Managerial Presentation XXI

8/7/2019 Managerial Presentation XXI

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Batch XXI SMBA

Roll No. 56

Roll No. 13

Roll No. 50

Roll No. 2

Roll No. 38


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Types of Market

Perfect competition

Imperfect competitiona) Monopoly and Monopsony

b) Monopolistic competition

c) Oligopoly and Oligopsony


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A Perfectly Competitive Market Aperfectly competitive market must meet the

following requirements:

Both buyers and sellers are price takers.

The number of firms is large.

There are no barriers to entry.

The firms products are identical. There is complete information.

Firms are profit maximizers.


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Perfect Competition The concept of competition is used in two ways

in economics.

Competition as a process is a rivalry among firms. Competition as the perfectly competitive market

structure.


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The Necessary Conditions for

Perfect Competition Both buyers and sellers are price takers.

Aprice takeris a firm or individual who takes

the market price as given. In most markets, households are price takers

they accept the price offered in stores.

Both buyers and sellers are price takers. The retailer is not perfectly competitive.


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The Necessary Conditions for

Perfect Competition The number of firms is large.

Large means that what one firm does has nobearing on what other firms do.

Any one firm's output is minuscule whencompared with the total market.


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The Definition of Supply and

Perfect Competition When a firm operates in a perfectly competitive

market, its supply curve is that portion of its

short-run marginal cost curve above averagevariable cost.


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Demand Curves for the Firm and

the Industry The demand curves facing the firm is different

from the industry demand curve.

Aperfectly competitive firms demand scheduleis perfectly elastic even though the demand curvefor the market is downward sloping.

Individual firms will increase their output inresponse to an increase in demand even thoughthat will cause the price to fall thus making allfirms collectively worse off.


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Market supply

Marketdemand

1,000 3,000

Price

$10

8

6

4

2

0Quantity

Market Firm

Individual firmdemand

Market Demand Versus Individual

Firm Demand Curve

10 20 30

Price

$10

8

6

4

2

0Quantity


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Perfect Competition

Q

P

Market Supply

Market Demand

pe


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Perfect Competition

Q

P

Market Supply

pe

p

At a price of p, zero isdemanded from the firm.

Market Demand


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Perfect Competition

Q

P

Market Supply

pe

p

p

At a price of p the firm faces the entiremarket demand.

At a price of p, zero isdemanded from the firm.

Market Demand


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Perfect Competition

MarketSupply

Market

Demand

Q

P

Firms Demand Curve

P

P* P*

y


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Four Basic Market Structures Perfectly Competitive: many firms, identical

products, free entry and exit, full and symmetric info

Monopoly: single firm, no close substitutes,barriers to entry, full and symmetric info

Oligopoly: several firms, similar products, degree ofproduct differentiation varies depending upon themarket, might be barriers, full and symmetric info

Monopolistic competition: many firms, similarproducts, slightly differentiated products, free entryand exit, full and symmetric info


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Competitive Market

This is the classictextbook marketstructure.

Firms in a competitivemarket all make a productthat is perfectlysubstitutable: all

demanders are equallysatisfied with anysuppliers product.


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Monopsony

Monopsony is a situation where there isone buyer you have seen Monopoly, acase of one seller. Here we want toexplore the impact on the market when

there is only one buyer of labor.


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Monopoly

The single seller makes aproduct that has nogood substitute.

Other firms may be ableto produce the good orservice but choose not toenter the market or arebarred from it.


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Up to now in our studies we have assumed

-firms are price takers in the output market meaning the price is setin the market by the interaction of many buyers and sellers and thenany one firm just works with the market price,

-firms are wage takers in the input market meaning the wage is set ina market setting as well.

Here we have the situation of a single buyer of labor and because ofthis the firm has the ability to set the wage instead of take the wage.

Lets start with a non-discriminating monopsonist. Recall thatsuppliers of labor have an upward sloping supply of labor curve

(ignoring the backward bending case). In fact we take as given themarket supply of labor as the sum of the labor supply from manyindividuals. On the next slide I have an example.


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$

L

Wage Qs

4 05 1

6 2

7 3

8 4

1 2 3 4

8765

S

In this example the suppliers of labor will supply a q of 1 when thewage is 5, and so on.


