Chapter 9 Alternative models of Competition Perfect and

Chapter 9: Alternative models of Competition Perfect and Imperfect Competition

Models of Competition Perfect (Pure) Competition Horizontal demand curve P = MR = AR No individual firm large enough to influence price Demand "perfectly elastic" (infinite elasticity) Profit maximum where MC=MR Homogeneous product (your corn and mine!)

Pure Competition Price $ MC MC=MR AC AVC Profit MR=AR=D=P AFC Y* Output

Price $ MC AC =AVC MC=MR MR=AR=D=P No profit in long run equilibrium. Y* Output

Models of Competition Monopolistic Competition D not equal to MR Demand curve not horizontal (slight downward slope) Demand elastic but not perfectly so Some product differentiation Elasticities more negative than -1 Examples: -3, or -25 Canned peas!!!

Price $ Monopolistic Competition MC AC Profit Demand P* MC=MR MR Output

In monopolistic competition, pure (economic) profit is possible, but not assured in long run equilibrium.

Models of Competition Oligopoly "Few" sellers Pricing and output decisions by firm linked to pricing and output decisions of other firms in the industry "Kinked" demand curve Competition ignores price increases but follows price decreases Prices tend to be sticky

For an Oligopoly, there are possible pure profits in the Long Run Airlines, Automobiles and Computers (perhaps) Product differentiation is a key characteristic

Price $ Oligopoly MC The "Kink" P* discontinuous MR Demand MC=MR Y* MR Output

Impact of Changing Marginal Costs on Oligopoly Pricing

Price MC $ The "Kink" P* discontinuous MR MC=MR Y* MR Demand Output

Price $ MC The "Kink" P* discontinuous MR MC=MR Y* MR Demand Output

Price $ MC The "Kink" P* discontinuous MR MC=MR Demand Y* MR Output

Price MC New P Old P discontinuous MR MC=MR Demand MR new Y Output

Models of Competition Monopoly 1 Firm is the industry There can be long run profits Not always profitable (Monopoly in hula hoops!) Patents, licenses D not equal to MR Elasticity depends on how badly consumers need (want) the good Are there good substitutes ? Polaroid? ? ?

Price $ P* Monopoly MC AC Profit MC=MR Demand Y* MR Output

Contemporary views of Imperfect Competition

Bain Model (due to Joe Bain) Economic Structure Conduct of Firms Industry Performance

Economic Structure S Number of firms in Industry Percentage of output by Top 5, top 10 etc. Concentration ratio Conduct of Firms C 4 P's Price Product Promotion Predatory practices Industry Performance P Industry Profitability Price vs. AC

Do arrows run both directions? ? ? Economic Structure Conduct of Firms Industry Performance S C P

Firm Growth options: 1. Horizontal mergers 2. Conglomerates 3. Vertical integration 4. Internal growth through reinvestment of profits

Limits to Growth: 1. Competition in industry 2. Access to capital markets 3. Demand for goods produced 4. Antitrust laws 5. Overall profitability 6. Patents, licenses held by others

Agricultural Bargaining Farmers are (usually) price-takers Cooperatives formed: inputs--Southern States, Cenex outputs--dairy coops attempt to cooperate to get lower input prices higher output prices works (sometimes!) dairy and oranges but not wheat and beef