100
80
Where?
How? When?
What?
Why?
2014
60
East
West
North
40
20
0
1st Qtr
2nd Qtr 3rd Qtr 4th Qtr
Who?
Managerial Economics
Stefan Markowski
Market structures: Monopoly,
monopolistic competition and oligopoly
The economics of competitive advantage
Detailed course schedule
Day no
Topic
Textbook ch.
1 (24 Nov;
3 hrs)
1. Introduction. Decision making process and its elements. The scope of
economic decision making. Application of marginal analysis
Chs. 1-2
2
3
3
3
2. Demand analysis and demand elasticities
Ch. 3
3. Buyer product valuation and choices. Consumer surplus. Buyer pricing
decisions
Ch. 4
4 (27 Nov;
2 hrs)
4. Production/transformation process. Production technologies and input-output
structure
Ch. 5
5 (28 Nov;
2 hrs)
5. Cost structure and cost drivers of producer pricing strategies. Production
scale and scope.
Chs. 5 and 7
6 (1 Dec; 3
hrs)
6. Structure-conduct-performance. Market structures: competition and
contestability. Pricing strategies of buyers and sellers
Ch. 8
7 (2 Dec; 3
hrs)
7. Market structures: monopoly/monopsony, monopolistic competition and
oligopoly. Pricing strategies and strategic behaviour
Chs. 9-10
8 (3 Dec; 3
hrs)
8. Input sourcing and investment. Pricing and market power
Chs. 6 and 11
9 (4 Dec; 2
hrs)
9. Decision making under conditions of uncertainty. Informational asymmetries
and risk management
Ch. 12
10 (5 Dec;
2 hrs)
10. Market research and market analysis. Auction and rings. Strategic
behaviour
Ch. 13
11 (8 Dec;
2 hrs )
12 (9 Dec;
2 hrs)
11. Public sector perspective
Ch. 14
13 (11
Dec; 2 hrs)
Examination
(25 Nov;
hrs)
(26 Nov;
hrs)
12. Revision
13. Examination
Topic 7: Market structures: Monopoly,
monopolistic competition and oligopoly
Pricing strategies and strategic behaviour
Topic contents
7.1
Managerial
perspective
7.2
Monopoly
7.3
Collusive
pricing
7.4
Market
differentiation
7.5
Monopsony
7.6
Bilateral
monopoly
7.7
Oligopoly
7.8
Monopolistic
competition
7.9
The dominant firm
7.10
Questions for
self-assessment
and review
7.11
Further
reading
7.1 Managerial Perspective
• This topic focuses on non- or less-competitive
market arrangements
• You can envisage these configurations of buyers
and sellers as idealised market structures
located along the continuum between perfect
competition at the one extreme and monopoly at
the other
• In practice, most market structures tend to be
less than highly competitive as much of
business competition is about establishing
secure market niches and carving out market
territories
7.2 Monopoly
• A market is a monopoly if there is only one
active seller in it, although there may or may not
be other inactive sellers
• If there are no threats from potential
competitors or buyers, a monopolist is free to
act as a price maker
• Decision rule to maximise monopoly profit:
MR = MC
s.t. AC < AR
• In Figure below, the monopoly profit-maximising
price is PM and quantity QM whilst the
competitive (price taker) would sell QC quantity
at price PC
7.2 Monopoly
Price/Costs
PM
PC
AC=MC
Demand = AR
QM
MR
QC
Quantity
Economics
for Managers
7.2 Monopoly
• There is a net welfare loss from the use of
monopoly power as well as a transfer of welfare
from the buyer to the monopolist
• The monopolist has no supply schedule (price
maker)
• The strength of a monopoly depends on the
availability of substitute products and, thus,
contestability of the monopolist’s market
dominance
• The most enduring monopolies tend to be ones
protected by law
• A monopolist may also use its market power to
segment the market to differentiate groups of
buyers to charge them different prices
7.3 Collusive Pricing
• A group of sellers may collude to act as a
monopolist
• This may take the form of a cartel or an implicit
collusion
• To succeed, a cartel or collusive agreement
must establish barriers to entry
• Cartels and collusive agreements are unstable
as:
– high profits attract newcomers
– existing members have an incentive to cheat and
engage in non-price competition
7.4 Market Differentiation
Price Discrimination in Two Markets
Market One
Market Two
P
P
P1
P2
MC
Q1
Q2
MR
MR
7.4 Market Differentiation
Perfect Price Discrimination
Price
LRMC
MR
