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ECMC41-Lec3 - ECMC41 Lecture 3 Market Structure and...

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ECMC41 – Lecture 3
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2 Market Structure and competition 1. Dominant firm models 2. Oligopoly models 3. Market of monopolistic competition
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3 Some key concepts Entry /Exit barriers (i) Government restrictions on entry. (ii) Structural barriers to entry (Bain) Absolute cost advantage Economies of scale Product differentiation (iii) Strategic barriers to entry (Lec6) Limit pricing /Predatory pricing/Investment in R&D to reduce cost/ Raising rival’s costs
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4 Residual demand curve ( 29 ( 29 ( 29 p S p D p D residual 3 & 2 1 - = S -i D(p) 6 5 50 100 150 3 180 6 5 100 3 180 Q q , Q q , $ $
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5 1. Dominant Firm Models Model 1: No entry model One dominant firm and many fringe firms Entry is blocked Step 1 : Derive the dominant firm’s residual demand curve Step 2: Obtain the dominant firm’s MR curve Step 3: Given MC, find market equilibrium price and Q.
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6 Step 1: Derive dominant firm’s residual demand curve i MC f S p 0 p Q ( 29 p D r d $ $ Q q , Q q ,
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7 Step 2: Derive MR curve Step 3: Find the market price p p MR < + = ε 1 1 1 d MR 2 d MR p 0 p d AC * d AC 1 p 1 d MC 2 d MC 2 p 1 d Q 2 d Q d MR $ $ Q q , Q q ,
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8 Model 1: Market equilibrium * d MC p d MC f S i AC i MC i q 1 p 1 p 1 d Q 2 p Market equilibrium Scenario1: Dominant firm makes positive profits. Fringe firms exist and might even positive economic profit (in the LR) Scenario2: Only the (rel. low cost) dom. firm serves the market (i.e. fringe firms all shut down as P is too low). d AC d MR $ $ Q q , Q q ,
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9 Model 2: Dominant firm with free-entry * d MC p p d MC d AC d MR d d D MR = d D $ $ Q q , Q q ,
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10 Model 2: Dominant firm with free-entry p p f Q Q , d Q Q , * d MC p p d MC d AC Step 1 Residual demand Step 2 Marginal revenue $ $ $ $ Q q , Q q ,
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11 Step 3: Find the market price * d MC p p d MC d AC Market equilibrium Scenario1: Dominant firm makes positive eco profits (but these have been lowered by entry). Fringe firms exist but earn zero eco profit Scenario2: Only the (relatively low cost) dominant firm serves the market (all fringe firms shut down as P is too low).
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