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Chap006.ppt managerial economics

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  • 1. Brickley, Smith, and Zimmerman, Managerial Economics and Organizational Architecture, 4th ed.Chapter 6: Market Structure © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 2. Market structure objectives• Students should be able to• Differentiate among the four archetypal market structures• Distinguish between price takers and price searchers © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 3. Market structure• What is a market? • 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 © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 4. Market structure the archetypes• Perfect competition• Monopoly• Monopolistic competition• Oligopoly © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 5. Perfect competition characteristics• Many buyers and sellers• Product homogeneity• Low cost and accurate information• Free entry and exit• Best regarded as a benchmark © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 6. Firm demand curve perfect competition © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 7. Firm supply• Short run – Marginal cost curve above average variable cost – P* = SRMC• Long run – Long-run marginal cost curve above long-run average cost © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 8. The firm’s short-run supply curve © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 9. The firm’s long-run supply curve © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 10. Competitive equilibrium © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 11. Barriers to entryIncumbent reactions Incumbent advantages• Specific assets • Precommitment contracts• Economies of scale • Licenses and patents• Excess capacity • Learning-curve effects• Reputation effects • Pioneering brand advantages © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 12. Monopoly• Strong barriers to entry  single supplier• Profit maximization – faces market demand and sets MR=MC• Unexploited gains from trade © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 13. Monopolist faces market demand © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 14. Monopolistic competition• Multiple firms produce similar products• Firms face downsloping demand curves• Profit maximization occurs where MC=MR• In the limit, firms compete away economic profits © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 15. Monopolistic competitor in the long run © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 16. 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 © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 17. The Nash equilibrium• An oligopolist does the best it can, given expectations of rival behavior• Behaviors are noncooperative• Duopolists considering a low price or a high price must consider rival’s response• Nash equilibrium occurs when each firm does the best it can given rival’s actions © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 18. Determining the Nash equilibrium © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 19. The Cournot model• Duopolists A and B face industry demand P=100-Q, Q=QA+QB• Each firm takes the other’s output as fixed E.g., PA=(100-QB*)-QA• Marginal revenue for A is MRA=(100-QB*)-2QA• If MC=0, profit is maximized if QA=50-.5QB, which is reaction function © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 20. Cournot equilibrium © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 21. Comparison of prices and output among different equilibria © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 22. The classic prisoners’ dilemma © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
  • 23. The cartel’s dilemma © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

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