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$

E

Wage Qs TLC MLC

4 0 0 xxx5 1 5 5

6 2 12 7

7 3 21 9

8 4 32 11

1 2 3 4

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S

Anondiscriminating monopsonist has to pay all the workers hiredthe same amount. TLC is the total labor cost (just the wage timesthe Qs) and MLC is the marginal cost of labor (the change in TLCdivided by the change in labor supplied Qs).

MLC


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Note, in order to get two units of labor the firm wouldhave to pay 12 6 to each worker. But the first worker

would have worked for 5. So the marginal cost to the firmof the second worker is 7, which is the 6 to get the secondworker but includes the 1 you give to the first worker. Asimilar story holds for all future units of labor.

The point here is that from the point of view of the firmthe MLC curve is not the supply of labor curve. The MLCcurve is above the supply of labor curve. The MLC curve isthe curve that shows the change in total labor cost fromhaving additional units of labor. The curve will be used tothink about how much labor the firms would want to hire.The other piece of information here is to remember thatthe demand for labor curve was the value of the marginalproduct of labor curve. It deals with the revenue of

additional works.


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Employment or hiring decision by the firm

The profit maximizing non-discriminating monopsonistwill hire labor up to the point where the value of themarginal product equals the MLC. Recall the marginalrevenue product is the revenue generated by the additional

worker.

The wage paid to each worker is the wage on the supplycurve at the optimal quantity.

On the next screenW

e have the result in a graph.


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$

L

S

MLC

MRP = D

W1

L1


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The firm on the previous screen does not want to go pastthe employment level where the MRP = MLC becausethose workers would bring in less revenue than the cost tohire them and thus the firm would lose out on some profit.

Plus the firm would not want to stop short of this pointbecause they would not take units of labor where therevenues of the labor are greater than the costs of takingthe labor.

On the next slide we compare the result of monopsonywith that of competition. In competition the wage andquantity traded occur where the supply and demand areequal.


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$

L

S

MLC

MRP = D

W1

L1 Lc

Wc


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The monopsony pays a lower wage than in competitionand hires less labor.

Remember a monopsony is a single buyer of labor. Oftenin economics we see that if the demand or supply side ofthe market has only 1 player then the single actor hasmarket power. The market power often results in lessthan desirable outcomes. Here the single buyer usespower to pay lower wages and thus fewer folks want towork at that low wage.

The monopsony likes this outcome better than

competition but not everyone else. Workers get lowerwages and less work and since less labor is desired lessoutput is made output people probably want.

Note here that the monopsony pays the workers less than there MRP W


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Monopolistic Competition

The market hasmany firms but eachsuppliers product is

differentiated. Consumers can be

induced to changebrands but they

have brandpreferences.


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Monopolistic Competition

Monopolistic Competition Characteristics

Many buyers and sellers.

Product heterogeneity.

Free entry and exit.

Perfect information.

Opportunity for normal profits in long-runequilibrium.


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Monopolistic Competition Price/OutputDecisions Set M = MR - MC = 0 to maximize profits.

MR=MC at optimal output. No durable economic profits because P=AR=AC.


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Monopolistic Competition Price/OutputDecisions Set M = MR - MC = 0 to maximize profits.

MR=MC at optimal output. No durable economic profits because P=AR=AC.


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Monopolistic Competition Process

Short-run MonopolyEquilibrium Monopolistically competitive firms take full advantage

of short-run monopoly. Long-run High-price/Low-outputEquilibrium

With differentiated products, P=AC at a point aboveminimum LRAC.

P > MR = MC. Long-run Low-price/High-outputEquilibrium

With homogenous products, P=AC at minimum LRAC. This is a competitive market equilibrium with

homogeneous production.


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Price Discrimination


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A practice whereby similar products are priced

differently to different customers or in different

markets

Definition


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Is any difference in price a signof pricediscrimination?

No, only difference in prices that cannot be

explained by the difference in costs

Examples:- Hardcover vs. paperback books

- Business class travel. The difference in prices can be

larger than the difference in costs

- Volume discounts that do not reflect economies of scale


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Types

First Degree

Second Degree Third Degree


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Some more types

Intertemporal

Peak Load Pricing Two Part Tariff

Bundling

Tying


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The practice of charging each

customer his or her reservation price. Perfect First Degree

Imperfect First Degree

First Degree Price Discrimination


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PerfectFirst Degree

An ideal case ofFirst Degree Price

Discrimination.Captures whole consumer surplus.


