring level of supernormal profit Comparing monopoly with perfect competitionComparing monopoly with perfect competition

MonopolyMonopoly The monopolist's demand curveThe monopolist's demand curve –downward sloping –MR below AR Equilibrium price and outputEquilibrium price and output –MC = MR –measuring level of supernormal profit Comparing monopoly with perfect competitionComparing monopoly with perfect competition –lower output at a higher price

Equilibrium of the industry under perfect competition and monopoly: with the same MC curve £ Q O MC Q1Q1 MR AR = D P1P1

£ Q O MC Q1Q1 MR AR = D P1P1 P2P2 Q2Q2 Equilibrium of the industry under perfect competition and monopoly: with the same MC curve

£ Q O MC ( = supply under perfect competition) Q1Q1 MR AR = D P1P1 P2P2 Q2Q2 Equilibrium of the industry under perfect competition and monopoly: with the same MC curve

MonopolyMonopoly The monopolist's demand curveThe monopolist's demand curve –downward sloping –MR below AR Equilibrium price and outputEquilibrium price and output –MC = MR –measuring level of supernormal profit Comparing monopoly with perfect competitionComparing monopoly with perfect competition –lower output at a higher price –costs under monopoly

MonopolyMonopoly The monopolist's demand curveThe monopolist's demand curve –downward sloping –MR below AR Equilibrium price and outputEquilibrium price and output –MC = MR –measuring level of supernormal profit Comparing monopoly with perfect competitionComparing monopoly with perfect competition –lower output at a higher price –costs under monopoly –innovation and new products

Contestable Markets Importance of potential competitionImportance of potential competition –low entry costs –low exit costs Perfectly contestable marketsPerfectly contestable markets Contestable markets and natural monopoliesContestable markets and natural monopolies The importance of costless exitThe importance of costless exit Hit-and-run competitionHit-and-run competition Importance of the theory of contestable marketsImportance of the theory of contestable markets