Class mkt structures i

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  • Class mkt structures i

    1. 1. Market Structures
    2. 2. Alternative Market Structures <ul><li>Classifying markets (by degree of competition) </li></ul><ul><ul><li>number of firms </li></ul></ul><ul><ul><li>freedom of entry to industry </li></ul></ul><ul><ul><ul><li>free, restricted or blocked? </li></ul></ul></ul><ul><ul><li>nature of product </li></ul></ul><ul><ul><ul><li>homogeneous or differentiated? </li></ul></ul></ul><ul><ul><li>nature of demand curve </li></ul></ul><ul><ul><ul><li>degree of control the firm has over price </li></ul></ul></ul>
    3. 3. Alternative Market Structures <ul><li>The four market structures </li></ul><ul><ul><li>perfect competition </li></ul></ul><ul><ul><li>monopoly </li></ul></ul><ul><ul><li>monopolistic competition </li></ul></ul><ul><ul><li>oligopoly </li></ul></ul>
    4. 4. Features of the four market structures
    5. 5. Perfect Competition <ul><li>Assumptions </li></ul><ul><ul><li>firms are price takers </li></ul></ul><ul><ul><li>freedom of entry of firms to industry </li></ul></ul><ul><ul><li>identical products </li></ul></ul><ul><ul><li>perfect knowledge </li></ul></ul><ul><li>Distinction between short and long run </li></ul><ul><ul><li>normal profits </li></ul></ul><ul><ul><li>supernormal profits </li></ul></ul>
    6. 6. Perfect Competition <ul><li>Short-run equilibrium of the firm </li></ul><ul><ul><li>Price </li></ul></ul><ul><ul><ul><li>given by market demand and supply </li></ul></ul></ul><ul><ul><li>Output </li></ul></ul><ul><ul><ul><li>where P = MC </li></ul></ul></ul><ul><ul><li>Profit </li></ul></ul><ul><ul><ul><li>( AR – AC ) × Q </li></ul></ul></ul><ul><ul><ul><li>possible supernormal profits </li></ul></ul></ul>
    7. 7. Short-run equilibrium of industry and firm under perfect competition O £ (b) Firm Q (thousands) O (a) Industry P Q (millions) Q e S D P e MC AR D = AR = MR AC AC
    8. 8. Perfect Competition <ul><li>The long run </li></ul><ul><ul><li>long-run equilibrium of the firm </li></ul></ul><ul><ul><ul><li>all supernormal profits competed away </li></ul></ul></ul>
    9. 9. Long-run equilibrium under perfect competition O O P £ Q (millions) Q L Q (thousands) New firms enter Supernormal profits Profits return to normal (a) Industry (b) Firm S 1 D LRAC P L P 1 S e AR 1 D 1 AR L D L
    10. 10. Perfect Competition <ul><li>The long run </li></ul><ul><ul><li>long-run equilibrium of the firm </li></ul></ul><ul><ul><ul><li>all supernormal profits competed away </li></ul></ul></ul><ul><ul><ul><li>LRAC = AC = MC = MR = AR </li></ul></ul></ul>
    11. 11. Long-run equilibrium of the firm under perfect competition £ Q O (SR)AC (SR)MC LRAC AR = MR D L LRAC = (SR)AC = (SR)MC = MR = AR
    12. 12. Monopoly <ul><li>Defining monopoly </li></ul><ul><ul><li>importance of market power </li></ul></ul><ul><ul><li>concentration ratios </li></ul></ul>
    13. 13. Concentration ratios in the UK
    14. 14. Monopoly <ul><li>Barriers to entry </li></ul><ul><ul><li>economies of scale </li></ul></ul><ul><ul><li>product differentiation and brand loyalty </li></ul></ul><ul><ul><li>lower costs for an established firm </li></ul></ul><ul><ul><li>ownership/control of key factors or outlets </li></ul></ul><ul><ul><li>legal protection </li></ul></ul><ul><ul><li>mergers and takeovers </li></ul></ul><ul><ul><li>aggressive tactics </li></ul></ul>
    15. 15. Monopoly <ul><li>The monopolist's demand curve </li></ul><ul><ul><li>downward sloping </li></ul></ul><ul><ul><li>MR below AR </li></ul></ul><ul><ul><li>AR curve is the demand curve for the monopolist </li></ul></ul>
    16. 16. AR and MR curves for a monopoly Q (units) 1 2 3 4 5 6 7 P =AR (£) 8 7 6 5 4 3 2 AR AR, MR (£) Quantity
