Market Structures

Microeconomics

Four Types of Market Structures

Perfect
Compe,,on

Monopolis,c
Compe,,on

Oligopoly

Monopoly

# of rms

Many

Many

Few

One

Products

Iden7cal

Dieren7ated

Iden7cal or
Dieren7ated

Unique

Entry/ Exit

Easy

Easy

Dicult

Nearly
Impossible

Prot
Maximiza7on

MR = MC

MR = MC

MR = MC

MR = MC

Price

PPC < PMC < PO < PM

Quan7ty

QPC > QMC > QO > QM

Examples

Perfect Competition
P
MC

PROFIT

ATC
AVC

Total
Cost
Q
TOTAL REVENUE

P* = MC = MR

All firms are

PRICE-TAKERS

Perfect Competition
Elastic demand due to high substitutability

If P increases

BUYER WILL BUY

FROM ANOTHER
FIRM

If P decreases

SELLER WONT BE
ABLE TO
ACCOMMODATE
THE CUSTOMER
RUSH

Perfect Competition
Shut-down

Exit

A short-run decision not to

produce anything because
of market conditions

A long-run decision to leave

the market.

P < AVC

P < ATC

Perfect Competition
In the Long-Run
The number of firms can change due to entry & exit.
Zero economic profit occurs (Accounting profit may

still be positive)

ECONOMIC PROFIT is revenue minus all costs including implicit costs, like
the opportunity cost of the owners time and money.

Perfect Competition
LONG-RUN

Ease in entry: the market becomes congested

Many sellers
Economic prot is zero
Ease in exit: Some rms will exit the market. not worth it

SHORT-RUN

Demand > Supply

Shortage
Prices will go up

Ease in entry: AYract new sellers

Monopoly
Costs and
Revenue

2. . . . and then the demand

curve shows the price
consistent with this quantity.
B

Monopoly
price

1. The intersection of the

marginal-revenue curve
and the marginal-cost
curve determines the
profit-maximizing
quantity . . .

Average total cost

A

MC

Firm is a
Price
Maker

Demand

Marginal
cost

Marginal revenue
0

QMAX

Quantity

Monopoly
Costs and
Revenue
Marginal cost
Monopoly E
price

B
Monopoly
profit

Average
total D
cost

Average total cost

C
Demand

Marginal revenue
0

QMAX

Quantity

Monopoly
In contrast to a competitive firm, the monopoly

charges a price above the marginal cost (P > MC).

For consumers, this high price makes monopoly

undesirable.

For the monopolist, the high price makes monopoly

profitable.

Monopoly
Price

P > MC;
monopoly

Deadweight
loss

Ineciency

Monopoly
price

P = MC; perfect
compe77on and
op7mum

Marginal
revenue

Marginal cost

Monopoly Efficient
quantity quantity

Demand

The monopolist
produces less than
the socially ecient
quan,ty
Quantity

Monopoly
Price discrimination is the business practice of selling

the same good at different prices to different

customers, even though the cost of production is the
same for all customers.

Monopolistic Competition
A hybrid of perfect competition and monopoly
Has market power
Differentiated products
Same graph as Monopoly but MCs charge at a lower

price (Demand and MR curves are flatter)

Advertising plays an important role to capture demand

Oligopoly
Competition of Market Share
Strategic behavior in oligopoly:

A firms decisions about P or Q can affect other firms

and cause them to react. The firm will consider these
reactions when making decisions.

Collusion: an agreement among firms in a market

about quantities to produce or prices to charge

Cartel: a group of firms acting in unison

Oligopoly
Game theory: the study of how people

behave in strategic situations.

Oligopoly (Game Theory)

Game theory helps us understand oligopoly and

other situations where players interact and

behave strategically.

Dominant strategy: a strategy that is best

for a player in a game regardless of the strategies

chosen by the other players

Prisoners dilemma: a game between

two captured criminals that illustrates

why cooperation is difficult even when it is mutually
beneficial

16

Oligopoly (Game Theory Prisoners

Dilemma)
The police have caught Bonnie and Clyde,

two suspected bank robbers, but only have

enough evidence to imprison each for 1 year.

The police question each in separate rooms,

offer each the following deal:

If you confess and implicate your partner,

you go free.
If you do not confess but your partner implicates
you, you get 20 years in prison.
If you both confess, each gets 8 years in prison.

Oligopoly (Game Theory Prisoners

Dilemma)
Bonnies decision
Confess

Confess
Clydes
decision

Remain silent

Bonnie gets
8 years
Clyde
gets 8 years
Bonnie goes
free

Remain
silent Clyde
gets 20 years

Bonnie gets
20 years
Clyde
goes free
Bonnie gets
1 year
Clyde
gets 1 year

Oligopoly (Game Theory The Fare Wars)

The players: American Airlines and United Airlines
The choice: cut fares by 50% or leave fares alone
If both airlines cut fares,

each airlines profit = $400 million

If neither airline cuts fares,
each airlines profit = $600 million
If only one airline cuts its fares,
its profit = $800 million
the other airlines profits = $200 million