Industrial Organization: from the Fundamentals of Microeconomic Principles

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Industrial Organizationfrom the Fundamentals of
Microeconomic Principles

• OUTLINE
• Perfect Competition
• Monopoly
• Monopolistic Competition
• Oligopoly

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Perfect Competition MonopolyDefinitions

• 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.

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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.

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Perfect CompetitionCharacteristics

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

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Perfect CompetitionShort 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.

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MonopolyCharacteristics

• 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.

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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.

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Monopolistic CompetitionCharacteristics

• Large number of buyers and sellers.
• Product heterogeneity.
• Free entry and exit.
• Perfect dissemination of information.

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Monopolistic CompetitionShort 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.

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More on Monopolistic Competition

• Although economic profit is zero (PATC), 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.

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Even More on Monopolistic Competition

• If P ATC and P gt MC, then ATC gt 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.

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OligopolyCharacteristics

• 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.