Study Guides (248,131)
United States (123,280)
Economics (26)
ECO 211 (20)
Robins (9)

ECO 211 Chapter 10, 14, 15.pdf

14 Pages
102 Views
Unlock Document

Department
Economics
Course
ECO 211
Professor
Robins
Semester
Fall

Description
Chapters  10,  14,  15  Concentra▯on,  Monopolis▯c  Compe▯▯on,  and  Oligopoly Varie▯es  of  Market  Structure w We  have  studied  the  two  extremes  of  market  structure  —  perfect  compe▯▯on  and  monopoly. w Most  industries  fall  somewhere  between  those  two,  differing  along  two  significant  scales: § Number  of  suppliers  of  output § The  degree  of  product  differen▯a▯on Monopolis▯c  Compe▯▯on w Monopolis▯c  compe▯▯on  is  a  market  structure  in  which  a  large  number  of  firms  compete  with  each  other  by   making  similar  but  slightly  different  products. w Making  a  product  slightly  different  from  the  product  of  a  compe▯ng  firm  is  called  product  differen▯a▯on. Oligopoly w Oligopoly  is  a  market  structure  in  which  a  small  number  of  producers  compete  with  each  other. w Some  oligopolies  (aluminum  can  manufacturing)  produce  iden▯cal  products. w Others  (automobiles)  produce  differen▯ated  products. Measures  of  Concentra▯on w Industries  in  which  only  a  few  firms  supply  all  the  output  are  said  to  be  concentrated. w Economists  have  developed  two  measures  of  concentra▯on: § The  four-­‐firm  concentra▯on  ra▯o § The  Herfindahl-­‐Hirschman  Index The  Four-­‐Firm  Concentra▯on  Ra▯o w The  four-­‐firm  concentra▯on  ra▯o  is  the  percentage  of  total  industry  sales  (in  dollars)  made  by  the  four  largest   firms. w The  range  of  this  measure  is  from  0  to  100. § 0  is  perfect  compe▯▯on § 100  means  there  are  four  or  fewer  firms  in  the  industry § Ra▯o  <  50  considered  compe▯▯ve Concentra▯on  Ra▯o  Calcula▯ons Smartphone  OS  Market  Share Concentra▯on  Ra▯o  Calcula▯ons Concentra▯on  Ra▯o  Calcula▯ons The  Herfindahl-­‐Hirschman  Index  (HHI)   w The  Herfindahl-­‐Hirschman  Index  (HHI)  is  the  sum  of  the  squared  market  shares  of  the  largest  50  firms  in  an   industry. w For  example,  if  there  are  four  firms  in  an  industry  with  market  shares  of  50%,  25%,  15%,  and  10%,  the  HHI  is: 50 +25 +15 +10  =  3,450 Using  the  HHI w A  monopoly  will  have  an  HHI  of  10,000  (100 ). w The  Jus▯ce  Department  defines  a  compe▯▯ve  market  as  one  with  an  HHI  less  than  1,000  (<100  is  regarded  as   highly  compe▯▯ve). w Markets  with  HHI  values  over  1,000  are  regarded  as  concentrated  (>2,000  is  regarded  as  highly  concentrated). Market  Structure Market  Structure  (Cont.) Limita▯ons  of  Concentra▯on  Measures w There  are  three  main  reasons  why  concentra▯on  ra▯os  may  be  misleading  as  measures  of  market  structure: § The  geographical  scope  of  the  market § Barriers  to  entry  and  firm  turnover § The  correspondence  between  a  market  and  an  industry Geographical  Scope  of  Market w Concentra▯on  ra▯o  calcula▯ons  are  based  on  na▯onal  market  data. w Some  goods  (such  as  newspapers)  are  sold  in  regional  markets. w Other  goods  and  services  (automobiles)  are  sold  in  global  markets. w In  either  case,  concentra▯on  ra▯os  are  misleading. Limita▯ons  of  Concentra▯on  Measures w Market  and  Industry § Markets  are  narrower  than  industries § Firms  make  many  different  products § Firms  switch  from  one  market  to  another Market  and  Industry w Concentra▯on  ra▯os  are  calculated  using  the  Standard  Industrial  Classifica▯on  (SIC)  codes  of  the  U.S.  Department   of  Commerce. w Markets  o▯en  do  not  correspond  neatly  to  industries. w Wes▯nghouse  is  classified  as  an  electrical  goods  and  equipment  producer.    They  actually  produce  many  other   non-­‐electrical  items. Barriers  to  Entry  and  Turnover w Measures  of  concentra▯on  do  not  tell  us  anything  about  the  extent  and  severity  of  barriers  to  entry  in  an   industry. w Even  in  markets  that  are  highly  concentrated,  there  may  be  compe▯▯on  if  entry  and  exit  cause  a  large  amount  of   turnover. Concentra▯on  Measures  for  the  U.S.  Economy w Motor  vehicles,  light  bulbs,  household  laundry  equipment,  chewing  gum,  and  breakfast  cereals  are  highly   concentrated  oligopolies. w Pet  food,  computers,  and  so▯  drinks,  are  moderately  compe▯▯ve w Women’s  clothing,  ice  cream,  concrete  blocks  and  bricks,  and  commercial  prin▯ng  are  highly  compe▯▯ve. Concentra▯on  Measures  in  the  United  States Market  Structures  in  the  U.S.  