KINH TẾ VI MÔ 2015 chapter 5 micro 1 5 market structure
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2015/12/21
Contents
Perfect Competitive Market
Monopoly
Monopolistic Competition
Obligopoly
Microeconomics
Market Structure
Chapter 5
By Tran Thi Kieu Minh, MSc
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©Kieu Minh, FTU, 2014
The four types of market structure
5.1 Competitive market
Perfectly Competitive Markets
Profit Maximization
Competitive Firm
Competitive Market Supply Curve
Economists who study industrial organization divide markets into four types:
monopoly, oligopoly, monopolistic competition, and perfect competition.
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Producer Surplus
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5.1.1 Perfectly Competitive Markets
E . g.Total, average, & marginal revenue - competitive firm
Price Taking
1.
The individual firm sells a very small share of the total
market output and the individual consumer buys too small a
share of industry output, therefore, cannot influence market
price. o have any impact on market price.
Price taker
Quantity
(Q)
Price
(P)
Total revenue
(TR=P ˣ Q)
Average revenue
(AR=TR/Q)
Marginal revenue
(MR=ΔTR/ΔQ)
1 gallon
2
3
4
5
6
7
8
$6
6
6
6
6
6
6
6
$6
12
18
24
30
36
42
48
$6
6
6
6
6
6
6
6
$6
6
6
6
6
6
6
Product Homogeneity
2.
The products of all firms are perfect substitutes.
Free Entry and Exit
3.
Buyers can easily switch from one supplier to another.
Suppliers can easily enter or exit a market.
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The Competitive Firm
The Competitive Firm
Demand curve faced by an individual firm is a horizontal
line at the market price P
Price
$ per
gallon
Firm
Price
$ per
gallon
Industry
S
D=AR=MR
Firm’s sales have no effect on market price
Average revenue = P
Marginal revenue = P
Profit Maximizing: For a perfectly competitive firm, profit
maximizing output occurs when
$6
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$6
MC (q) MR AR P
D
100
7
200
Output
(gallons)
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100
Output
(millions
of gallons)
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P rofit maximization for a competitive firm
Costs
and
Revenue
Ma rginal cost as the competitive firm’s supply curve
Price
The firm maximizes profit
by producing the quantity
at which marginal cost
equals marginal revenue.
MC
MC
P2
ATC
MC2
ATC
P=MR1=MR2
P=AR=MR
P1
AVC
AVC
MC1
0
Q1
QMAX
Q2
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5.1.2 Competitive Firm’s Decision
0
Quantity
At the quantity Q1, marginal revenue MR1 exceeds marginal cost MC1, so raising production
increases profit. At the quantity Q2, marginal cost MC2 is above marginal revenue MR2, so
reducing production increases profit. The profit-maximizing quantity QMAX is found where the
horizontal price line intersects the marginal-cost curve.
Shutdown
Short-run decision not to produce anything
During a specific period of time
Because of current market conditions
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Quantity
©Kieu Minh, FTU, 2014
The firm’s short-run decision to shut down
Shut down if TR
Competitive firm’s short-run supply curve
The portion of its marginal-cost curve
That lies above average variable cost
Firm still has to pay fixed costs
Exit
Long-run decision to leave the market
Firm doesn’t have to pay any costs
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Q2
Competitive Firm’s Decision
Q1
An increase in the price from P1 to P2 leads to an increase in the firm’s profit-maximizing
quantity from Q1 to Q2. Because the marginal-cost curve shows the quantity supplied by
the firm at any given price, it is the firm’s supply curve.
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Competitive Firm’s profit
The competitive firm’s short-run supply curve
Costs
1. In the short run, the
firm produces on the
MC curve if P>AVC,...
MC
If P > ATC
ATC
AVC
If P < ATC
2. ...but
shuts down
if P
0
Profit = TR – TC = (P – ATC) ˣ Q
Loss = TC - TR = (ATC – P) ˣ Q
= Negative profit
Quantity
In the short run, the competitive firm’s supply curve is its marginal-cost curve (MC) above
average variable cost (AVC). If the price falls below average variable cost, the firm is
better off shutting down.
