Different Market Structures (Copy)

7.6.1 Perfect Competition and Imperfect Competition

• Perfect Competition:
  • Many buyers and sellers, each too small to influence price.
  • Homogeneous (identical) products.
  • Free entry and exit.
  • Perfect information available to all participants.
• Imperfect Competition:
  • Markets where conditions of perfect competition are not met. Includes:

7.6.2 Structure of Listed Markets

7.6.3 Barriers to Entry and Exit

• Legal Barriers:
  • Patents, licenses, copyrights preventing entry.
• Market Barriers:
  • Strong brand loyalty and reputation of existing firms.
• Cost Barriers:
  • High startup costs, economies of scale, sunk costs.
• Physical Barriers:
  • Control of essential resources or infrastructure.

7.6.4 Performance of Firms in Different Market Structures

Revenues and Revenue Curves

Output and Profits in Short and Long Run

• Perfect Competition:
  • Short run: firms can make supernormal profits or losses.
  • Long run: firms make normal profits due to free entry/exit.
• Monopoly:
  • Can sustain supernormal profits in both short and long run due to barriers.
• Monopolistic Competition:
  • Short run: supernormal profits possible.
  • Long run: normal profits due to entry.
• Oligopoly:
  • Profits depend on competition/collusion; can sustain supernormal profits.

Shutdown Price

• Shutdown Price:
  • Price below which firm stops production to avoid losses greater than fixed costs.
  • In short run, firm shuts down if price < AVC.
  • In long run, if price < ATC, firm exits industry.

Supply Curve of Perfectly Competitive Firm

• Upward sloping MC curve above AVC forms the supply curve.

Efficiency and X-Inefficiency

• Productive Efficiency: Lowest point on AC curve.
• Allocative Efficiency: P = MC.
• X-Inefficiency: Inefficiency due to lack of competitive pressure; common in monopoly.

Contestable Markets

• Characteristics: low entry and exit costs, threat of potential competition, no sunk costs.
• Implications: Firms behave competitively to avoid entry of rivals.

Price Competition and Non-Price Competition

• Price Competition: Firms compete by lowering prices.
• Non-Price Competition: Advertising, product differentiation, customer service.

Collusion and Prisoner’s Dilemma in Oligopoly

• Firms may collude (formal or tacit) to maximise joint profits.
• Prisoner’s Dilemma: individual incentive to cheat leads to worse outcome for both.

Example: Two-Player Payoff Matrix

• (Payoffs represent profits in millions).
• Both collude: moderate profits.
• Both cheat: lower profits due to price war.

7.6.5 Definition and Calculation of the Concentration Ratio

• Concentration Ratio:
  • Measures market share of the largest firms in the industry, typically the top 4 or 5 firms.
  • Formula:
    CR4 = Sum of market shares of four largest firms (%)
• Interpretation:
  • High CR4 (> 60%) indicates an oligopoly or monopoly power.
  • Low CR4 indicates more competitive market.

Diagrams

Diagram 1: Revenue Curves — Perfect Competition vs Monopoly

Price / Revenue
↑
| PC: AR=MR = horizontal line
|-------------------------
|                       
|                        
|                          Monopoly AR
|                          
|                            Monopoly MR (below AR)
|_______________________________→ Quantity

Diagram 2: Kinked Demand Curve in Oligopoly

Price
↑
|     Demand
|     /
|    /  
|   /    
|  /      _____________
| /                   
|/_____________________________→ Quantity

- Demand curve has a kink at current price.
- MR curve is discontinuous at kink.

Diagram 3: Prisoner’s Dilemma Payoff Matrix (Tabular)

Diagram 4: Concentration Ratio Illustration

Market Share (%)
↑
| ██████ Firm 1 (40%)
| ████   Firm 2 (20%)
| ██     Firm 3 (10%)
| ██     Firm 4 (10%)
| ░░░░░  Others (20%)
|___________________________→ Firms

CR4 = 40 + 20 + 10 + 10 = 80% (Oligopoly)