CHARACTERISTIC MONO- OLIGO- MONO- COM- POLY POLY POLIS- PETI- TIC C. TION STRUCTURE # firms? differentiated? entry is: market power?CONDUCT: interdependece?Marginal Cost Pricing?PERFORMANCE: High prices? Economic Profits?Efficient capacity util? Efficient investment? Allocatively Efficient?

One Few Many ManyUnique ? Yes NoBlocked Impeded Easy EasyYES YES YES NO

NO YES NO NO NO NO NO YES

Yes Yes Yes No Yes Yes No No No No Under Yes No No No Yes No No No Yes

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LRAC(envelope)

#4#3#2

#1

Most EfficientInvestment(lowest point)

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LRAC

LRMC

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LRMCDEMAND

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PROFIT MAXIMIZATION

CHARACTERISTIC MONO- OLIGO- MONO- COM- POLY POLY POLIS- PETI- TIC C. TION STRUCTURE # firms? differentiated? entry is: market power?CONDUCT: interdependece?Marginal Cost Pricing?PERFORMANCE: High prices? Economic Profits?Efficient capacity util? Efficient investment? Allocatively Efficient?

One Few Many ManyUnique ? Yes NoBlocked Impeded Easy EasyYES YES YES NO

NO YES NO NO NO NO NO YES

Yes Yes Yes No Yes Yes No No No No Under Yes No No No Yes No No No Yes

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LRMCDEMAND

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PROFIT MAXIMIZATION

TC

TOTAL COST

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PROFIT MAXIMIZATION

TR

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PROFIT MAXIMIZATION

TC

TOTAL COST

PRO-FIT

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DEMANDMR

MR=MC

OTHER EFFICIENCIES?

MIN SRAC

MIN LRAC

P=LRMC

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DEMANDMR

MR=MC

OTHER EFFICIENCIES?

MIN SRAC

MIN LRAC

P=LRMC

NOT EFFICIENTINVESTING

INEFFICIENTCAPACITY UTILIZATION

(ALLOCATIVELYINEFFICIENT)

NONE!!

MONOPOLY

• HIGH PRICES (P>SRAC)

• HIGH LONG RUN PROFITS (P>LRAC)

• INEFFICIENT CAPACITY (SRAC NOT THROUGH MIN OF LRAC)

• INEFFICIENT CAPACITY UTILIZATION (NOT AT MIN SRAC)

• INEFFICIENT ALLOCATION OF RESOURCES (P>MC)

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Price ($/copier)OLIGOPOLY MODELS

4X

3X

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1X

Average Explicit CostLong Run Average CostDemandamerican choice

european choice

japanese choice

OLIGOPOLY

• HIGH PRICES (P>SRAC)

• HIGH LONG RUN PROFITS (P>LRAC)

• INEFFICIENT CAPACITY (SRAC NOT THROUGH MIN OF LRAC)

• INEFFICIENT CAPACITY UTILIZATION (NOT AT MIN SRAC)

• INEFFICIENT ALLOCATION OF RESOURCES (P>MC)

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MONOPOLISTIC COMPETITION

MR

Demand

LRAC

Long Run ProfitMaximizing Output

MONOPOLISTIC COMPETITION

• HIGH PRICES (P>SRAC)

• NO LONG RUN PROFITS (P=LRAC)

• INEFFICIENT CAPACITY (SRAC NOT THROUGH MIN OF LRAC)

• UNDERUTILIZED CAPACITY (AT LOWER OUTPUT THAN MIN SRAC)

• INEFFICIENT ALLOCATION OF RESOURCES (P>MC)