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Case study: Near-empty restaurants and
off-season miniature golf
Profit as the area between price and average total cost
(a) A firm with profits
Price
Profit
P
ATC
(b) A firm with losses
MC
Price
ATC
MC
Loss
ATC
P=AR=MR ATC
P
P=AR=MR
0
Q
Quantity
(profit-maximizing quantity)
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0
Q
(loss-minimizing quantity)
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Quantity
Restaurant – stay open for lunch?
Fixed costs
Not relevant
Are sunk costs in short run
Variable costs – relevant
Shut down if revenue from lunch < variable costs
Stay open if revenue from lunch > variable costs
Operator of a miniature-golf course
Ignore fixed costs
Stay open if revenue > variable costs
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Competitive Market Supply Curve
Quiz1
a.
b.
c.
A competitive Firm ABC has average production cost
($) of
75
ATC 2 q
q
What is the short-run supply curve of the firm?
If market price is $30, what is the optimum quantity
of the firm? How much is the maximum profit?
What is the firm’s decision if market price decreases
to $10? Explain.
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Each firm – supplies quantity where P = MC
Market supply
For P > AVC: supply curve is MC curve
Add up quantity supplied by each firm
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Quiz 2
(a) Individual firm supply
(b) Market supply
MC
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S h ort-run market supply
Price
Short run: market supply with a fixed number
of firms
Price
Supply
A competitive market of a good A has 1000 similar sellers,
each has production cost of:
TC
$2.00
$2.00
1.00
1.00
0
100
200
Quantity
(firm)
0
1 2
q 5q 8
2
Market demand of good A is :
Q 20000 500P
1.
What is the market supply curve of good A?
2.
What is the equilibrium price and quantity?
3.
What is the optimum selling quantity of each seller?
100,000 200,000
Quantity
(market)
In the short run, the number of firms in the market is fixed. As a result, the market supply curve,
shown in panel (b), reflects the individual firms’ marginal-cost curves, shown in panel (a). Here,
in a market of 1,000 firms, the quantity of output supplied to the market is 1,000 times the
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quantity
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5.1.3 Producer Surplus
Producer Surplus for a Firm
In the short-run:
Price is greater than MC on all but the last unit of output.
Therefore, surplus is earned on all but the last unit
Price
($ per
unit of
output)
The producer surplus is the sum over all units produced
of the difference between the market price of the good
and the marginal cost of production.
Area above supply to the market price
Producer
Surplus
MC
AVC
B
A
P
At q* MC = MR.
Between 0 and q ,
MR > MC for all units .
Producer surplus
is area above MC
to the price
q*
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Producer Surplus for a Market
Producer Surplus for a Firm
Price
($ per
unit of
output)
Producer
Surplus
MC
Output
©Kieu Minh, FTU, 2014
Price
($ per
unit of
output)
AVC
S
B
A
P
Market producer surplus is
the difference between P*
and S from 0 to Q* .
P*
D
C
q*
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Producer surplus
is also ABCD =
Revenue minus
variable costs
Producer
Surplus
D
Q*
Output
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Output
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5.2.1 Monopolist
Microeconomics
5.2 Monopoly
Monopolist
Demand andMarginal Revenue
Profit maximization
Market power
Price discrimination
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Monopoly resources
A key resource required for production is owned by a single
firm
Higher price
Government regulation
Government gives a single firm the exclusive right to
produce some good or service
Government-created monopolies
Patent and copyright laws
Higher prices; Higher profits
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Monopoly resources
Government regulation
The production process
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Why Monopolies Arise
Firm that is the sole seller of a product without
close substitutes
Price maker
Barriers to entry
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Why Monopolies Arise
The production process
A single firm can produce output at a lower cost than can a
larger number of producers
Natural monopoly
Arises because a single firm can supply a good or service to
an entire market at a smaller cost than could two or more
firms
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Economies of scale over the relevant range of output
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Demand and Revenue
6.2.2 Profit maximization
A Monopolist’s Demand Curve
Price maker
Price
Sole producer
Downward sloping demand
Market demand curve: P = f (Q)
A monopolist’s revenue
Total revenue: TR = Px Q = f (Q) x
Q
Average revenue: AR = TR/Q
Marginal revenue: MR = △TR/△Q
= TR’(Q)
Can be negative
0
Always: MR < P
MR curve – is below the demand
curve
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Demand
Q
MR
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Monopoly
price
2. . . . and then the demand curve shows the
price consistent with this quantity.
