ECMC41-Lec2 - ECMC41 Lecture 2 Market Structure and...

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ECMC41 – Lecture 2
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2 Market Structure and Competition 1. 2. Perfect competition and monopoly 3. Dominant firm model Intranet: Exercise: concepts
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3 Firm: for profit entity (1) Objective: Profit maximization (2) Structure: (role of) Ownership and Control (3) Size: advantages of being large? (i) Horizontal boundary: market share and variety of products - Economies of scale, scope - MES (ii) Vertical boundary: “make-or-buy” decision - Coase: costs of using the market
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4 Two important concepts 1. Economies of scale AC = (TC/Q) falls as Q rises Sources: indivisibilities Indivisibility of fixed costs Physical laws 2. Economies of scope TC(Q X ,Q Y ) < TC(Q X ,0) + TC(0,Q Y ) Sources: Same as for SR static scale economies (above) plus Common inputs Cost complementarity
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5 Perfect competition Imperfect competition Monopolistic  competition Monopoly Oligopoly Non-cooperative cooperative ?
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6 Measures of market structure 1) Four-firm concentration ratio (CR4) 2) Herfindahl-Hirschman Index ( HHI ) = = 4 1 4 i i s CR = = n i i s HHI 1 2
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7 Example: Measures of market concentration Share S1 S2 S3 S4 S5, S6,…. . Industry I 40% 10% 5% 5% 40% Industry II 15% 15% 15% 15% 40% Industry III 50% 5% 2.5% 2.5% 40% Each of these three industries has a 4-firm concentration ratio of 0.60
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ECMC41-Lec2 - ECMC41 Lecture 2 Market Structure and...

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