Competition And Market

Structure

Types Of Market Structure

Monopolistic Competition:
- Many firms produce differentiated products.
- Sold the products to many buyers.
- Such as: local physicians market, local
markets for video rental, dry
cleaning.

Monopolistic Competition
Maximizes its profit at the point at which its

marginal revenue equals marginal cost.

MR = MC
Monopolistic competition different from a

differentiated products oligopoly:

- monopolistically competitive markets are
characterized by free entry.

Monopolistic Competition (continued)

Figure 13.13 Page 510

Profit Maximization Monopolistic Competition.

Types Of Market Structure: Oligopoly

1. Homogeneous Products Oligopoly.
2. Differentiated Products Oligopoly.

Types Of Market Structure: Oligopoly

(continued)
Homogeneous Products Oligopoly:
Markets in which a small number of firms sell
products that have virtually the same:
-- attributes,
-- performance characteristics,
-- image,
-- price.

Types Of Market Structure: Oligopoly

(continued)
Differentiated Products Oligopoly Markets:
Markets in which a small number of firms sell
products that are substitutes for each other but
also differ from each other:
-- attributes,
-- performance characteristics,
-- image,
-- price.

The Cournot Model of Oligopoly:

Homogenous products of oligopoly.
Considered a duopoly market (a market in

which there are just two firm).

Example:

The firms:
1. Samsung.
2. LG.

Their product is DRAM Chips (identical product from Samsung

and LG).

Their MC is identical.

Both firms will charge the same price.

Without colluding with each other.

No knowledge of each others plan.

How much to produce by each firm?

Example (continued):
The market price is not known until both

firms have made their output choice.

Each firm will make the output choice that

maximizes its profit based on its expectation

of the other firms output choice.

Example (continued):
Figure 13.1. Page 485.
Suppose Samsung expects LG to produce
50 units of output.
Suppose Samsung expects LG to produce
20 units of output.

Equilibrium In Cournot Market

Figure 13.2. Page 486.
Rs = Samsungs reaction function.
Rlg = LGs reaction function.
A = Samsung produces 20 units based
information LG will produce 50 units.
B = Samsung produces 35 units based information LG
will produce 20 units.
The Cournot Equilibrium at E = Samsung produces 30 units
and LG produces 30 units.

The Cournot Equilibrium VS Monopoly Equilibrium

And Perfectly Competitive Equilibrium
Figure 13.4.

- If Samsung and LG behave as profit

maximizing Cartel (Monopoly),
They will produce a total 45 units (22.5 units
by Samsung, and 22.5 units by LG).
The Cartel (Monopoly) equilibrium point is M (22.5
units Samsung, 22.5 units LG), where Cournot
Oligopoly equilibrium is at E (30 units Samsung, 30
units LG).

The Cournot Equilibrium VS Monopoly Equilibrium

And Perfectly Competitive Equilibrium (continued):
Suppose that a market consists N identical
firms, that the market demand curve is:
P = a bQ
P = price of output.
a = intercept.
b = coefficient (slope).
Q = output
With MC is c

The Cournot Equilibrium VS Monopoly Equilibrium

And Perfectly Competitive Equilibrium (continued):
Monopoly Market Structure:

Price = (0.5 a) + (0.5 c)

Market quantity: 0.5 {(a-c)/b}
a = intercept
b = coefficient
c = MC

The Cournot Equilibrium VS Monopoly Equilibrium

And Perfectly Competitive Equilibrium (continued):
Cournot Duopoly Market Structure:

Price = {(1/3) a} + {(2/3) c}

Market quantity: (2/3) {(a-c)/b}
a = intercept
b = coefficient
c = MC

The Cournot Equilibrium VS Monopoly Equilibrium

And Perfectly Competitive Equilibrium (continued):
Perfect Competition Market Structure:

Price = c
Market quantity: {(a-c)/b}
a = intercept
b = coefficient
c = MC