Economy w Between  1939  and  1980,  the  U.S.  economy  became  increasingly  compe▯▯ve. § In  1980,  three-­‐fourths  of  the  value  of  goods  and  services  produced  in  the  U.S.  was  sold  in  markets  that  are   highly  compe▯▯ve. § Monopolies  accounted  for  only  about  5%  of  total  sales. § Since  1980,  there  has  been  even  more  compe▯▯on  (global  trading),  but  have  also  been  many  mergers  of   oligopolies  leading  to  greater  concentra▯on  in  certain  oligopolis▯c  industries  (i.e.  telecommunica▯ons) Monopolis▯c  Compe▯▯on § Monopolis▯c  compe▯▯on  is  a  market  with  the  following  characteris▯cs: § A  large  number  of  firms. § Each  firm  produces  a  differen▯ated  product. § Firms  compete  on  product  quality,  price,  and  marke▯ng. § Firms  are  free  to  enter  and  exit  the  industry. Monopolis▯c  Compe▯▯on w Large  Number  of  Firms § The  presence  of  a  large  number  of  firms  in  the  market  implies: § Each  firm  has  only  a  small  market  share  and  therefore  has  limited  market  power  to  influence  the  price  of   its  product. § Each  firm  is  sensi▯ve  to  the  average  market  price,  but  no  firm  pays  a▯en▯on  to  the  ac▯ons  of  the  other,   and  no  one  firm’s  ac▯ons  directly  affect  the  ac▯ons  of  other  firms. § Collusion,  or  conspiring  to  fix  prices,  is  impossible. Monopolis▯c  Compe▯▯on w Product  Differen▯a▯on § Firms  in  monopolis▯c  compe▯▯on  prac▯ce  product  differen▯a▯on,  which  means  that  each  firm  makes  a   product  that  is  slightly  different  from  the  products  of  compe▯ng  firms. Monopolis▯c  Compe▯▯on w Compe▯ng  on  Quality,  Price,  and  Marke▯ng § Product  differen▯a▯on  enables  firms  to  compete  in  three  areas:  quality,  price,  and  marke▯ng. § Quality  includes  design,  reliability,  and  service. § Because  firms  produce  differen▯ated  products,  each  firm  has  a  downward-­‐sloping  demand  curve  for  its  own   product. § But  there  is  a  tradeoff  between  price  and  quality. § Differen▯ated  products  must  be  marketed  using  adver▯sing  and  packaging. Monopolis▯c  Compe▯▯on w Entry  and  Exit § No  barriers  to  entry  in  monopolis▯c  compe▯▯on,  so  firms  cannot  earn  an  economic  profit  in  the  long  run. w Examples  of  Monopolis▯c  Compe▯▯on § Figure  13.1  on  the  next  slide  shows  market  share  of  the  largest  four  firms  and  the  HHI  for  each  of  ten   industries  that  operate  in  monopolis▯c  compe▯▯on. Monopolis▯c  Compe▯▯on § The  red  bars  refer  to  the  4    largest  firms. § Green  is  the  next  4. § Blue  is  the  next  12. § The  numbers  are  the  HHI. Output  and  Price  in  Monopolis▯c  Compe▯▯on w Short-­‐Run  Economic  Profit § A  firm  that  has  decided  the  quality  of  its  product  and  its  marke▯ng  program  produces  the  profit   maximizing  quan▯ty  at  which  its  marginal  revenue  equals  its  marginal  cost    (MR  =  MC). § Price  is  determined  from  the  demand  curve  for  the  firm’s  product  and  is  the  highest  price  the  firm  can   charge  for  the  profit-­‐maximizing  quan▯ty. Output  and  Price  in  Monopolis▯c  Compe▯▯on § Figure  13.2(a)  shows  a  short-­‐run  equilibrium  for  a  firm  in  monopolis▯c  compe▯▯on. § It  operates  much  like  a  single-­‐price  monopolist. Output  and  Price  in  Monopolis▯c  Compe▯▯on § Firm  produces  the  quan▯ty  at  which  price  =  marginal  cost  &  sells  that  quan▯ty  for  highest  possible  price. § It  earns  an  economic  profit  (as  in  this  example  when  P  >  ATC) Output  and  Price  in  Monopolis▯c  Compe▯▯on w Long  Run:  Zero  Economic  Profit § In  the  long  run,  economic  profit  induces  entry. § And  entry  con▯nues  as  long  as  firms  in  the  industry  earn  an  economic  profit—as  long  as  (P  >  ATC). § In  the  long  run,  a  firm  in  monopolis▯c  compe▯▯on  maximizes  its  profit  by  producing  the  quan▯ty  at  which   its  marginal  revenue  equals  its  marginal  cost,  MR  =  MC. Output  and  Price  in  Monopolis▯c  Compe▯▯on § As  firms  enter  the  industry,  each  exis▯ng  firm  loses  some  of  its  market  share.  The  demand  for  its  product   decreases  and  the  demand  curve  for  its  product  shi▯s  le▯ward. § The  decrease  in  demand
More Less

Related notes for ECO 211

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit