1

2
1hls ls abouL how rms behave. Looklng aL whaL consLralns Lhelr behavlour - oLher
rms, consumers, governmenL pollcy...
1hls ls a Lhlrd year course ln economlcs - we are looklng aL lmporLanL economlc
models/Lheorles Lo dlscuss quesuons LhaL are ln Lhe papers and on MlnlsLers desks
every day. My [ob ls Lo make sure you know Lhe economlcs and you have some ldea
of how Lo use lL.

3
4
3
SLyllsed benchmark
Much of lndusLrlal economlcs/compeuuon economlcs ls abouL whaL happens when
Lhese condluons are noL meL
6
See llgure 3.1 and 3.2 ln LWC showlng equlllbrlum.
PorlzonLal rm demand curve because prlce Laker (lnnlLe prlce elasuclLy of
demand). A8=M8=llrm demand
llrm supply curve=S8MC curve above Average CosL Curve.
Say aL 1 (greaLer Lhan AC) - maklng abnormal proL
CeL enLry because auracLed by poLenual for enLry, whlch wlll shl lndusLry supply
curve, reduclng prlce Lo 2.
keep reduclng unul reach rlce equal Lo AC. lf have hlgher Lhen wlll geL enLry wlLh
cheaper prlces. lf go lower wlll make loss.
LeasL emclenL rms (l.e. Lhose wlLh hlgher AC) don'L survlve. Survlvlng rms produce
emclenLly glven Lechnology.

Work wlLh example:
uemand: p=100-13q (llnear demand funcuon)
1C=10q (consLanL reLurns Lo scale, no xed cosLs)
n=18-1C=100q-13q
2
-10q=90q-13q
2

p=MC=10 lmplles 100-13q=10 whlch lmplles q=6
n=0


7
naLural monopoly - one rm produces aL lower AC Lhan more Lhan one rm
compeung because of decreaslng reLurns Lo scale.
8
See LWC llgure 3.3 Lo see equlllbrlum
roL maxlmlsauon aL M8=MC
Plgher prlce and less ouLpuL Lhan perfecL compeuuon
Work wlLh example:
uemand: p=100-13q (llnear demand funcuon)
1C=10q (consLanL reLurns Lo scale, no xed cosLs)
n=18-1C=100q-13q
2
-10q=90q-13q
2

n
max
where M8=MC whlch ls 90-30q=0 whlch lmplles q=3, p=33, n=133

9
10
See LWC llgure 3.8 Lo see equlllbrlum

11
12
noLe LhaL ln Ch 10 of LWC
AnoLher model LhaL does noL really sLand up Lo scruuny because of llmlung
assumpuons (no sunk cosLs, no barrlers Lo enLry, no long-run analysls Laklng accounL
of lncumbenL reacuons)
8uL has broughL Lo fore lmporLance of conslderlng poLenual enLry as consLralnL on
rms, as well as exlsung markeL sLrucLure.
AlLhough a sLauc model, lLs lmporLance ls ln conslderlng dynamlc lnLeracuons.
13
Look aL monopoly prlclng dlagram.

AL prlce above AC (where maklng proLs), rms wlll enLer and Lake some of demand.
AL prlce below AC rm wlll make losses
Lqulllbrlum where prlce equal Lo AC
Won'L observe enLry buL poLenual enLry wlll consLraln prlce.
14
13
16
17
Compare Consumer Surplus and roducer surplus under perfecL compeuuon and
monopoly - deadwelghL loss of monopoly
Can do slmllar deadwelghL loss analysls for dlerenL markeL sLrucLures

18
Look aL deadwelghL loss dlagram and see whaL happens lf reduce monopoly cosLs
19
need Lo look aL long-run (even medlum-Lerm) lmpllcauons
20
Aghlon and CrlmLh 8 (2003), !"#$%&&"' )'* +,"-./0 1%2"'2343'5 6/%",7 )'*
8,)2&2%, Ml1 ress
very lnLeresung book buL some of lL ls Lechnlcal economlc growLh Lheory -
lnLroducuon glves good avour of Lhe lssues wlLhouL Lhe economlc growLh Lheory.
Mlxed Lheorles and emplrlcal evldence may suggesL LhaL need Lo conslder oLher
facLors aecung growLh pollcy alongslde compeuuon. 1here are lssues relaung Lo
Lhe umlng of Lhe pollcy - e.g. Lhe exLenL Lo whlch new Lechnologles and requlred
facLors of producuon are ln place (how close Lo Lechnology and producuon fronuer) -
and Lhe exLenL Lo whlch monopoly ls consldered a 'Lemporary' soluuon Lo promoLe
lnnovauon or creaLed lndenlLely.
21
SLarL looklng aL whaL deLermlnes compeuuon ln a markeL by uslng SLrucLure-
ConducL-erformance model. We wlll spend much of Lhe resL of Lhe course
unplcklng Lhe rlgld assumpuons of Lhe model buL recognlse upfronL LhaL lL provldes a
useful framework for debaung Lhe lssues.
22
23