[AMECON] CH.5 | Competitive Market Structure and Monopolistic Markets

Market Structure

refers to the degree of competition and the number of consumers and producers in that market. It is often described in terms of barriers to entry or exit, the numbers of buyers and sellers, number of competitors, extent of product substitutability, and the degree of mutual interdependence between firms.

Perfect Competition

occurs when there are many buyers and sellers who have minimal to no control over their price.

perfect competition, monopolistic competition, oligopoly, and monopoly.

Four Major Market Structures (4)

Perfect Competition

Number of sellers: Large; Type of product: Homogenous; Control over price: None; Entry condition: Very easy; Example: Agriculture.

Monopolistic Competition

Number of sellers: Many; Type of product: Differentiated; Control over price: Very little; Entry condition: Easy; Example: Retail.

Oligopoly

Number of sellers: Few; Type of product: Homogenous or differentiated; Control over price: Strong; Entry condition: Difficult; Example: Airlines.

Monopolistic Competition

Number of sellers: Many; Type of product: Differentiated; Control over price: Very little; Entry condition: Easy; Example: Retail.

Perfect (Pure) Competition

A perfectly competitive industry has many buyers and sellers, each with a relatively small market share. Buyers have complete information about the prices charged by each firm, and there are no barriers to entry or exit.

Price Taker

the individual firm has little or no power on the price of its goods or services. The firm is then called a _______ as price is dictated by the market.

four conditions

Conditions of Perfect Competition – ____ conditions must be met.

Homogenous Product

are very similar in physical composition, as well as quality. Is a indistinguishable from other competing products.

Heterogenous Products

items that cannot be easily substituted or replaced by other products.

Many Buyers and Sellers

The presence of multiple players enables the market to dictate the price of the product through competition.

Full Dissemination of Information

the widespread availability and ________________________. In order for markets to react efficiently, information needs to be accessible to all buyers and sellers.

No Barriers to Entry

barriers to enter the market must be low. Firms must be able to easily enter and exit the industry.

Common Barriers to Entry

Brand loyalty; Capital requirements; Economies of scale; Government regulations; Legal requirements (patents, licenses, and copy rights).

Market Clearing Price

the interaction between demand and supply determines the ______________.

Price and Revenue under Perfect Competition

since the price is constant for all quantities, price also equals average revenue and marginal revenue.

Profit

defined as the difference between the firm’s total revenue and its total cost.

Profit Maximization

to maximize profit, a pure competitive firm should produce up to the point where marginal revenue of the last unit is equal to the marginal cost of the last unit produced.

Demand under Perfect Competition

since demand is perfectly elastic, price is equal to marginal revenue and also to average revenue.

Shutdown Condition

A firm can only continue to produce if its revenues exceed its variable costs.

Avisala

Short-Run Normal Profit – MR = P = MC.

Short-Run Profit – MR = P > MC, Profit.

Short-Run Loss – MR = P < MC, Loss.

Market Entry

The introduction of fresh participants ultimately increases supply in the market, causing a shift in the supply curve.

Long-Run Economic Profit

firms in perfectly competitive markets have zero economic profits in the long run.

Market Exit

If some firms are grappling with financial losses, then these firms will exit the market causing a leftward shift in the market supply curve.

Yes i

Short Run Operation – ATC>P>AVC → Operate.

Short Run Shutdown – P<AVC → Shutdown.

Long Run Operation – P>ATC → Operate.

Long Run Shutdown – P<ATC → Shutdown.

Normal Profit

the average total cost curve contains a normal rate of return (profit) on investment.

Economic Profit

Anything above this is called an above average rate of return or __________.

Economic Conditions of Monopoly

Sole seller; Unique product with no close substitute; Lack of information; High barriers to entry.

Sole Seller

The primary condition of a monopoly lies in the presence of a _________ of the product. This is usually caused by significant increasing returns to scale, with the minimum efficient scale in the industry or geographical area allowing only one firm, or major barriers to entry and exit.

Lack of Information

When a seller’s information is not disseminated throughout the market, an inherent advantage tilts towards the seller over the buyer.

High Barriers to Entry

a barrier to entry is any obstacle that makes it unprofitable or impossible for new firms to enter an industry.

Eighth Freedom or Cabotage

the right granted to a foreign airline to operate domestically.

Common Barriers to Entry

Brand loyalty, Capital requirements, Labor unions, Legal/government barriers, Project risks, and Technology.

Brand Loyalty

corresponds to the preference of consumers for a particular product from a well-recognized company.