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Quantity

$/Q

D = AR

MR

Pmax

MCP*

Q* Q**

PC

Consumer surplus when a

single price P* is charged.

Variable profit when a

single price P* is charged.

Additional profit from

perfect price discrimination

PerfectFirst Degree


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Charging a few

different prices

based on theestimates of

customers

reservationprices.

ImperfectFirst Degree


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Practice of charging different prices per

unit for different quantities of the same

good or service.

extract some, but not all of consumer

surplus

Second Degree


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This form of price discrimination divides

consumers (with different demand curves)

into two or more groups. It is the mostprevalent form of price discrimination.

Consumer groups can be made based on

some observable characteristics.

Third Degree


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How to decide price for each group

ObjectiveMR1 = MR2

MR1 = MR2 = MC

Determining relative price

Higher price will be charged to group with lowdemand elasticity.

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Third Degree $/Q


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noteEven if third degree price

discrimination is feasible it

does not always pay to sell

to both groups of consumersif marginal cost is rising very

readily.


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Examples Discounts to students and senior citizens

Publishers charging a higher rate to libraries

than to individuals Different airline and train fairs Different labels like premium/non-premium,

supermarket label etc.


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Firmshould be able to preventresales

Services: it is very difficult to resale a haircut

Students are required to show a student ID to

enter a football game with a student ticket

It is very difficult to buy a car in Canada and

bring it into the US


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Separating the Market With Time

Initial release of a product, the demand is inelastic

x Hard cover books

x New release of a movie

x Latest fashions

x Latest Technology

Intertemporal


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Separating the Market With Time

Once this market has yielded a maximum profit,

firms lower the price to appeal to a general market

with a more elastic demand

x Paper back books

x

Movie Ticketsx Discount rack

Intertemporal


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Oligopoly

Afew sellers makeproducts that are good,but not perfect,

substitutes. Consumers can be

induced to changesuppliers but have only

a limited number ofchoices.


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Oligopoly

Oligopoly Market Characteristics Few sellers.

Homogenous or unique products. Blockaded entry and exit. Imperfect dissemination of information. Opportunity for above-normal (economic) profits in

long-run equilibrium.Examples of Oligopoly National markets for aluminum, cigarettes, electrical

equipment, filmed entertainment, ready-to-eat cereals,etc.

Local retail markets for gasoline, food, specializedservices, etc.


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Cartels and Collusion

Overt and Covert Agreements Cartels operate under formal agreements.

x Powerful cartels function as a monopoly. Collusion exists when firms reach secret, covert

agreements.

Enforcement Problem Cartels are typically rather short-lived because

coordination problems often lead to cheating. Cartel subversion can be extremely profitable. Detecting the source of secret price concessions can be

extremely difficult.


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Oligopoly Output-Setting Models

Cournot Oligopoly

Cournot equilibrium output is found bysimultaneously solving output-reaction curvesfor both competitors.

Cournot equilibrium output exceeds monopoly

output but is less than competitive output.


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Oligopoly Price-Setting Models

Bertrand Oligopoly: Identical Products The Bertrand model focuses upon the price reactions.

The Bertrand model predicts a competitive marketprice/output solution in oligopoly markets withidentical products.

Bertrand Oligopoly: Differentiated Products The Bertrand model demonstrates how price-setting

oligopolists profit with differentiated products.


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Sweezy Oligopoly

Sweezy model predicts sticky prices. Sweezy model explains why prices in oligopoly

markets sometimes fail to respond to marginalcost change.


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Characteristics of Market Types

Marketstructure

ExamplesNumber

ofproducers

Type ofproduct

Power offirm over

price

Barriersto entry

Non-pricecompetition

Perfectcompetition

Parts ofagriculture are

reasonably closeMany Standardized None Low None

Monopolisticcompetition

Retail trade Many Differentiated Some LowAdvertising and

productdifferentiation

OligopolyComputers, oil,

steelFew

Standardized ordifferentiated

Some HighAdvertising and

productdifferentiation

Monopoly Public utilities One Unique productConsider-

ableVery high Advertising


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Documents

Managerial Presentation XXI