Industrial Organization:

from the Fundamentals of Microeconomic

Principles
OUTLINE
Perfect Competition
Monopoly
Monopolistic Competition
Oligopoly
Perfect Competition & Monopoly
Definitions
Perfect Competition A market
structure characterized by a large
number of buyers and sellers of an
identical product.
Monopoly A market structure
characterized by a single seller of a
highly differentiated (unique) product.
Price Taker vs. Price Maker
Price Taker Buyers and sellers whose
individual transactions are so small that
they do not affect market prices.
Price Maker Buyers and sellers whose
large transactions affect market prices.
NOTE: Being a price maker does not
mean you can charge any price you like.
Perfect Competition
Characteristics
1. Large number of buyers and sellers.
2. Product homogeneity.
3. Free entry and exit.
4. Perfect dissemination of information.
Perfect Competition
Short Run vs. Long Run
In the short-run economic profit (or loss)
is possible.
In the long-run, competitive pressures
will cause the typical firm to earn zero
economic profits.
NOTE: UNDERSTAND THE MATHEMATICS OF
PERFECT COMPETITION IN THE SHORT-RUN
AND THE LONG-RUN.
Monopoly
Characteristics
1. A single seller.
2. Unique product.
3. Blockaded entry and exit.
4. Imperfect dissemination of information.
NOTE: UNDERSTAND THE MATHEMATICS OF
MONOPOLY IN THE SHORT-RUN AND THE
LONG-RUN.
Monopolistic Competition and
Oligopoly
Monopolistic Competition A market
structure characterized by a large
number of sellers of differentiated
products.
Oligopoly A market structure
characterized by few sellers and
interdependent price/output decisions.
Monopolistic Competition
Characteristics
1. Large number of buyers and sellers.
2. Product heterogeneity.
3. Free entry and exit.
4. Perfect dissemination of information.
Monopolistic Competition
Short Run vs. Long Run
In the short-run economic profit (or loss)
is possible.
In the long-run, competitive pressures
will cause the typical firm to earn zero
economic profits.
More on Monopolistic
Competition
Although economic profit is zero (P=ATC),
price is still greater than marginal cost.
Product differentiation results in a downward
sloping demand curve.
Consequently, price exceeds marginal revenue.
WHY?
To profit maximize MR = MC, therefore price
exceeds marginal cost.
Even More on Monopolistic
Competition
If P = ATC and P > MC, then ATC > MC.
What does this mean? A firm in monopolistic
competition does not produce at capacity (i.e. it
is not as efficient as perfect competition).
Is this a social cost? Is product differentiation
worth inefficient production?
NOTE: UNDERSTAND THE MATHEMATICS OF
MONOPOLISTIC COMPETITION IN THE SHORT-RUN AND
THE LONG-RUN.
Oligopoly
Characteristics
1. Few sellers
2. Homogenous or unique product.
3. Barriers to entry and exit.
4. Imperfect dissemination.
Key: Price and output decisions are
interdependent.
THIS WILL BE THE PRIMARY SUBJECT
MATTER OF THIS COURSE.