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MARKET STRUCTURE
Market Characteristics
10/19/16
The degree of
product differentiation
Perfect
competition
Monopoly
Monopolistic
competition
Oligopoly
Type of Product
Standardised
Differentiated
Standardised or differentiated
Entry Barriers
Very Easy
Easy
Difficult
Price-Taker or Price
Maker?
Unique
Very Difficult or
Impsibosle
Price-makerno
competitors; no
perfect substitutes
Price-maker (with a
Price-maker (with a strong
recognition of other sellers) recognition of other sellers)
P>MR=MC
P>MR=MC
P>MR=MC or P=MR=MC,
depending on type of
competition and product
differentiation.
Horizontally sloped;
Residual Demand Curve perfectly elastic
demand curve
Downward
sloping
Downward-sloping: slightly
differentiated products are
available
Downwardsloping
Market Power
None
Low to High
Low to High
High
Long-run Economic
Profit
None
None
Price
P=MR=MC
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Examples: monopoly
pharmaceuticals with patents
regulated utilities (although this is changing)
last chance gas station on the edge of the desert
Examples: oligopoly
oil refining
processed foods
airlines
internet access and cell phone service
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Oligopoly
Why oligopoly occurs:
Economies of scale
Barriers to entry
Mergers:
Vertical mergers
o The joining of a firm with another to which it sells an output or from which it buys an input
Horizontal mergers
o The joining of firms that are producing or selling a similar product
Measuring Concentration
Concentration ratio
The percentage of all sales contributed by the
leading four or leading eight firms in an
industry
Sometimes called the industry concentration
ratio
The Herfindahl-Hirschman Index
The Herfindahl-Hirschman Index (HHI) is equal
to the sum of the squared sales shares of all
n
firms
in
n = number of firms in the industry
HH the
S 2 industry.
i 1
12
oligopolies engage in a
game:
any competition between players (such as firms) in which strategic behavior
plays a major role
Game Theory
Economic optimization has two shortcomings when applied to actual
business situations
assumes factors such as reaction of competitors or tastes and preferences of
consumers remain constant
managers sometimes make decisions when other parties have more
information about market conditions
Game theory
set of tools used by economists, political scientists, military analysts,
and others to analyze decision making by players (such as firms)
who use strategies
these analytic tools can be used to analyze
oligopolistic games
scissor-paper-stone
coin-matching games
tic-tac-toe
elections
nuclear war
Elements of a Game
A game involves players making strategic decisions
Players are the decision-making units
A strategy is an option available to a player
Payoffs are the outcomes
Fundamental aspects of game theory
players are interdependent
uncertainty: other players actions are not entirely predictable
Types of games
zero-sum or non-zero-sum
cooperative or non-cooperative
two-person or n-person
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Game Theory
A payoff matrix is a table that describes the outcome for each player and for
each set of strategic choices.
A dominant strategy (DS) is a strategy that produces the optimal outcome
regardless of what the other players do.
A dominant strategy equilibrium (DSE) occurs if each player in a game
chooses its dominant strategy.
A Nash equilibrium occurs if every players strategy is optimal given its
competitors strategies.
Prisoners Dilemma
two-person, non-zero-sum,
non-cooperative
always has a dominant
strategy
equilibrium is stable
confessing is the dominant
strategy for each player, no
matter what other player
chooses
each player has no incentive
to unilaterally change his
strategy