Marginal cost
B
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Profit maximization
Profit maximization for a monopoly
Costs
and
Revenue
Profit maximization
If MR > MC – increase production
If MC > MR – produce less
Maximize profit
Produce quantity where MR=MC
Intersection of the marginal-revenue curve and the
marginal-cost curve
Profit maximization
Perfect competition: P=MR=MC
Monopoly: P>MR=MC
1. The intersection of the marginal-revenue
curve and the marginal-cost curve
determines the profit-maximizing quantity . . .
Average total cost
A
Demand
Price equals marginal cost
Price exceeds marginal cost
A monopoly’s profit
Profit = TR – TC = (P – ATC) ˣ Q
Marginal revenue
0
Quantity
Q1
QMAX
Q2
A monopoly maximizes profit by choosing the quantity at which marginal revenue equals
marginal cost (point A). It then uses the demand curve to find the price that will induce
consumers
to buy that quantity (point B). ©Kieu Minh, FTU, 2014
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5.2.3 Market Power
The monopolist’s profit
Costs
and
Revenue
Marginal cost
B
Monopoly E
price
L
Average total cost
Monopoly
profit
Average
total
cost
P MC
P
higher numbers implying greater market power.
Demand
D
A firm's market power: its ability to price above marginal cost.
Lerner index, named after the American economist Abba
Lerner (1903-1982), was formalized in 1934.
For a perfectly competitive firm (where P=MC), L=0; such a
firm has no market power.
C
Marginal revenue
0
Quantity
QMAX
The area of the box BCDE equals the profit of the monopoly firm. The height of the box
(BC) is price minus average total cost, which equals profit per unit sold. The width of the
box (DC) is the number of units sold.
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6.2.4 The Welfare Cost of Monopolies
Monopoly
Produce quantity where MC = MR
Produces less than the socially efficient quantity of output
Charge P>MC
The deadweight loss:
Triangle between: demand curve and MC curve
The inefficiency of monopoly
Costs
and
Revenue
Marginal cost
Deadweight
loss
QA
Monopoly
price
DWL ( P MC).dQ
Q*
Demand
Marginal revenue
0
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MonopolyEfficient
quantity quantity
Quantity
Because a monopoly charges a price above marginal cost, not all consumers who value the good at more than
its cost buy it. Thus, the quantity produced and sold by a monopoly is below the socially efficient level. The
deadweight
between
demand
37 loss is represented by the area of the triangle
©Kieu
Minh,the
FTU,
2014 curve (which reflects the value
of the good to consumers) and the marginal-cost curve (which reflects the costs of the monopoly producer).
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The Welfare Cost of Monopolies
The monopoly’s profit: a social cost?
Monopoly
Higher profit
Not a reduction of economic welfare
Bigger producer surplus
Smaller consumer surplus
Monopoly profit
Not a social problem
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Price discrimination
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A monopolist has MC = 4 + Q and FC of $1000.
He faces the demand of P = 160 – Q (P & C: $/kg, Q :
kg)
1. What are the optimum quantity and price of the
monopoly? How much is the maximum profit?
2. How much is the consumer surplus created by this
monopoly?
3. How much is the DWL?
4. Government places a tax of $4/kg for the product of
the monopoly. How does profit change?
5. Graph the results
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5.2.5 Price Discrimination
Quiz 3
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Perfect First-Degree Price Discrimination
Business practice
Sell the same good at different prices to
different customers
Increase profit
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If the firm can perfectly price discriminate, each consumer
is charged exactly what they are willing to pay.
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Additional profit from producing and selling an incremental unit is
now the difference between demand and marginal cost
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Perfect First-Degree Price Discrimination
First-Degree Price Discrimination
In practice perfect price discrimination is almost never
possible
Firms can discriminate imperfectly
$/Q
P max
Without price discrimination,
output is Q* and price is P*.
Variable profit is the area
between the MC & MR (yellow).
Consumer surplus is the area
above P* and between
0 and Q* output.
