2
Market Structure Characteristics
We characterize an industry by

The number of firms and their size distribution

Product differentiation

Barriers to entry

The picture to the right concerned with two markets:

No. 2 yellow corn: many producers/sellers (Perfect
Competition)
 Farm equipment: few manufacturers/sellers
(Oligopoly) Pages 145-148

3
Perfect Competition

Up to now we have been assuming the firm and market reflect conditions of perfect competition

Not a bad assumption for many agricultural subsectors

A large number of small firms: 2 million farms

A homogeneous product: No. 2 yellow corn

Freely mobile resources: No barriers to entry caused by patents, etc. or barriers to exit (???)

Perfect knowledge of market conditions:
Quality outlook information from government, university and private sources

4

Many markets in which farmers buy inputs and sell their products however do not reflect perfect competition conditions

Chapter 9 focuses on specific types of imperfect competitors in the farm input market

These firms are capable of setting prices farmers must pay for specific inputs

5
Imperfect Competition in Selling

6
rd

Monopolistic Competition

Definition

Production and Pricing Decisions

Oligopolies

Definition/Examples

Production and Pricing Decisions

Monopolies

Definition/Examples

Production and Pricing Decisions

Comparison of Market Structures
Pages 106-107

7
A

Unlike perfect competitors who face a perfectly elastic (horizontal) demand curve

Imperfect competitors selling a differentiated product have a downward sloping demand curve
$ Firm’s demand curve under P.C.
A
$
Firm’s demand curve under imperfect competition
B
Q
B
Q

8
2
1
0
5
4
7
6
3
Price Quantity Total Rev. Avg. Revenue Marginal Revenue
15 0 0 ------------
14
13
2
4
28
52
14
13
14
12
2 20
12
11
6
8
72
88
12
11
10
8
10
9
8
10
12
14
100
108
112
10
9
8
6
4
2
16
18
20
22
24
26
28
30
112
108
100
88
72
52
28
0
7
6
5
4
3
2
1
-----
0
-2
-4
-6
-8
-10
-12
-14
Table 9-1 Imperfect
Competition
Firm faces a downward sloping demand curve →
MR
≤ AR
Marginal Revenue
(MR) : Change in revenue from the sale of the last unit of output
(ΔTR÷ΔQ)
Average Revenue
(AR): Total
Revenue/Total output (TR÷Q)
Note: Price =
Average Revenue
Page 149

9
Marginal Revenue: Change in revenue from the sale of the last unit of output
Page 150

Maximum Total Revenue
10

Marginal revenue in this instance is also downward sloping

MR=0 at the point where TR is at a maximum
Page 150

11
Types of Imperfect Competitors in Input Markets



Let’s start here…

12
Monopolistic Competitors

Many sellers

Each firm has relatively small market share

Power to set prices somewhat like a monopoly

Face competition like perfect competition

Collusion is not possible given number of firms in the industry

No barriers to entry or exit
Page 148-151

13
Monopolistic Competitors

Product Differentiation: Each firm makes a product that is slightly different from the products of competing firms
 Close substitutes but no perfect substitutes
 An attempt to ↑ price will normally results in a ↓ in volume sold

Competition on Quality, Price, Marketing

Quality is design, reliability, service provided to buyer and ease of access to product

The firm faces a downward sloping demand curve

Firm must market intensively: promotions, distribution, packaging, etc.
Page 148-151

14
Monopolistic Competitors

Product differentiation does not necessarily mean there are any physical differences among products

They might all be the same, but how they are sold may make all the difference
Page 148-151

15
Monopolistic Competitors

The monopolistic competitor tries to set his/her product apart from the competition
 Main method is via advertising

When this is done successfully, the demand curve becomes more vertical or inelastic
 Buyers are willing to pay more because they believe it is much better than their other choices

