duffy-ic - DuffysNotes Market Structures...

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Duffy’s Notes Market Structures
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Theories of Imperfect Competition Industrial organization is the study of the behavior of imperfectly competitive industries. In this class, we will look at some of the possible organizations.
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Different Possibilities Perfect Competition (many small firms that produce an identical product, price takers) Monopoly (one firm, market demand = firm’s demand) Oligopoly (a few firms, which may produce identical products or branded products) Monopolistic competition (many producers of similar, but not identical products. Branded products with easy entry and exit.)
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Products Aircraft Batteries Cigarettes Electricity Appliances Wheat Breakfast cereals Which markets are characterized by many small firms producing an identical product?
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The U.S. economy In the United States, perhaps the majority of products are produced in industries where there are only a few major firms and/or where products carry brand names. One notable exception is agricultural products.
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Imperfect Competition Imperfect Competition prevails in an industry whenever individual sellers have some measure of control of their output price.
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Graphical Depiction d q p perfect competition d imperfect competition q p Firm Level Demand Curves
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The Level of Control Imperfect competition does not mean that a firm has absolute control over price. If a product with many substitutes (or even one close substitute) is priced well above the substitutes, few if any consumers will buy it.
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Why do we have imperfect competition? Economies of size. Barriers to entry. Branded products with differences in characteristics of the products.
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Barriers to Entry Some industries are difficult to enter. They may, for example, require a very large initial capital outlay, or there may be legal restrictions limiting the number of firms.
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Legal Restrictions Governments sometimes restrict competition through patents, entry restrictions, and foreign trade tariffs and quotas.
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Entry Restrictions Governments may restrict entry for a variety of reasons. Some towns limit the availability of liquor licenses because they want to limit the number of establishments serving alcohol. Some cities restrict the number of taxi-cab drivers to avoid excess congestion caused by too many cabs in the downtown area.
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Import Restrictions Governments may restrict imports to keep out foreign competitors.
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High Cost of Entry An economic barrier to entry occurs if an industry requires a high initial capital outlay, as is the case in the aircraft industry. Or the new industry might have to overcome strong consumers habits (such as occur from using one brand of software) via an expensive advertising and education campaign.
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Advertising and Barriers to Entry Firms can use advertising to make it difficult for new firms to enter a market. Advertising is used to differentiate products
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This note was uploaded on 11/15/2011 for the course AGEC 7100 taught by Professor Duffy,p during the Fall '08 term at Auburn University.

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duffy-ic - DuffysNotes Market Structures...

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