3 Micro (Fach) / Markets (Lektion)
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- 1.1 Perfect Competitive Markets [ Commodities (Aluminum), Internet industries, FOREX market, Agricultural markets l Walkers Crisps on Baker Street l Features of perfect competition Many firms. Freedom of entry and exit; this will require low sunk costs. Identical or homogeneous product. All firms are price takers, therefore the firm’s demand curve is perfectly elastic. There is perfect information and knowledge. Sellers do not have the ability to set the price of the good Price is exogenous, firm chooses profit maximizing quantity Firm acts as if it can sell any quantity at the equilibrium price. MR = P Plausible when There are many small independent buyers & sellers The product is homogenous and of known quality There is perfect information about price Competitive markets are efficient, in the sense that they generate largest possible Total Surplus, and max CS and PS Prices are NOT controlled by any single firm We can think about the market as if Firms make selling decisions, taking the market price as given -> market supply curve Buyers make purchase decision taking the market price as given -> market demand curve Equilibrium P is determined at the point at which Quantity demanded = Quantity supplied
- Contestable Markets [ FIVE GUYS, Airbnb, Uber, Private Education ] Low barriers to entry and exit so that new suppliers can come into a market to provide fresh competition One or more dominant businesses with significant market power Absence of sunk costs Access to technology Low consumer loyalty Size of entry barriers Different from perfect competition in that: firm to have price-setting power firms in a market can produce a differentiated product
- Oligopoly - Imperfect Competition Chocolate bars, Crude OPEC Crude oil, Supermarkets in UK, Breweries, cell phone service providers, major airlines, Fuel retailing in UK, Broadband Cournot Quantity Competition - Firms act as Quantity Takers - Suppliers simultaneously choose Q they bring to market - P decreases with the industry’s joint output - Homogenous goods (identical from consumer perspective) where production plans are mare in advance: OPED, certain metals and chemicals, broadband Homogenous goods identical from consumer perspective Small number of dominant firms in the market Firms have market power
- Capacity Selection in Cournot Competition with N firms Firms choose Q in a non-cooperative, uncoordinated manner Results is an over-investment in capacity [over-production] Prisoner’s dilemma-like outcome: Capacity expansion lower prices, potentially hurting all industry players. As all firms follow this logic, this results in industry environment where all firms are worse off Cournot Equilibrium: Firm 1’s Q1 is a best response to Firm 2’s Q2 AND Firm 2’s Q is a best response to Firm 1’s Q profits given firm 2 produces Q1*.Q1* maximizes Firm 1’s profits given Firm 2 produces Q2*AND Firm 2’s Q is a best response to Firm 1’s Q profits given firm 2 produces Q1*. Firm 1’s Q1 is a best response to Firm 2’s Q2 Q1* maximizes Firm 1’s profits given Firm 2 produces Q2* AND Firm 2’s Q is a best response to Firm 1’s Q profits given firm 2 produces Q1*.
- Cournot Market [ OPEC, certain metals and chemicals, broadband ] Homogenous goods (identical from consumer perspective) Production plans are mare in advance Firms act as Quantity Takers Suppliers simultaneously choose Q they bring to market P decreases with the industry’s joint output
- Duopoly 2 Sellers Prisoners Dilemma Game: each acts intedepndently in its own interest Non-cooperative equilibrium will be bad for both Firms compete but possess market power
- Monopolistic Competiton Many competing producers Differentiated products free entry and exit in the long run