1. ECONOMICS UNIT #2 MICROECONOMICS
Market Structures

2. CHARACTERISTICS OF PERFECT (PURE) COMPETITION
Large number of sellers
Standardized product
Easy entry and exit into the market
Firms are “price takers”
Firms will break even in the long-run
(no economic profit)

3. WHAT IS A COMPETITIVE MARKET?
In a competitive market…
The actions of any single buyer or seller in the market have a negligible impact on the market price.
Each buyer and seller takes the market price as given.

4. PERFECTLY ELASTIC DEMAND
Firms cannot obtain a higher price by restricting output and do not need to lower their price to increase sales

5. A firm is considered a monopoly if . . .
it is the sole seller of its product.
its product does not have close substitutes.

6. WHY MONOPOLIES ARISE
The fundamental cause of monopoly is barriers to entry.

7. WHY MONOPOLIES ARISE Barriers to entry have three sources:
Ownership of a key resource.
The government gives a single firm the exclusive right to produce some good.
Costs of production make a single producer more efficient than a large number of producers.

8. Government-Created Monopolies
Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets.

9. Government-Created Monopolies
Patent and copyright laws are two important examples of how government creates a monopoly to serve the public interest.

10. Natural Monopolies
An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.

11. Natural Monopolies
A natural monopoly arises when there are economies of scale over the relevant range of output.

12. THE WELFARE COST OF MONOPOLY
Monopolies charge higher prices than perfectly competitive firms

13. PUBLIC POLICY TOWARD MONOPOLIES
Government responds to the problem of monopoly in one of four ways.
Making monopolized industries more competitive.
Regulating the behavior of monopolies.
Turning some private monopolies into public enterprises.
Doing nothing at all.

14. PRICE DISCRIMINATION
Price discrimination is the business practice of selling the same good at different prices to different customers, even though the costs for producing for the two customers are the same.

15. PRICE DISCRIMINATION Examples of Price Discrimination Movie tickets
Airline prices
Discount coupons
Financial aid
Student discounts
Ladies’ night
Quantity discounts

16. CHARACTERISTICS OF MONOPOLISTIC COMPETITION
Relatively large number of sellers
Differentiated products
Easy entry and exit
Nonprice competition and advertising
Break even in the long run (no economic profits)

17. LARGE NUMBER OF SELLERS
Each firm has a small market share
Collusion is unlikely
Firms act independently of one another

18. DIFFERENTIATED PRODUCTS
Firms try to distinguish their products
Product attributes
Service
Location
Brand names/packaging
Product differentiation does allow some control over price

19. EASY ENTRY AND EXIT
Not as easy as perfect competition but significantly easier than oligopoly or monopoly

20. NONPRICE COMPETITION AND ADVERTISING
Product differentiation and advertising are referred to as nonprice competition

21. COMPETITION WITH DIFFERENTIATED PRODUCTS
When firms make profits, more firms enter the industry and reduce the profits of existing firms

22. OLIGOPOLY CHARACTERISTICS
A few large producers
Homogeneous or Differentiated Products
Control Over Price but Mutual Interdependence
Barriers to Entry
Can make profits in the long-run

23. CONCENTRATION RATIO 4 Firm Concentration Ratio
sales by the four largest firms
40% or more=oligopoly

24. MARKETS WITH ONLY A FEW SELLERS
The key feature of oligopoly is the tension between cooperation and self-interest.
Firms are interdependent with other firms

25. Competition, Monopolies, and Cartels
Firms could work together to make the industry work like a monopoly (usually illegal)
Collusion
An agreement among firms in a market about quantities to produce or prices to charge.
Cartel
A group of firms acting in unison.

26. The Equilibrium for an Oligopoly
A Nash equilibrium is a situation in which companies choose their best strategy given the strategies that all the others have chosen.

27. GAME THEORY AND THE ECONOMICS OF COOPERATION
Game theory is the study of behavior in strategic situations.

28. The Prisoners’ Dilemma
The prisoners’ dilemma provides insight into the difficulty in maintaining cooperation.
Often people (firms) fail to cooperate with one another even when cooperation would make them better off.

29. Figure 2 The Prisoners’ Dilemma
Bonnie’ s Decision
Confess
Remain Silent
Bonnie gets 8 years
Clyde gets 8 years
Bonnie gets 20 years
Clyde goes free
Confess
Clyde’s
Decision
Bonnie goes free
Clyde gets 20 years
gets 1 year
Bonnie
Clyde gets 1 year
Remain
Silent
Copyright©2003 Southwestern/Thomson Learning

30. The Prisoners’ Dilemma
The dominant strategy is the best strategy for a player to follow regardless of the strategies chosen by the other players.

31. The Prisoners’ Dilemma
Cooperation is difficult to maintain, because cooperation is not in the best interest of the individual player.

32. Figure 3 An Oligopoly Game
Iraq ’
s Decision
High Production
Low Production
Iraq gets $40 billion
Iran gets $40 billion
Iraq gets $30 billion
Iran gets $60 billion
High
Production
Iran ’ s
Decision
Iraq gets $60 billion
Iran gets $30 billion
Iraq gets $50 billion
Iran gets $50 billion
Low
Production
Copyright©2003 Southwestern/Thomson Learning

33. Oligopolies as a Prisoners’ Dilemma
Self-interest makes it difficult for the oligopoly to maintain a cooperative outcome with low production, high prices, and monopoly profits.

34. Figure 4 An Arms-Race Game
Decision of the United States (U.S.)
Arm
Disarm
U.S. at risk
USSR at risk
U.S. at risk and weak
USSR safe and powerful
Arm
Decision
of the
Soviet Union
U.S. safe and powerful
USSR at risk and weak
U.S. safe
USSR safe
(USSR)
Disarm
Copyright©2003 Southwestern/Thomson Learning

35. Figure 5 An Advertising Game
Marlboro’ s Decision
Advertise
Don ’
t Advertise
Marlboro gets $3
billion profit
Camel gets $3
Camel gets $5
billion profit
Marlboro gets $2
Advertise
Camel’s
Decision
Camel gets $2
billion profit
Marlboro gets $5
Camel gets $4
billion profit
Marlboro gets $4
Don ’ t
Advertise
Copyright©2003 Southwestern/Thomson Learning

36. Figure 6 A Common-Resource Game
Exxon ’
s Decision
Drill Two Wells
Drill One Well
Exxon gets $4
million profit
Texaco gets $4
Texaco gets $6
million profit
Exxon gets $3
Drill Two
Wells
Texaco’s
Decision
Texaco gets $3
million profit
Exxon gets $6
Texaco gets $5
million profit
Exxon gets $5
Drill One
Well
Copyright©2003 Southwestern/Thomson Learning

37. Why People Sometimes Cooperate
Firms that care about future profits will cooperate in repeated games rather than cheating in a single game to achieve a one-time gain.

38. Figure 7 Jack and Jill Oligopoly Game
Jack’s Decision
Sell 40 Gallons
Sell 30 Gallons
Jack gets
$1,600 profit
Jill gets
Jill gets
$2,000 profit
Jack gets
$1,500 profit
Sell 40
Gallons
Jill’s
Decision
Jill gets
$1,500 profit
Jack gets
$2,000 profit
Jill gets
$1,800 profit
Jack gets
Sell 30
Gallons
Copyright©2003 Southwestern/Thomson Learning