Basis for product differentiation

Physical differences Convenience

Ambience

Appeals to vanity
Reputations
Snob appea
Page 148-151

16
Monopolistic Competitors

Typical Monopolistic Competitor

Tries to set firm apart from competition

New Product Development and Innovation

Advertising o Create consumer perception of product differentiation
– real or imagined o Attempt to keep demand as inelastic as possible

Selling costs can be extremely high
Page 148-151

17
Monopolistic Competitors

Short run profits can exist but long run profits are reduced to 0 with industry entrants

Fast food industry is a good example

All services basically the same

Extensive use of marketing to differentiate products/services across firms

Striving to produce more products and services
Page 148-151

18
Monopolistic Competitors

Production Decision:

Determine output level where
MC=MR ( Why does this make sense?
)

Pricing Decision:

Determine where above quantity intersects the downward sloping demand curve
Page 148-151

Monopolistic
Competition
Short run profits exist if:
P
SR
> ATC
SR at Q
SR
19
Short run profits

The firm produces Q
SR

Prices its products at P where MR=MC at E
SR by reading off the demand curve at quantity Q
SR
 Represents consumer’s willingness to pay for Q
SR Page 150

Monopolistic
Competition
20
Short run loss

At Q
SR
, P
SR
< ATC
SR
Page 150

21
P
LR
= ATC
LR

In the Long Run (LR)
 Profits are bid away as more firms enter the market
 Losses will no longer exist as firms leave the market

At Q
LR the remaining firms are just breaking even
Monopolistic
Competition
Page 151

22
Monopolistic Competitors

How much is the industry dominated or not dominated by few suppliers

Geographical scope – national, regional, global
 An industry can be almost perfectly competitive on a national scope, but almost a monopoly locally e.g. Feed Retailing

Barriers to entry and exit: industries may appear concentrated but few barriers exist to prevent entry
Page 148-151

23
Monopolistic Competitors

Quantitative measures of competition

Concentration Ratio (CR): 2,4, 8, 20, etc

% of the value of total market revenue accounted for by 2, 4, 8, 20, etc. largest firms in the industry

Low CR values→ a high degree of competition
 High CR values → an absence of competition
Page 148-151

24
Monopolistic Competitors

Quantitative measures of competition

Herfindahl-Hirschman Index (HHI): The square of the % market share of each firm summed over the largest 50 firms in an industry or all firms if < 50 in industry

Perfect competition, HHI is small

Only 1 firm, HHI is 10,000 = (100 2 )
 U.S. Justice Department o HHI < 1,000 competitive markets o HHI > 1,800 could be considered concentrated industry worthy of Justice Dept. examination of any purchases
Page 148-151

25
Oligopolies

A few number of sellers

Each can impact market price & quantities

Interdependent in their decision making

Key component in marketing strategies and pricing behavior

Match price cuts but not price increases by fellow oligopolists

Do this to maintain market share

Non-price competition between oligopolists to uniquely identify products
Pages 152-155

26
Oligopolies

Rival oligopolists will match price cuts but not price increases in the short run because they want to capture a larger market share

If there are differences in prices they are the result of successful product differentiation

Tend to have stable prices

Changes in production and other costs not easily passed on and may have to be absorbed
Pages 152-155

27
Oligopolies

Price leadership strategy

A particular firm dominates the market

Controls the largest share of the market
 Other industry firms more efficient in operation, marketing, etc.

The dominant firm first sets its price to maximize profit

Remaining firms set their prices based on the dominant firms pricing

The price set by the oligopolist seller is higher under perfect competition

Quantity produced is lower then perfect comp.
Pages 152-155

28
Oligopolies

The dominant firm may be efficient enough to set a lower price

Eventually drive the other firms out of the market
Pages 152-155

29
Oligopolies

Examples of Oligopolies

Auto manufacturers

1997 CR4 value of 97.4

Aircraft manufacturing

Farm machinery and equipment

John Deere, J.I.Case and New Holland

80% of 2-wheel drive tractors
 close to 90% of combines sold in the U.S.