Patent or Copyright

The holder of the __________t has exclusive legal right to sell the product.

Capital Requirements

The capital necessary to commence production may be sufficiently significant so that the potential profits do not justify the investment, the associated risk is too high, or the capital cannot be obtained.

Technology

can also be a substantial barrier, depending on the industry. Without a certain required level of ________, some firms may be unable to compete effectively in a market.

Labor Unions

essentially band workers together to bargain as a monopolist of labor supply and can thereby raise members’ wages above the competitive level.

Scope Agreements

contracts with labor groups dictate various requirements, such as the size of aircraft for the regional airlines.

Project Risk

the overall risk of critical projects.

Economies of Scale

the enormous cost of doing business in this market and the substantial ___________, including the deep experience and institutional knowledge required on such complex engineering, means that the minimum efficient scale in the industry supports few firms.

Natural Monopoly

a product of economies of scale. In industries with high fixed costs, significant economies of scale can be achieved as production increases. One firm is much more efficient than multiple firms in providing the goods or services to the market.

Monopoly Demand

the market demand equals the firm’s demand.

Monopoly Profit Maximization

The profit-maximizing output is the point where marginal revenue equals marginal cost.

Monopoly Loss

simply having a monopoly does not guarantee long-run profits, as a combination of shifts in the demand curve and changes in average cost could put the firm in ________.

MR = MC.

Monopoly Price Decision – monopolists will set their price where ________.

Competitive Price

When the MR of selling a good is greater than the MC of producing it, firms are making a profit on that product, and producing one more unit will add more revenues than costs, therefore increasing profits. If MR < MC, producing one less unit will save more costs than it sacrifices in revenues, resulting in enhanced profitability.

Monopoly Pricing

A monopolist produces less output and sells it at a higher price than a perfectly competitive firm.

Maximum Pricing

Opting for _________ will cause demand for the product to fall as consumers find ways to adapt to substitute goods or otherwise change their habits to buy less of the monopolized product.

Airport Monopoly

can arise due to a number of factors, such as slot availability, gate and facility availability, infrastructure, or government regulation.

Slot Availability

The lack of available gates and slot controls at some airports acts to protect incumbent carriersand makes it difficult for new entry and, at some airports, can allow an airline to exert monopoly power.

Slot-Controlled Airports

demand for takeoff and landing slots exceeds the available capacity. This limitation on slots curbs the ability of new airlines to enter the market.

Airport Slot

represents the right to land or takeoff from an airport at a given time.

Grandfather Right

entitles an airline to the same slot in the future if they are currently using it.

Use-It or Lose-It Rule

stipulates that the airline must use the slot for at least 80% of the time during the scheduled period.

Gate and Facility Availability

schedule is limited by the availability of gates. Airlines are allocated with a specific count of gates in a particular airport, depending on the leasing agreements.

Common Use System

airlines pay a fee per use for using the facilities.

Hub Premium Hypothesis

originating or terminating passengers are charged a higher fare than other passengers traveling throughout the carrier’s system.

Positive Network Effects

effects from hub-and-spoke systems also produce benefits that, as Economides (2004) shows, may be greater than the damage of higher prices at the hub.

Commercial Aircraft Manufacturing Market

Boeing and Airbus compete in the large commercial aircraft (LCA) market. Bombardier and Embraer compete in the regional jet market.

Capital-Intensive Industry

Modern aircraft manufacturing is a heavily ______________ requiring immense expenditures in research, development, and manufacturing.

Jet Engine Manufacturing Market

Broadly speaking, the market has four major firms: General Electric (GE), CFM International, Pratt & Whitney (P&W), and Rolls-Royce.

Aircraft Engine Market Concentration

General Electric, Pratt & Whitney, and Rolls-Royce control the largest share of the world’s aircraft engine market at a combined percentage of around 98%.

CFM LEAP-1B high bypass turbofans

Engine Manufacturing Monopoly Example – all Boeing 737Max are powered by ______________________, meaning that CFM LEAP has a monopoly on the supply of engines for 737 aircraft.

Monopsony

a market condition in which one buyer faces many sellers. Due to the presence of only one buyer, a common theoretical implication is that the price of the good is pushed down near the cost of production.

Bilateral Monopoly

a market condition consisting of only one buyer and only one seller.

Bilateral Monopoly Characteristics

The monopolist producer has an incentive to limit production to maximize profit, while the monopsonist buyer utilizes its market power to increase production to lower cost.