Quantity
Demand = MR*
7.4 Market Differentiation
• Peak-load pricing is similar to price
discrimination in that involves a firm charging
different prices for the same product at
different times (peak and off-peak) as demand
fluctuates over time
• Both price discrimination and peak- load pricing
may be used by industries where the long term
AC curve declines as output expands
7.5 Monopsony
• A monopsony is market characterised by the
presence of only one active buyer and many
sellers
• A monopsonist is a monopolistic buyer who
may use its market power to maximise profits
• The monopsonist is a price maker who faces an
upward sloping supply curve
• The monopsonist has no demand curve (price
maker)
7.5 Monopsony
Monopsony
Price/Costs
Buyer’s Marginal Cost
Average Cost = Supply
PC
Average Benefit =
Marginal Benefit
PM
QM
QC
Quantity
7.6 Bilateral Monopoly
• A bilateral monopoly is a market where a
monopolistic seller is trading with a
monopsonistic buyer
• Bargaining between the two parties is confined
to price-quantity combinations acceptable to
both of them
• The outcome depends on their relative market
power
7.7 Oligopoly
• Oligopolistic markets are characterised by the
presence of few sellers facing large numbers of
atomistic buyers
• Each sellers recognises that its profits depend
on how its competitors respond to its own
market strategy
• The perception of interdependence and
strategic behaviour are the two key aspects of
oligopolistic market
7.8 Oligopoly
• A duopoly is a market with only two active
sellers and many atomistic buyers
• In some oligopolistic markets there may be
firms that exercise price leadership (set the
market price as price makers, which other firms
accept as price takers)
• Barometric pricing by a particular firm means
its price leadership is seen as an indicator of
the market price
7.8 Monopolistic Competition
• A monopolistic competition refers to a market
where a number of price making sellers face
many atomistic buyers
• Each seller operates as a price maker in a
particular market niche selling somewhat
differentiated product to achieve competitive
advantage
• But there is enough competition between these
market niches to stop sellers from making
monopoly profits
7.9 The Dominant Firm
• This is a case where a single firm dominates the
market (controls 60-80% of it) and other firms
are confined to the competitive fringe
• The dominant firm acts as a price maker and the
competitive fringe sellers are price takers
• The dominant firm may engage in predatory
pricing to deter challengers, especially if it
enjoys scale and/or scope related cost
advantages
7.10 Questions for self-assessment
and review
Basic concepts and applications
1.
a. What is a market?
b. Give an example and explain how market
boundaries are determined in this case
2. Describe market equilibrium and outline the forces that
move a market toward its equilibrium
3. What is the 'invisible hand' of the market place and what
does it do?
4. Define price 'ceiling' and price 'floor' and give an example
of each
5. When the price of petrol increases, what happens to the
demand for and supply of second hand cars?
7.10 Questions for self-assessment
and review
6.
a. What is the short run effect of a price ceiling
applied in a particular market? Give an example
b. The long run effect of this policy? Give an example
7. Are price controls:
a. likely to be effective?
b. desirable?
8. Using a suitable diagram show why a market monopoly is
likely to reduce the buyer’s welfare
9. Using a suitable diagram show why a market monopsony
is likely to reduce the seller’s welfare
10. What does it mean that the monopolist has no supply
curve and the monopsonist has no demand schedule?
7.10 Questions for self-assessment
and review
11. Explain the nature and mechanics of monopolistic
competition and the practical relevance of this model
12. Describe the mechanics of oligopoly. What does it mean
that oligopolists are likely to behave strategically?
13. What is a cartel? Why this form of market collusion
tends to be unstable in the long term? If so, why is it often
illegal?
7.11
Further reading
Baye (2010): chs. 9-10