MC
P*
With perfect discrimination, firm
will choose to produce Q**
increasing variable profits to
include purple area.
Can charge a few different prices based on some estimates
of reservation prices
PC
D = AR
MR
Q*
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Q**
Quantity
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First-Degree Price Discrimination
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First-Degree Price
Discrimination in Practice
Examples of imperfect price discrimination
Car salesperson (15% profit margin)
Colleges and universities (differences in financial aid)
Six prices exist resulting
in higher profits. With a single price
P*4, there are fewer consumers.
$/Q
Lawyers, doctors, accountants
P1
P2
P3
MC
P* 4
Discriminating up to
P6 (competitive price)
will increase profits
P5
P6
D
MR
Q*
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Quantity
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Second-Degree Price Discrimination
Second-Degree Price Discrimination
In some markets, consumers purchase many units of a
good over time
$/Q
Demand for that good declines with increased consumption
Electricity, water, heating fuel
Firms can engage in second degree price
discrimination
P0
Without discrimination: P
= P0 and Q = Q0. With
second-degree
discrimination there are
three blocks with prices
P1, P2, & P3.
Different prices are
charged for different
quantities or
“blocks” of same
good
P1
P2
AC
P3
Practice of charging different prices per unit for different
quantities of the same good or service- Block pricing
MC
D
MR
Q1
1st Block
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Third-Degree Price Discrimination
Practice of dividing consumers into two or more
groups with separate demand curves and charging
different prices to each group
1.
2.
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Q2
Q3
Quantity
3rd Block
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Third-Degree Price Discrimination
How can the firm decide what to charge each group of
consumers?
1.
Divides the market into two-groups.
Each group has its own demand function.
Examples: airlines, premium v. non-premium liquor,
discounts to students and senior citizens, frozen v. canned
vegetables, magazines.
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Q0
2nd Block
2.
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Total output should be divided between groups so that MR
for each group are equal.
Total output is chosen so that MR for each group of
consumers is equal to the MC of production
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Third-Degree Price Discrimination
Algebraically
P1: price first group
P2: price second group
C(QT) = total cost of producing output
Profit:
Third-Degree Price Discrimination
Firm should increase sales to each group until
incremental profit from last unit sold is zero
Set incremental for sales to group 1 and 2 = 0
QT = Q1 + Q 2
= P1Q1 + P2Q2 - C(QT)
Combining these conclusions gives
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MR1 = MR2 = MC
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Third-Degree Price Discrimination
$/Q
First group of consumers:MR1= MC
Second group of customers:MR2 = MC
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Third-Degree Price Discrimination
$/Q
Consumers are divided into
two groups, with separate
demand curves for each group.
MC = MR1 at Q1 and P1
P1
•Q T: MC = MRT
•Group 1: more inelastic
•Group 2: more elastic
•MR1 = MR2 = MCT
•Q T control MC
MC
MRT = MR1 + MR2
P2
D2 = AR2
D2 = AR2
MCT
MRT
MRT
MR2
MR1
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MR2
D1 = AR1
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D1 = AR1
MR1
Quantity
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Q1
Q
Q
2
T
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Minh, FTU, 2014
Quantity
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Other Types of Price Discrimination
Intertemporal Price Discrimination
Intertemporal Price Discrimination
$/Q
Practice of separating consumers with different demand
functions into different groups by charging different prices at
different points in time
Initial release of a product, the demand is inelastic
Hard back v. paperback book
New release movie
Technology
Initially, demand is less
elastic resulting in a
price of P1 .
P1
Over time, demand becomes
more elastic and price
is reduced to appeal to the
mass market.
P2
D2 = AR2
AC = MC
MR2
MR1
D1 = AR1
Q1
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Other Types of Price Discrimination
$/Q
Practice of charging higher prices during peak periods when
capacity constraints cause marginal costs to be higher.
Rush hour traffic
Electricity - late summer afternoons
Ski resorts on weekends
Movies on weekends
MC
MR=MC for each
group. Group 1
has higher
demand during
peak times
P1
Demand for some products may peak at particular times.
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Peak-Load Pricing
Peak-Load Pricing
Quantity
Q2
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D1 = AR1
P2
MR1
D2 = AR2
MR2
Q2
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Q1
Quantity
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Competition versus monopoly: A summary comparison
Similarities
Goal of firms
Rule for maximizing
Can earn economic profits
in short run?
