Download Industrial Organization

Industrial Organization
AG BM 102
Introduction
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Willard’s Mistake
Competitive Environment
Relevant Market
Market power
Market structure – Market Conduct-Market
performance
Market Structure – those
characteristics of the market
that significantly affect the
behavior and interaction of
buyers and sellers
US Chicken Production
2014
Tyson
21%
Other
47%
Pilgrim's Pride
18%
Sanderson
7%
Perdue
7%
US Beef Production
2014
Other
25%
National Beef
10%
Cargill
19%
Tyson
24%
JBS
22%
US Pork Production
2014
Other
29%
Tyson
17%
JBS Swift
11%
Hormel
8%
Cargill
9%
Smithfield
26%
Market Conduct – a firm’s
policies toward its market and
toward the moves made by its
rivals in that market
Market Performance – how well
does an industry do what
society might reasonably expect
it to do
Market – a collection of firms, each
of which is supplying products that
have some degree of
substitutability, to the same potential
buyers
• Common buyers for sellers
• Common sellers for buyers
• Relatively homogeneous product
Industry- sellers of a particular
product or closely competing
products
Relevant market – the portion of
the total market that a
participant views as including
his or her direct competitors and
customers (or suppliers)
Some market models
• Pure competition
• Monopoly – a single seller
• Monopsony – a single buyer
Marginal Revenue
The change in total revenue
from expanding sales by one
more unit
Marginal revenue
Quantity
Price
1
11
Total
Revenue
11
Marginal
Revenue
9
2
10
20
7
3
9
27
5
4
8
32
Calculating Marginal Revenue
Q = 12 - P
TR = PQ
P = 12 - Q
TR = (12 - Q) Q = 12Q - Q2
MR = D(TR)/D(Q) = 12 - 2Q
MC = MR
Calculating Marginal Revenue
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Solve the demand function for P
P = 12 –Q
Take the coefficient of Q and double it
MR = 12 – 2Q
Monopoly
Quantity
1
Demand
Price
11
Marginal
Revenue
10
Marginal
Cost
1
2
10
8
2
3
9
6
3
4
8
4
4
5
7
2
5
6
6
0
6
7
5
-2
7
For Monopoly, find where
MC =MR
and then go up to the price on
the demand curve
Marginal Factor Cost
The change in total factor cost
from buying one additional unit
of an input
Marginal Factor Cost
Quantity
Price
Total
Expenditure
1
1
1
Marginal
Expenditure
3
2
2
4
5
3
3
9
7
4
4
16
Calculating Marginal Factor Cost
P=Q
TC = PQ = Q
2
MFC = D(TC)/D(Q) = 2Q
Calculating Marginal Factor Cost
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Solve the Supply curve for P
P=Q
Double the coefficient of Q
MFC = 2Q
Ordinarily the line doesn’t run through the
origin
• The process is the same – solve for P –
double the coefficient of Q
Monopsony
Quantity
Supply Price
Marginal
Factor Cost
Marginal
Value
Product
1
1
2
11
2
2
4
10
3
3
6
9
4
4
8
8
5
5
10
7
6
6
12
6
For Monopsony, find where
MFC =MVP
and then go down to the price
on the supply curve
Concluding Comments
• Where does a 500 pound gorilla sit?
• Market power is important
• Understanding it helps you understand
market behavior