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Brickley, Smith, and Zimmerman,
Managerial Economics and
Organizational Architecture, 4th ed.
Chapter 6: Market Structure
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Market structure
objectives
• Students should be able to
• Differentiate among the four archetypal
market structures
• Distinguish between price takers and
price searchers
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Market structure
• What is a market?
• All firms and individuals willing and able to
buy or sell a particular product
• What is market structure?
• Defined by attributes of the market
environment
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Market structure
the archetypes
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•
•
•
Perfect competition
Monopoly
Monopolistic competition
Oligopoly
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Perfect competition
characteristics
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•
•
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Many buyers and sellers
Product homogeneity
Low cost and accurate information
Free entry and exit
• Best regarded as a benchmark
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Firm demand curve
perfect competition
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Firm supply
• Short run
– Marginal cost curve above average
variable cost
– P* = SRMC
• Long run
– Long-run marginal cost curve
above long-run average cost
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The firm’s short-run supply curve
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The firm’s long-run supply curve
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Competitive equilibrium
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Barriers to entry
Incumbent reactions
Incumbent advantages
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•
•
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• Precommitment
contracts
• Licenses and patents
• Learning-curve effects
• Pioneering brand
advantages
Specific assets
Economies of scale
Excess capacity
Reputation effects
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Monopoly
• Strong barriers to entry  single
supplier
• Profit maximization
– faces market demand and sets MR=MC
• Unexploited gains from trade
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Monopolist faces market demand
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Monopolistic competition
•
•
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Multiple firms produce similar products
Firms face downsloping demand curves
Profit maximization occurs where MC=MR
In the limit, firms compete away economic
profits
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Monopolistic competitor in the
long run
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Oligopoly
• A few firms produce most market output
• Products may or may not be
differentiated
• Effective entry barriers protect firm
profitability
• Firm interdependence requires strategic
thinking
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The Nash equilibrium
• An oligopolist does the best it can, given
expectations of rival behavior
• Behaviors are noncooperative
• Duopolists considering a low price or a
high price must consider rival’s
response
• Nash equilibrium occurs when each firm
does the best it can given rival’s actions
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Determining the Nash equilibrium
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The Cournot model
• Duopolists A and B face industry demand
P=100-Q, Q=QA+QB
• Each firm takes the other’s output as fixed
E.g., PA=(100-QB*)-QA
• Marginal revenue for A is
MRA=(100-QB*)-2QA
• If MC=0, profit is maximized if
QA=50-.5QB, which is reaction function
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Cournot equilibrium
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Comparison of prices and output
among different equilibria
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The classic prisoners’ dilemma
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The cartel’s dilemma
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