Welcome to
BU-224 Micro Economics –
Week 8 Seminar
Overview
Welcome
Review of Week 7 Material
Questions
Unit 8 Material
Questions
Preview of Unit 9
End
Unit 7 Material
Market Structure
Monopoly
Oligopoly
Monopolistic Competition
Perfect Competition
Market Structures
• Monopoly
• Oligopoly
• Monopolistic competition
• Perfect competition
Market Structures
• Monopoly
• Oligopoly
• Monopolistic competition
• Perfect competition
Monopoly
Oligopoly
• There are just a handful of firms.
• They usually compete on price and
service.
• If they don't compete, they can be
called a cartel.
• Examples
• OPEC
• Coca Cola and Pepsi
• Boeing and Airbus
Oligopoly
Monopolistic Competition
• Monopolistic competition involves
dozens of similar firms.
• They compete on price and services.
• Each firm's product is slightly different
from the products of other firms.
• Examples
Monopolistic Competition
Perfect Competition
• Pure competition involves hundreds or
thousands of firms.
• Homogeneous product
• Easy entry/exit of firms
• They don't compete on price – they are price
takers.
• Perfect information
• The firm's products are identical to one another.
• Examples
• Agriculture (wheat/corn)
Perfect Competition
Questions
Overview
Welcome
Review of Week 7 Material
Questions
Unit 8 Material
Questions
Preview of Unit 9
End
Unit 8 Material
Oligopoly Market Structure
Product Differentiation
Market Concentration Ratios
Oligopoly
• There are just a handful of firms.
• They usually compete on price and
service.
• If they don't compete, they can be
called a cartel.
• Examples
• OPEC
• Coca Cola and Pepsi
• Boeing and Airbus
Oligopoly
Oligopoly (cont'd)
• Strategic Dependence
• A situation in which one firm’s actions with
respect to price, quality, advertising, and
related changes may be strategically
countered by the reactions of one or more
other firms in the industry
• Such dependence can exist only when
there are a limited number of firms
in an industry.
Oligopoly
Oligopoly (cont'd)
• Why oligopoly occurs
• Economies of scale
• Barriers to entry
• Mergers
• Vertical mergers
• Horizontal mergers
Oligopoly (cont'd)
• Vertical Merger
• The joining of a firm with another to
which it sells an output or from which it
buys an input
• Horizontal Merger
• The joining of firms that are producing or
selling a similar product
Oligopoly (cont'd)
• Measuring industry concentration
• Concentration Ratio
• The percentage of all sales contributed
by the leading four or leading eight firms
in an industry
• Sometimes called the industry
concentration ratio
Measures of seller
concentration
The concentration ratio is the percentage of
total market sales accounted for by an absolute
number of the largest firms in the market.
The four-firm concentration ratio (CR4)
measures the percent of total market sales
accounted for by the top four firms in the
market.
The eight-firm concentration ratio (CR4)
measures the percent of total market sales
accounted for by the top eight firms in the
market.
Concentration Ratios: Very Concentrated Industries
Industry or Product
Refrigerators
Motor vehicles
Soft drinks
Long distance telephone
Laundry machines
Breakfast foods
Vaccuum cleaners
Running shoes
Beer
Aircraft engines
Domestic air flights
Tires
Aluminum
Soap
Pet food
CR4
CR8
94
94
94
92
91
88
80
79
77
72
68
66
64
60
52
98
98
97
97
NA
93
96
97
94
83
82
86
88
73
71
Source: U.S. Bureau of the Census, Census of Manufacturers
Concentration Ratios: Less Concentrated Industries
Industry or Product
Fast food
Personal computers
Office furniture
Toys
Bread
Lawn equipment
Machine tools
Paint
Newspapers
Furniture
Boat building
Concrete
Women's dresses
CR4
CR8
44
45
45
41
34
40
30
24
22
17
14
8
6
57
63
59
58
47
57
44
36
34
25
22
12
10
Source: U.S. Bureau of the Census, Census of Manufacturers
Oligopoly (cont'd)
Oligopoly (cont'd)
E-Commerce Example:
Market Concentration in the Computer Printer
Industry
• The computer printer industry generated
$50 billion in revenues in a recent year, and
four firms had a high market share.
• Of the four: Hewlett-Packard earned $24
billion, Lexmark $9.7 billion, Dell $6.9 billion
and Epson $5.2 billion.
• These figures imply a concentration ratio
of 91.6%. Thus, the printer industry is
very concentrated.
Oligopoly, Inefficiency,
and Resource Allocation
• To the extent oligopolists have market power—the
ability to individually affect the market price for the
industry’s output—they lead to resource
misallocations, just as monopolies do.
• But if oligopolies occur because of economies of
scale, consumers might actually end up paying
lower prices.
• All in all, there is no definite evidence of serious
resource misallocation in the United States because
of oligopolies.
Oligopoly
Oligopoly
Oligopoly
Oligopoly
Week 8 Assignment
Problem 1
• Dr. Fine and Dr. Feelgood are the only two medical doctors
offering immediate walk-in medical services in the town of
Springfield. That is, they operate in a duopoly. Each doctor can
charge either a high price or a low price for a standard medical
visit. The accompanying matrix shows their payoffs, in profits per
patient (in dollars), for any choice that the two doctors can
make.
Week 8 Assignment
• Suppose the two doctors play a one-shot game—that is,
they interact only once and never again. What will be the
Nash (non-cooperative) equilibrium in this one-shot game?
• Now suppose the two doctors play this game twice. Also,
suppose each doctor can play one of two strategies: it can
play either “always charge the low price” or “tit for tat”—
that is, it starts off charging the high price in the first
period, and then in the second period it does whatever the
other doctor did in the previous period. Write down the
payoffs to Dr. Fine from the following four possibilities:
• Dr. Fine plays “always charge the low price” when Dr.
Feelgood also plays “always charge the low price.”
Week 8 Assignment
Discussion
• Discuss the role of advertising in
product differentiation and the intent of
advertising in altering the firm’s
demand curve.
Thank you for attending.
I look forward to seeing you next week!