Imperfect Competition Market

Structure Models (11/5/09) Alternative Market Structure Models

Seller Side Buyer Side
Today: Monopoly and Review Exam II Perfect
„ „ Perfect
Competition/ Competition/
Nextt W
N Week:
k IImperfect
f tC Competition
titi M Models
d l and
d Competitive C
Competitive
titi
Structure-Conduct Performance Applications „ Monopolistic „ Monopsonistic
Competition Competition
„ Oligopoly Oligopsony
Nov 17th, 19th – Price Discovery „
„ Monopoly „ Monopsony
Exam III (Nov 24th)

AEC 305, Food and Agricultural Marketing Principles AEC 305, Food and Agricultural Marketing Principles

Comparisons of Industry Market

Market Structure, Conduct,
Structures and Performance
Characteristics Perfect Monopolistic Oligopoly Monopoly
Competition Competition Oligopsony Monopsony
Number of Government Oversight/Regulation
Buyers/Sellers
(very large number, Very large # Many Few One
many, few, one)
Product Differentiation Homogenous Slightly Homogeneous Unique
(Homogeneous, Slightly Differentiated or
Differentiated, Unique) Market Structure Market Conduct Market Performance
Differentiated •Pricing Efficiency
•# of Buyers and Sellers •Price Decisions
Ease of Entry/Exit •Product Similarity •Non Price Decisions •Operational Efficiency
(Easy, Relatively Easy Easy Relatively Difficult Blocked •Ease of Entry/Exit (product development, •Profits/Distribution
Difficult, Difficult, Easy or Closed •Info Available advertising/promotion) •Consumer Preferences
Closed) •Quantity Decisions •Information
Degree of Info Available
to Competitors Perfect A Lot Limited None, Unless
(Perfect, A lot, Limited, Regulated
None)
Influence on Price No Yes, But Ltd by Yes Yes
(yes or no) Price Taker # of Substitutes Price Maker Price Maker
AEC 305, Food and Agricultural Marketing Principles

Competitive Markets Review Perfect Competition-- Individual Producer

Individual producer faces a perfectly
„ Many buyers and sellers who have no influence on price
elastic demand curve
– individual demand is perfectly elastic (price taker)
Price
„ Easy to enter and exit the industry, everyone has s=MC
complete information Classic example is a corn farmer –
producing homogenous product,
product
„ P d
Producer’s
’ d
determine
t i quantity
tit where:
h P =MR
MR =MCMC takes price established in the
„ Economic Profits can exist in the short run, firms don’t d=MR market, if profits exist in the short-
compete on price (they are price takers) or quality P = MR=MC run, entry occurs, supply increases,
(homogenous goods), but attempt to lower their costs prices fall until all economic profit is
„ Production in the long-run occurs at the minimum of eliminated
the LRAC --- can be earning accounting profits, but not
What is on the opposite end of the
economic profits (allows for enough return on Q spectrum for market structure
investment to keep remaining firms in the business) (Individual Producer) models?

AEC 305, Food and Agricultural Marketing Principles AEC 305, Food and Agricultural Marketing Principles

1
 Producer Price Determination Under
Monopoly Market Structure Monopoly
Monopolist has control over setting
Price quantity and price (price setter) … „ Complete freedom in selecting price or quantity
(Note: P>MR=MC „ Monopolist faces the entire (downward sloping)
MC demand curve
Monopolist faces a downward sloping „ Prices will be higher and quantity lower than those
P demand curve which is the market demand represented by competitive market conditions,
curve assuming same costs and demand schedules
„ No guarantee of profitability … perhaps there is a
MC
reason there is only one firm
D „ Would a monopolist ever consider selling at a price
MR
Quantity that did not maximize profits?
Q1 „ (threat of entry or government regulation)

AEC 305, Food and Agricultural Marketing Principles AEC 305, Food and Agricultural Marketing Principles

Reasons for the Existence of a Monopoly Monopoly -- Examples

„ Single seller has a patent/sole owner of „ Sole Owner of Patent/Copyright/Technology/Rights – Microsoft

(Windows), NCAA (college sports), Pharmaceutical Companies
technology „ Government Sanctioned
Public Utilities (e.g. water and electric companies)
„ The potential benefits of economies of scale „

„ Trade Policy (restrict imports)

for a single “large” firm versus a higher cost „ Network Solutions Inc.
structure for a large number of smaller firms „ Location Monopolies
„ (e.g., corner grocery in isolated area, gas station/agribusiness in
„ Location advantages rural area, cinema/stadium/theme park concessions, airport
dining/shops)
„ Government sanctioned „ Quality/Quantity Superiority Sometimes Lead to “Monopoly
Market Power”
„ Quality advantage that no other firm/market „ (e.g., U.S. tobacco prior to 1970s, first local tomatoes at local
can duplicate farmers market)

AEC 305, Food and Agricultural Marketing Principles AEC 305, Food and Agricultural Marketing Principles

Perfect vs Imperfect Competition Models Monopolistic Competition Model

Perfect Competition Monopoly Monopolistic Competition As with other imperfect
Price competition models,
produce where MR = MC,
MC MCd MCd with price being determined
along the demand curve
s = MC P P P But note that demand is
MC D MC D more elastic … more close
P = MR=MC d=MR
MR substitutes, not much
MR incentive to compete on
price … Why?
MC
D Consequently they compete
MR more on product
Quantity differentiation and product
Q1 Q1 Qd Qd QT
promotion/better services

AEC 305, Food and Agricultural Marketing Principles AEC 305, Food and Agricultural Marketing Principles

2
 Monopolistic Competition – characteristics
of both perfect competition and monopoly
„ Many sellers dealing with slightly differentiated products
(physical/perceived differences, and/or varying services)
„ Extensive knowledge
„ Ease of Entry/Exit
„ Limited market power
„ Demand curve very elastic, but a price maker
„ Emphasis on non-price competition and services
„ Attempt to develop customer loyalty, but must be aware of
actions of close competitors
„ Examples include fast food restaurants, convenience stores,
clothing stores, gas stations, pizza delivery firms