    17. 17. AR and MR curves for a monopoly Q (units) 1 2 3 4 5 6 7 P =AR (£) 8 7 6 5 4 3 2 TR (£) 8 14 18 20 20 18 14 MR (£) 6 4 2 0 -2 -4 MR AR, MR (£) Quantity AR
    18. 18. Sources of Monopoly <ul><li>Elasticity of demand </li></ul><ul><li>Number of firms in the market </li></ul><ul><li>Interaction among the firms </li></ul>
    19. 19. Price Discrimination <ul><li>Price discrimination involves exploiting demand characteristics that allow the same product to be sold at various prices unrelated to the cost of supply. </li></ul><ul><li>In practice a single consumer may be charged different prices for different units of a good bought or different consumers may be charged different prices for the same product or service. </li></ul>
    20. 20. Types of Price Discrimination <ul><li>First Degree </li></ul><ul><ul><li>First-degree price discrimination occurs where a firm charges a different price for each unit sold. </li></ul></ul><ul><ul><li>the supplier is able to charge each customer according to his willingness or ability to pay. </li></ul></ul><ul><ul><li>Examples include doctors, lawyers, barbers. </li></ul></ul><ul><ul><li>Also used in auctions </li></ul></ul>
    21. 21. <ul><li>Second Degree </li></ul><ul><ul><li>Second-degree price discrimination occurs where the monopolist charges different prices for different quantities, or blocks, of the same product. </li></ul></ul><ul><ul><li>The consumer is charged a price that varies with consumption in which initial units incur a higher price than later units </li></ul></ul><ul><ul><li>Examples include utility industries like electricity, water supply </li></ul></ul><ul><ul><li>Principle often works in case of quantity discounts </li></ul></ul>
    22. 22. <ul><li>Third Degree </li></ul><ul><ul><li>Third-degree price discrimination occurs where the monopolist is able to separate the market demand into two or more groups of customers and then charge each group a different price for the same product </li></ul></ul><ul><ul><li>Condition for market separation is the absence of arbitrage opportunities </li></ul></ul><ul><ul><li>Examples include railways and airlines </li></ul></ul>
    23. 23. Two part pricing <ul><li>Combination of a fixed rate and a variable rate </li></ul><ul><li>Fixed charge is designed to recover fixed costs and the variable element is intended to reflect more closely the marginal cost of consumption </li></ul><ul><li>This encourages additional consumption, particularly in industries with high fixed cost, declining average costs and excess capacity </li></ul><ul><li>Examples include telephones, internet service providers, electricity, amusement parks, pubs, sports clubs etc </li></ul>
    24. 24. Peak Load pricing <ul><li>Price structures may be constructed to reflect the variations in costs or to limit investment in capacity. </li></ul><ul><li>Applied when demand varies significantly by time of the day, the week or the year and costs of supply vary with the level of demand </li></ul><ul><li>Examples include electricity, off season pricing in airlines, road transport etc, shopping malls </li></ul>
    25. 25. Coupons and Rebates
    26. 26. Monopoly <ul><li>Equilibrium price and output </li></ul><ul><ul><li>MC = MR </li></ul></ul>
    27. 27. Profit maximising under monopoly £ Q O Q m MR MC
    28. 28. Monopoly <ul><li>Equilibrium price and output </li></ul><ul><ul><li>MC = MR </li></ul></ul><ul><ul><li>measuring level of supernormal profit </li></ul></ul>
    29. 29. Profit maximising under monopoly £ Q O Q m MR MC
    30. 30. Profit maximising under monopoly £ Q O MC Q m MR AC AR AC AR
    31. 31. Profit maximising under monopoly £ Q O MC AC Q m MR AR AR AC Total profit

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