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COMPETITION

DEMAND

LRAC

LRMCSUPPLY

MARKET FIRM POINT OF VIEW

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COMPETITION

DEMAND

SRAVC

SUPPLY

MARKET FIRM POINT OF VIEW

SRMC

SRACA

BSHUT DOWN PRICE

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COMPETITION

DEMAND

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LRMCSUPPLY

MARKET FIRM POINT OF VIEW

PROFIT

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ENTRY DUE TO PROFIT

DEMAND

LRAC

LRMCSUPPLY

MARKET FIRM POINT OF VIEW

SHIFT

LOSS

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COMPETITIVE EQUILIBRIUM: THROUGH NATURAL MARKET FORCES

DEMAND

LRAC

LRMC

SUPPLY

MARKET FIRM POINT OF VIEW

PERFECT COMPETITION

• LOWEST PRICES (P= MIN SRAC)

• NO LONG RUN PROFITS (P=LRAC)

• EFFICIENT CAPACITY (SRAC THROUGH MIN OF LRAC)

• FULLY UTILIZED CAPACITY (AT SAME OUTPUT AS MIN SRAC)

• EFFICIENT ALLOCATION OF RESOURCES (P=MC)

PORTER’S INDUSTRY STUDY

• STRUCTURAL ANALYSIS (# of firms, product differentiation, barriers to entry, government involvement, cost conditions, supply and demand conditions, global,etc

• CONDUCT: Analysis of competitive behavior, interdependence, industry strategies,

• PERFORMANCE: Price, Profitability, Efficiency, Quality, etc.

FIRM’S STRATEGY COVERS:

• COST REDUCTION

• RATE OF SUBSTITUTION (switching cost, segmentation, complements)

• VERTICAL STRATEGIES: buyers, sellers

• HORIZONTAL STRATEGIES: entry deterrence, competitor analysis,

• INFORMATION & SIGNALLING STRATEGIES

• GAME THEORETIC STRATEGY.

STRATEGIC INSTRUMENTS (LONG RUN)

• CAPACITY EXPANSION- domestic, global• VERTICAL INTEGRATION• ENTRY • SPINOFFS (DIVESTMENT)• COALITIONS (TRADE ASSNS., ETC.)• JOINT VENTURES & OTHER

COOPERATIVE VENTURES.

TACTICAL INSTRUMENTS (SHORT RUN)

• RATE OF PRODUCTION (eg shut down)

• PRICING

• PURCHASING MANAGEMENT (inventories, labor contracting, etc.)

• ADVERTISING & MARKETING

• FINANCIAL & ACCOUNTING MANAGEMENT

DATA SOURCESProduct Lines Buyers and their behaviorComplementary productsSubstitute productsGrowth (rate, patterns)Technology (Pdcn Fcn.)- substitutability, Economies, marginal productivity- technological changeMarkets (segments, practices)SuppliersCompetitors

SocialPoliticalEconomicStakeholders

Environment

NUMBER OF FIRMS0 1 2 3 4 5 10 20 N

PRICE MONOPOLY PRICE

COMPETITIVEPRICE

COURNOT

CHAMBERLAIN

BERTRAND

PAYOFF MATRIX FOR THE PRISONER’S DILEMMA

DON’T TELLTELL

DON’TTELL

TELL

BOTH Hunt-jailFREE Liddy-free & write bkLiddy-jail BOTH INHunt-free JAIL& writes bk

HUNT

LIDDY

SOLUTION TO PRISONER’S DILEMMA

• EXCHANGE INFORMATION

• ENFORCEMENT (ALTER PAYOFF MATRIX)

• REPETITION

PAYOFF MATRIX FOR THE PRISONER’S DILEMMA: LOWERING PRICES

FIRM IFIRM

II

DON’T LOWERCHANGE PRICE

DON’TCHANGELOWERPRICE

Both gain II brokeprofits I gains monopolyI broke II gains No Profitmonopoly

PAYOFF MATRIX FOR THE PRISONER’S DILEMMA: RAISING PRICES

FIRM IFIRM

II

RAISE DON’TPRICE CHANGE

RAISEPRICEDON’TCHANGE

Both gain II brokeprofits I gains monopolyI broke II gains No Profitmonopoly

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MARKET FIRM POINT OF VIEW