1. Week 5 Chapter 6: Market Structure
ECON 308
Week 5
Chapter 6: Market Structure

2. Market structure: Objectives
Students should be able to
Differentiate among the four archetypal market structures
Distinguish between price takers and price searchers

3. Market structure What is a market? What is market structure?
All firms and individuals willing and able to buy or sell a particular product
What is market structure?
Defined by attributes of the market environment

4. Demand Facing the Firm $P $P $P $P D1 D3 D4 D2 Q Q Q Q
 Increasing degrees of Competition 
 Increasing degrees of Market Power 

5. Market structure the archetypes
Monopoly
Oligopoly
Monopolistic competition
Perfect competition

6. Alternative Market Structures
The Most Competitive Case:
The Price Taker Firm

7. Perfect competition = Price Taker Characteristics
Many buyers and sellers
Product homogeneity
Low cost and accurate information
Free entry and exit
Best regarded as a benchmark

8. Market and Firm Demand $P $P
Firm
Market D S Pe Pe D S D
Q/T Qe
Q/T

9. Firm supply Short run Long run
Marginal cost curve above average variable cost
P* = SRMC
Long run
Long-run marginal cost curve above long-run average cost

10. Price Taker Firm $ P MC Price = Marginal Revenue Pe D = MR
Profit Maximizing Rate of output Qe
Q/T

11. Total Revenue = Pe x Qe
$ P MC Pe D
Total Revenue Qe
Q/T

12. Total Cost = AC x Q
$ P MC AC Pe D
AC at Qe
Total Cost Qe
Q/T

13. Profit = TR - TC
$ P MC AC Pe D Q
Q/T

14. Profits occur if (P=MC) > ACPe
D = MR Qe
Q/T

15. Market Response to ProfitsD So S’ Pe P’ So D
Qx/T Qe Q’

16. Price Taker Firm: Zero ProfitsMC
ATC D
Pe’
D’ = MR Qe
Q/T

17. Price Taker Firm: Loss
$ P MC
ATC
Loss Pe
D = MR Qe
Q/T

18. Market Response to LossesD S’ So P’ Po S’ D
Qx/T Q’ Qo

19. Price Taker Firm: Zero ProfitsMC
ATC
Pe’
D’ = MR Po D Qe
Q/T

20. Implications of Price-Taker Industry
Demand for the firm is horizontal at the market price
Efficiency: Price equals marginal cost of production
Competition drives price to equal Average cost
Economic profits only exist in the short-run.

21. Long-Run Industry Equilibrium$P $P
Firm
Market D MC S
ATC Pe Pe D S D
Q/T Qe Qe
Q/T

22. Sources of Market Power: Barriers to entry
Incumbent reactions
Specific assets
Economies of scale
Excess capacity
Reputation effects
Incumbent advantages
Precommitment contracts
Licenses and patents
Learning-curve effects
Pioneering brand advantages

23. Monopoly Strong barriers to entry  single supplier
Profit maximization
faces market demand and sets MR=MC
Unexploited gains from trade

24. Oligopoly A few firms produce most market output
Products may or may not be differentiated
Effective entry barriers protect firm profitability
Firm interdependence requires strategic thinking

25. Monopolistic competition
Multiple firms produce similar but differentiated products
Firms face downsloping demand curves
Profit maximization occurs where MC=MR
In the limit, firms compete away economic profits
Tend to see lots of advertising