Microecon. 4 (mkt structures)

Microecon. 4 (mkt structures)

1. Profits

   • When total revenue = total cost --> normal profit
   • When TR > TC --> abnormal profit
   • TR < TC --> losses

2. Perfect competition

   • Assumptions
     • large nbr of small firms
     • price-takers
     • identical products
     • no barriers to entry/exit
     • perfect knowledge
   • Profit max (MC=MR)
   • SR: abnormal profits and losses e.g. technological changes
   • LR: no abnormal profits as they attract more firms, thus increasing supply and lowering p's and demand
   • Advantages
     • consumers gain from low prices
     • consumers determine what and how much is to be produced
     • competition creates efficiency
       • no point in advertising
       • development of new technology
   • disadvantages
     • lack of variety
   • efficiency in P.C
     • both productive and allocative in LR
     • may not achieve either in the SR

3. Productive efficiency (MC=AC)

4. Allocative efficiency (MC=AR)

5. Monopoly

   • Assumptions
     • only one seller
     • barriers to entry exist, very high
     • price maker
     • ability to make abnormal profits
   • economies of scale
     • benefit of producing large quantities (lower AC)
   • Natural monopoly: when a single large firm can produce for the entire mkt at a lower ATC than 2+ smaller firms e.g. electricity
   • abnormal profits in SR and possibly LR (barriers to entry)
   • neither productively nor allocatively efficient (restricting output in order to force up prices)
   • disadvantages
     • against public interest
     • higher p's and lower output
     • profits in spite of inefficiency
     • less incentive to be efficient
   • advantages
     • abnormal profits may encourage more monopoly industries

6. Monopolistic competition

   • Assumptions
     • Many firms
     • differentiated products e.g. car mechanics
     • free entry and exit in respons to profits
     • imperfect knowledge
     • price makers to a certain extent
   • SR: produce at MC=MR. Can have abnormal profits or losses
     • neither productive nor allocative efficiency
   • LR: normal profits (freedom of entry and exit)
     • no efficiency either
   • Non-price competition
     • when a firm tries to distinguish its product from competing products by changing for example design and workmanship
     • involves: advertising, coupons, product development

7. Oligopoly

   • assumptions
     • few firms share large proportion of industry's output
     • high barriers to entry e.g. high start-up costs, legal barriers
     • identical or differentiated products
   • collusion
     • To coordinate prices, limit competition --> act as monopoly to make abnormal profits
     • Formal (cartel)
       • formal agreement among firms to undertake planned actions to prevent competition
       • e.g. setting product quotas, price fixing, dividing mkt's
       • difficulties
         • nbr of firms
         • incentives to cheat
         • need high barriers to entry to avoid price lowering
     • Informal (tacit)
       • charging same price and limiting competition without any agreement
       • Price leadership: a firm has clear dominance in mkt and other firms follow the changes
       • Limit pricing: firms informally agree to a price lower than MC=MR --> lower profits and discourage firms from entering
   • non-collusive oligopoly --> kinked d-curve
     • price rigidity