CH 9 Market Structure The characteristics of a market that influence how trading takes place

Price Taker A firm that treats the price of its product as given and beyond control

Shutdown price The price at which a firm is indifferent between producing and shutting down Firms supply curve A curve that shows the quantity of output a competitive frim will produce at different prices

Market supply curve A curve indicating the quantity of output that all sellers in a market will produce at different prices in the short run

Normal profit Another name for zero economic profit

Constant cost industry An industry in which the long-run supply is horizontal because each firms cost curves are unaffected by changes in industry output Long Run Supply Curve A curve indicating price and quantity combinations in an industry after all long run adjustments have taken place

Increasing cost industry An industry in which the long-run supply curve slopes upwards because each firms LRATC curve shifts upward as industry output increases.

Decreasing cost industry An industry in which the long-run supply curve slopes downward as industry output increases

Market Signals Price changes that cause change in production to match change in consumer demand

CH 10 Monopoly The only seller in a market, or a market with just one seller How do monopolies arise: 1. Economic of scale a single firm can produce at a lower cost than 2 or more Natural Monopoly A monopoly that arises when, due to economics of scale, a single firm can produce for the entire market at a lower cost per unit than 2 or more firms 2. Legal Barriers give one firm the ability to become a monopoly it is done to give incentive for finding new technologies and etc Patent a temporary grant of monopoly rights over a new product or science discovery Copyright A grant of exclusive rights to sell a literary, musical, or artistic work 3. Government Franchise A government-granted right to be the sole seller of a product or service 4. Network Externalities Additional benefits enjoyed by all users of a good or service because others use it as well Monopoly Behavior goal make profut Single-price monopoly A monopoly firm that is limited to charging the same price for each unit of output sold A Monopoly has a downward demand curve (same as markets) so its marginal curve is always under it! Profit Maximization is where MC=MR (MC comes from bottom) Monopoly produces at the level that is not as the perfect competition market it produces less normally Market power The ability of a seller to raise price without losing all demand for the product being sold a M is a price setter has market power downward demand! Price setter A firm (with market power) that selects its price, rather than accepting the market price A monopoly earns profit if P>ATC and loss if P<ATC. The distance is profit/loss per unit Also in short run if P<AVC shut down! (All where MC=MR) In long run A Monopoly can make a profit! If it is suffering a loss in the long run it will exit!

All else equal a Monopoly will have a higher price and lower output than a perfectly competitive firm (because its demand market downward slop MC=MR is not where t is for perfect competitive)

Rent-seeking activity Any costly action a firm undertakes to establish or maintain its monopoly status (In economics rent is earnings beyond min needed)

Price Discrimination Charging different prices to different customers for reasons other than differences in cost Requirements for Price Discrimination: 1. Market power downward demand ability to have people paying a different amount 2. Identifying Willingness to Pay need to know how much to charge each 3. Prevention of Resale so ones that buy cheap can sell to others P.D is always good for the firm! But some customers will loss from it while other might benefit Also it takes away from consumer surplus and from dead loss?

Perfect Price Discrimination Charging each customer the most he or she would be willing to pay for each unit purchased

How to choose multiple prices: (USE SAME MC)!!

P.D. is everyday life Coupons/sales/rebates/also colleges do that for tuition CH 11 Imperfect Competition A market structure in which there is more than one firm but one or more of the requirements of perfect competition is violated Monopolistic Competition - has 3 fundamental characteristics: 1. Many buyers and sellers buyer has no influence on price, but seller has market power- acts as price setter. but do not take other firms into account 2. Sellers offer a differentiated product Because it produces a differentiated product, a monopolistic competitor faces a downward-sloping demand curve: it can sell more by charging less, or raise price without losing all customers (D includes quality and location) 3. Sellers can easily enter and exit the market each firm can leave, or new can enter. Also, any firm can copy the successful practices of other firms like special sales etc In the short run M.C. can earn both negative and positive profit

In long run M.C. will earn 0 economic profit new firms can enter if positive until demand shifts to the left to the point in is tangent to the ATC. Or in if losing firms leave demand shifts to right same point Important in M.C. there will be excess capacity the price in L.R. cannot be where price touches min ATC (called capacity point), for its demand it downward slopping if it makes profit the demand will keep shifting to the left until in tangent to ATC on the down sloping section of it. Also, id demand is already there the M.C. will loss by producing the amount that it equal to the min ATC. (it has to have a horizontal demand in order to have 0 eco profit and be on the minlike in perfect competition) Also society losses from excess capacity, but it also gains from product differentiation.

Nonprice competition Any action a firm takes to SHIFT its demand curve rightward Oligopoly A market structure with a small number of strategically interacting firms (many types 1 big and other smaller/ all same size/) The way we view a market depends on how we define it with a narrow enough definition easy to find an oligopoly. Economists say to define the market just broadly enough so it includes reasonably close substitutes. How Oligopolies Arise: Economics of scale natural oligopoly a market that tends naturally towards oligopoly because the min efficient scale of the typical firm is a large fraction of the market Reputation as a Barrier an established oligopoly is likely to have favorable reputation Strategic Barriers an O firm can maintain excess capacity to warn u that if u (new) come it they will saturate the market and leave u with no revenue. Also, they make deals to have their products on shelves. Legal Barriers Patents and Copyrights for some firms but no all. Also they lobby a lot to get their ways, Zoning..

Oligopolies cannot use the MC=MR approach because the second one firm sets its price the other can change its own and the demand of the first firm changes and it has to start all over again. Game theory An approach to modeling the strategic interaction of oligopolies in terms of moves and countermoves Dominant Strategy A strategy that is best for a player no matter what strategy the other player chooses Nash Equilibrium A situation in which every player of a game is taking the best action for themselves, given the actions taken by all other players (u dont change ur behavior once there-no incentive)

When 2 players have both dominant strategy the result always Nash E! Also we assume that each player takes the best action for himself !

Duopoly An oligopoly market with only two sellers Repeated play A situation in which strategically interdependent sellers compete over many time periods Explicit collusion Cooperation involving direct communication between competing firms about setting prices Cartel A group of firms that selects a common price that maximizes total industry profits Tacit Collusion Any form of oligopolistic cooperation that does not involve explicit agreement Tit-for-tat A game-theoretic strategy of doing to another player this period what he has done to you in the previous period Price Leadership A form of collusion in which one firm sets a price that other firms copy The Limits of Collusion: The market demand curve higher price less sold Oligopolies are often wakened or destroyed by new technologies Collusion is limited by powerful incentives to cheat on any agreement

Anti Trust legislation and enforcement: 1. Preventing collusive agreement among firms, such as price-fixing agreements 2. Breaking up large firms or limiting their activities when market dominance harms consumers 3. Preventing mergers that would lead to harmful market domination

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