Differences
Number of firms
Marginal revenue
Price
Produces welfare-maximizing
level of output?
Entry in long run?
Can earn economic profits
in long run?
Price discrimination possible?
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Competition
Monopoly
Maximize profits
MR=MC
Maximize profits
MR=MC
Yes
Yes
Many
MR=P
P=MC
One
MR
Yes
Yes
No
No
No
No
Yes
Yes
4.
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Elasticities of Demand for
Brands of Colas and Coffee
Many firms
1.
3.
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5.3.1 Monopolistically Competitive Market
2.
5.3 Monopolistic Competition
Not a price – taker
Having market power for their own products.
Free entry and exit
Differentiated but highly substitutable products
The amount of monopoly power depends on the
degree of differentiation
Examples of this very common market structure :
Toothpaste, Soap
Cookies and Cake
Instant noodles
Fashion
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A Monopolistically Competitive Firm
$/Q
Short Run
MC
AC
P SR
DSR
MRSR
QSR
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Downward sloping
demand – differentiated
product
Demand is relatively
elastic – good substitutes
MR < P
Profits are maximized
when MR = MC
This firm is making
economic profits
Monopolistic Competition
If inefficiency is bad for consumers, should monopolistic
competition be regulated?
Market power is relatively small. Usually there are enough
firms to compete with enough substitutability between
firms – deadweight loss small.
Inefficiency is balanced by benefit of increased product
diversity – may easily outweigh deadweight loss.
Quantity
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5.4.1 Oligopoly Market
Small number of firms
Product differentiation may or may not exist
Barriers to entry
5.4 Oligopoly
Nash Equilibrium
Game Theory
Cartel
Examples
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Scale economies
Patents
Technology
Name recognition
Strategic action
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Automobiles
Steel
Aluminum
Petrochemicals
Electrical equipment
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Oligopoly
5.4.2 Oligopoly Equilibrium
Management Challenges
Strategic actions to deter entry
Threaten to decrease price against new competitors by keeping
excess capacity
Rival behavior
Because only a few firms, each must consider how its actions will
affect its rivals and in turn how their rivals will react
If one firm decides to cut their price, they must consider
what the other firms in the industry will do
Could cut price some, the same amount, or more than firm
Could lead to price war and drastic fall in profits for all
Actions and reactions are dynamic, evolving over time
Defining Equilibrium
Nash Equilibrium
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5.4.3 Competition Versus Collusion:
Game Theory
Firms are doing the best they can and have no incentive to change
their output or price
All firms assume competitors are taking rival decisions into account
Each firm is doing the best it can given what its competitors are doi
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Payoff Matrix for Prisoners’ Dilemma
The Prisoners’ Dilemma : An example in game theory,
called the Prisoners’ Dilemma, illustrates the problem
oligopolistic firms face
Two prisoners have been accused of collaborating in a crime
They are in separate jail cells and cannot communicate
Each has been asked to confess to the crime
Prisoner B
Confess
Prisoner A
Don’t
confess
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Don’t confess
Confess
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-5, -5
-1, -10
Would you choose to confess?
-10, -1
-2, -2
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Oligopolistic Markets
Cartels
In some oligopoly markets, pricing behavior in time can
create a predictable pricing environment and implied
collusion may occur
In other oligopoly markets, the firms are very aggressive and
collusion is not possible
Firms are reluctant to change price because of the likely response
of their competitors
In this case, prices tend to be relatively rigid
Producers in a cartel explicitly agree to cooperate in
setting prices and output
Typically only a subset of producers are part of the cartel
and others benefit from the choices of the cartel
If demand is sufficiently inelastic and cartel is enforceable,
prices may be well above competitive levels
Conclusions
1.
Collusion will lead to greater profits
2.
Explicit and implicit collusion is possible
3.
Once collusion exists, the profit motive to break and lower
price is significant
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Cartels
Examples of successful cartels
OPEC
International Bauxite Association
Mercurio Europeo
Examples of
unsuccessful cartels
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Copper
Tin
Coffee
Tea
Cocoa
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