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ECE1010-07 - UNIT III COMPETITIVE STRATEGY 11/12 Monopoly...

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UNIT III: COMPETITIVE STRATEGY • Monopoly • Oligopoly Strategic Behavior 11/12
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Monopoly Market Structure Monopoly Multiplant Monopoly: 1 Firm – 2 Plants Price Discrimination: 1 Firm – 2 Markets Next Time: Duopoly
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Market Structure So far, we have looked at how consumers and firms make optimal decisions (maximize utility and profits) under constraint. Then we looked at how those individual decisions are coordinated via the market. Under Perfect Competition, we assume an infinite number of infinitely small price-takers, and we know that the competitive market equilibrium is Pareto-efficiency. Now want to consider other market structures (e.g., monopoly; duopoly) and characterize the corresponding equilibria; what are the welfare consequences of these market structures?
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Market Structure Market structure is related to market concentration and competitiveness . Perfect Competition is a polar case (low conc; high comp), where rational decision-making at the individual level (consumer; firm) adds up to optimal outcomes at the social level – The Invisible Hand Theorem of Welfare Economics. Once we move away from perfect competition, firms can exploit market power : their behavior can influence prices (and profits). Monopoly is the case where a single firm has market power. Later we will consider what happens when several firms have power in the market (oligopoly). Here, competitive strategy comes to the fore.
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Market Structure Perfect Comp Oligopoly Monopoly No. of Firms infinite (>)2 1 Output MR = MC = P ??? MR = MC < P Profit 0 ? Yes Efficiency Yes ??? POINT 1: Under every market structure, all firms attempt to maximize profits, s.t., MR = MC. POINT 1: The number of firms in the market is determined by entry conditions.
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Market Structure Perfect Comp Oligopoly Monopoly No. of Firms infinite (>)2 1 Output MR = MC = P ??? MR = MC < P Profit 0 ? Yes Efficiency Yes ??? POINT 1: Under every market structure, all firms attempt to maximize profits, s.t., MR = MC. POINT 1: Profits signal entry. For a firm to remain profitable, there must be barriers to entry (or the market is too small for a second firm).
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Market Structure Perfect Comp Oligopoly Monopoly No. of Firms infinite (>)2 1 Optimality MR = MC = P ??? MR = MC < P Profit 0 ? Yes Efficiency Yes ??? POINT 2: Under every market structure, all firms attempt to maximize profits, s.t., MR = MC.
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Market Structure Perfect Comp Oligopoly Monopoly No. of Firms infinite (>)2 1 Optimality MR = MC = P ??? MR = MC < P Profit 0 ? Yes Efficiency Yes ???
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