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Program: GM 2
Market Structure
Introduction
The pricing and output decision will actually be answered within the framework of four basic
types of markets: perfect competition, monopoly, monopolistic competition, and oligopoly.
Perfect competition and monopoly can be considered the two extreme market environments in
which a firm competes in terms of market power. In terms of market power, monopolistic
competition and oligopoly are somewhere between the two extremes of perfect competition and
monopoly. From a pedagogical standpoint, it is easier to understand and appreciate the
particulars of monopolistic competition and oligopoly if there is first a thorough understanding
of perfect competition and monopoly.
number of buyers
future expectations of buyers
financing terms
Strategy for firms in Imperfect Competition
Strategy: the means by which an organization uses its scarce resources to relate to the
competitive environment in a manner that is expected to achieve superior business
performance over the long run.
Strategy is important when firms are price makers and are faced with price and non-price
competition as well as threats from new entrants into the market
More important for firms in imperfectly competitive markets than those in perfectly
competitive markets or monopoly markets
Managerial economics: the use of economic analysis to make business decisions involving
the best use of an organizations scarce resources
Industrial organization: studies the way that firms and markets are organized and how
this organization affects the economy from the viewpoint of social welfare
Structure-Conduct-Performance (S-C-P) paradigm: says structure affects conduct which
affects performance
structure: number of firms in industry, conditions of entry, product differentiation
conduct: pricing strategies, advertising, product development, legal tactics, collusion
performance: maximization of societys welfare
Porters Five Forces model: illustrates the various factors that affect the ability of any
firm in the industry to earn a profit