Cattle slaughtering

CR4 value increased from 39% to 67% over the 1985-1995 period
Pages 152-155

6

Demand curve DD

All oligopolists move prices together and share market

Demand curve dd

A single firm changes its price

Curve DD is more inelastic

Below point 1, firms match price cut

This leads to a kinked demand curve d1D

Leads to a discontinuous marginal revenue curve, d256
30
Remember oligopolists account for the reaction of other firms so there is no single demand curve
Page 154

31

Meeting demand along the lower segment of the kinked demand curve → the firm is maintaining its market share
Page 154

32

Shifting MC curves reflecting technological advances will not affect P
E and Q
E

It does impact profits as MC drops from pt 3 to pt 4
Page 154

33
Monopolies

One seller in the market

Entry of other firms restricted by patents, etc. (i.e., barrier to entry)

Firm has absolute power over setting market price

Produces a unique product

It can have economic profits in the long run because it can set price without competition
Page 155-156

P
E
34
0
M
N
$/unit
TVC
Q
E
C
B
A
Monopolies
MC
ATC
AVC

Total revenue = area
0P
E
CQ
E

Monopolist produces quantity where
MC=MR (pt A),
Q
E

Uses the demand curve
(pt C) when setting price P
E
MR
Demand= AR
Quantity
Page 155-156

Monopolies
$/unit
P
E
M
N
35
0
C
B
A
TVC
Q
E
MR
MC
ATC
AVC

Total variable costs for the monopolist is equal to area
0NAQ
E
, (green box)

=AVC x Q
E
= 0N x Q
E
Demand= AR
Quantity
Page 155-156

Monopolies
$/unit
36
C
P
E
M
N
TFC
B
A
0
Q
E
MR
MC
ATC
AVC

Total fixed costs equals
NMBA (orange box)

=(ATC-AVC) x Q
E
Demand= AR
Quantity
Page 155-156

Monopolies
$/unit
P
E
M
N
TFC
TVC
37
0
C
B
Q
E
A
MR
MC
ATC
AVC

Total cost is area
0MBQ
E
(green box
+ orange box)

= area ONAQ
E
+ area NMBA
Demand= AR
Quantity
Page 155-156

Monopolies
$/unit
Economic
Profit
C
P
E
M
N
TFC
B
A
TVC
38
0
Q
E
MR
MC
ATC
AVC

Monopoly economic profit = area MP
E
CB

= Total Revenue (yellow box) – Total Costs (green box + orange box)
Demand= AR
Quantity
Page 155-156

Monopolies
$/unit
C
39
P
E
Economic
M
Profit
TFC
N
TVC
0
Q
E
B
A
MR
MC
ATC
AVC

Total fixed costs equals
NMBA (orange box)

=(ATC-AVC) x Q
E
Demand= AR
Quantity
Page 155-156

40

Lets compare the results we have obtained from the alternative market structures

41
Perfect Competition Case
Consumer surplus = sum of areas
1, 4, 5, 8 and 9 (blue triangle)
Page 157

42
Perfect Competition Case

Producer surplus = to the sum of areas 2, 3,
6 and 7 (green triangle)
Page 157

43
Perfect Competition Case

Total economic surplus
= sum of blue and green triangles

=sum of areas 1 – 9
Page 157

44
Monopoly Case

CS = sum of areas 8 and
9, (new blue triangle)

Compared to P.C., consumers would be economically worse-off by areas 1, 4 and 5

Paying a higher price, P
M

Purchasing a smaller quantity, Q
M
Page 157

45
Monopoly Case

PS = to sum of areas 3, 4, 5, 6 and
7 (green area)

Compared to P.C. producers lose area
2 but gain areas 4
+ 5

Economically better-off than
P.C.
Page 157

46
Monopoly Case

Society as a whole would be economically worse-off by areas 1+2

Known as the dead weight loss

Reflects the fact that less of available resources in this market are used to provide products to consumers
Page 157

