1. Industrial Organization AG BM 102

2. Introduction Willard’s Mistake Competitive Environment Relevant Market Market power Market structure – Market Conduct-Market performance

3. Market Structure – those characteristics of the market that significantly affect the behavior and interaction of buyers and sellers

7. Market Conduct – a firm’s policies toward its market and toward the moves made by its rivals in that market

8. Market Performance – how well does an industry do what society might reasonably expect it to do

9. Market – a collection of firms, each of which is supplying products that have some degree of substitutability, to the same potential buyers Common buyers for sellers Common sellers for buyers Relatively homogeneous product

10. Industry- sellers of a particular product or closely competing products

11. Relevant market – the portion of the total market that a participant views as including his or her direct competitors and customers (or suppliers)

12. Some market models Pure competition Monopoly – a single seller Monopsony – a single buyer

14. Marginal Revenue The change in total revenue from expanding sales by one more unit

15. Marginal revenue QuantityPriceTotal Revenue Marginal Revenue 111 9 21020 7 3927 5 4832

16. Calculating Marginal Revenue

17. Solve the demand function for P P = 12 –Q Take the coefficient of Q and double it MR = 12 – 2Q

18. Monopoly QuantityDemand Price Marginal Revenue Marginal Cost 111101 2 82 3963 4844 5725 6606 75-27

19. For Monopoly, find where MC =MR and then go up to the price on the demand curve

23. Marginal Factor Cost The change in total factor cost from buying one additional unit of an input

24. Marginal Factor Cost QuantityPriceTotal Expenditure Marginal Expenditure 111 3 224 5 339 7 4416

25. Calculating Marginal Factor Cost

26. Solve the Supply curve for P P = Q Double the coefficient of Q MFC = 2Q Ordinarily the line doesn’t run through the origin The process is the same – solve for P – double the coefficient of Q

27. Monopsony QuantitySupply PriceMarginal Factor Cost Marginal Value Product 11211 22410 3369 4488 55 7 66126

28. For Monopsony, find where MFC =MVP and then go down to the price on the supply curve

32. Concluding Comments Where does a 500 pound gorilla sit? Market power is important Understanding it helps you understand market behavior