47
Summary of Imperfect Competitors from a Selling Perspective
Page 157

48
Imperfect Competition
From the Buying Perspective

49
Types of Imperfect Competitors on the Buying Side

Monopsonistic competition

Oligopsony

Monopsony
Let’s start here…

50
Monopsonies

Single buyer in the input market

Focus is on the marginal input cost of purchasing an addition unit of resources

Will purchase input until Marginal
Value Product (MVP)=Marginal
Input Cost (MIC)

As long as MVP>MIC, the monopsonist makes a profit
Page 158-160

51
Monopsonies

Under perfect competition, the firm views the input supply curve as a horizontal line

Firm can purchase as much as desired as the going price
 Firm’s purchase does not impact inputs cost

Monopsonist is the only input buyer
 →Faces an upward sloping input supply curve

Buying decisions impact input prices
Page 158-160

52
Monopsonies

Monopsonist must consider the marginal input cost (MIC) when purchasing inputs

MIC defined as the change in the cost of an input as more of the input is used

Lets look at a simple example

Monopsonist must pay higher prices per unit if he/she wants to purchase greater amounts of the input
 →MIC curve is above the input supply curve
Page 158-160

53
Marginal Input Cost
Units of
Variable Input
1
2
5
6
3
4
7
8
9
10
Price/Unit
($)
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
7.00
7.5
Total Input
Cost
3.00
7.00
12.00
18.00
25.00
33.00
42.00
52.00
63.00
75.00
Marginal
Input Cost
-----
4.00
5.00
6.00
7.00
8.00
9.00
10.00
11.00
12.00
Page 158-160

54
Marginal Input Cost
9
8
7
6
5
4
3
2
1
12
11
10
1 2 3 4 5 6 7 8 9 10
Quantity/unit of time
Marginal Input Cost
Input Supply Curve
Data obtained from previous table
Page 158-160

55
Monopsonies

Profit maximizing monopsonist

Use variable input to the point where
Marginal Input Cost (MIC) =Marginal
Revenue Product (MRP)

MRP = addition to total revenue attributed to the addition of one unit of variable input
= Marginal revenue x MPP

So long as MRP>MIC, profits will increase with increased input use

If MRP<MIC, profits will ↑ by reducing the amount of input used (Why?)
Page 158-160

56
Buying Decisions by Perfect Competitors

MRP = MVP under perfect competition

MVP=P
PC x MPP
Page 160

57
Buying Decisions by a Monopsonist

Monopsonist makes decisions along
MRP curve

Differs from MVP
 MRP=MIC at A

Purchase Q
M inputs
Page 160

58
Buying Decisions by a Monopsonist

Resource use

Higher Price paid under P.C., P
PC
 Utilization higher under P.C., Q
PC

Price difference referred to as monopsonistic exploitation
(i.e., P
PC
– P
M
)
Page 160

Product Selling
Perspective
Perfect
Competition
Monopolistic
Competition
Input Purchasing
Perspective
Perfect
Competition
Monopsonistic
Competition
Oligopoly Oligopsony
59
Monopoly Monopsony

Can have any combination of the above for a particular firm

Lets look at profit maximization under specific cases
Page 160


Case #1 : Monopsonist in input purchasing and
Monopolist seller of product
 Equilibrium: MRP=MIC at Point A.

Pricing off input supply curve gives Q
MM and P
MM
60 Page 161

61

Case #2 : Perfect Competition in input purchasing and Monopoly seller

Equilibrium is where MRP=Supply at C
 No Marginal InputCost curve → Q
PCM and P
PCM
Page 161

62

Case #3 : Monopsony in input purchasing and
Perfectly Competitive seller

Equilibrium: MVP=MIC at Point E

Pricing off supply curve → Q
MPC and P
MPC
Page 161

63

Case #4 : Perfect Competition in both input purchasing and product sales

Equilibrium: MVP=Supply at Point F
 → Q
PC and P
PC
Page 161

64
Monopsonistic Competitors

Many firms buying resources

Ability to differentiate services to producers

Differentiated services includes distribution convenience and location of facilities, willingness to provide credit or technical assistance

P and Q determined same as monopsonist
Page 161

65
Oligopsonies

A few number of buyers of a resource

Profit earned will depend on elasticity of supply for resource (less elastic than monopsonistic competition)

Each oligopsonist knows fellow oligopsonists will respond to changes in price or quantity it might initiate

P and Q determined same as monopsonist
Page 161

66
Various segments of the livestock industry
Exhibit several forms of imperfect competition.
Page 162

67
Governmental Regulation

Various approaches have been used to counteract adverse effects of imperfect competition in the marketplace

Legislative acts passed by Congress, including the Sherman Antitrust and Clayton Acts

Price ceilings

Lump-sum Tax

Minimum price or floors
Page 162

68

Sherman Antitrust Act of 1890

Prohibited monopoly and other restrictive business practices

Packers and Stockyards Act of 1921

Reinforced Anit-trust laws regarding livestock marketing

Capper-Volstead Act of 1922

Exempted cooperatives from anti-trust laws

Robinson-Patman Act

Prohibited price discrimination practices

Agricultural Marketing Agreement Act

Established agricultural marketing orders
Page 163

69

Regulatory agencies such as the Federal
Trade Commission can impact monopoly effects by instituting a maximum (ceiling) price

FTC charged with investigating business organizations and practices and carrying out anti-trust provisions

How can we model the impact of price ceilings?
Page 163

70
A′
Implications of a Price Ceiling
D

Without regulatory involvement the monopolist will

Equate MR and MC
(point C)

Produce Q
M and charge price P
M

Earn a profit of
A′P
M
BD
Page 164

71
A′
Implications of a Price Ceiling
D
 With gov’t imposed price ceiling, P
MAX
 The demand curve is given by P
MAX
ED

MR is P
MAX
EFG

Mono. produces more (Q
1
>Q
M
) at a lower price (P
P
M
)
MAX
<
Page 164

72
A′
Implications of a Price Ceiling
Monopolist’s profit falls to area IP
MAX
EH (turquoise box)
Page 164

73

A regulatory agencies can impact the level of monopoly profits by assessing a lump-sum tax

May be a license fee or one-time charge

Corresponds to a fixed tax regardless of output level

How can we model the impact of a lump sum tax?
Page 165

74
Implications of Lump-Sum Tax

The monopolist equates
MC=MR (pt. F)

Produces Q
M

Charges P
M

Profit of AP
M
BC
Page 165

75
Implications of Lump-Sum Tax 
Lump-sum tax
 ↑ firm’s ATC from
ATC
1 to ATC
2
 ↓ producer surplus from AP
M
BC to
EP
M
BT

Does not change output level or price
The loss in producer surplus is area AETC
(blue box) Page 165

76
 In a monopsony, the gov’t could regulate the price of a resource by imposing a minimum price that must be paid for that resource

Good example is the various minimum wage laws

How can we model the impact of a minimum price policy?
Page 165

77
Implications of a Minimum Price

No minimum price

Monopsonist determines where
MRP=MIC

Employ Q
M input units

Pays $P
M
/unit
Page 166

78

Minimum price, P
F,
Implications of a Minimum Price imposed
 Monopsonist’s MIC curve would be
P
F
DCB

The firm would use more input
Page 166

79

Unlike perfect competition, imperfect competitors have ability to influence price

Monopolistic competitors try to differentiate their product

Monopolists are the only seller in their product market. Monopsonists are the only buyer

Oligopolies are a few number of sellers while oligopsonies are a few number of buyers .

What are the economic welfare implications of imperfect competition?

80
Chapter 10 focuses on
in agriculture and the