1. Brickley, Smith, and Zimmerman,
Managerial Economics and
Organizational Architecture, 4th ed.
Chapter 6: Market Structure
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

2. Market structure
objectives
• Students should be able to
• Differentiate among the four archetypal
market structures
• Distinguish between price takers and
price searchers
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

3. Market structure
• What is a market?
• All firms and individuals willing and able to
buy or sell a particular product
• What is market structure?
• Defined by attributes of the market
environment
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4. Market structure
the archetypes
• Perfect competition
• Monopoly
• Monopolistic competition
• Oligopoly
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5. Perfect competition
characteristics
• Many buyers and sellers
• Product homogeneity
• Low cost and accurate information
• Free entry and exit
• Best regarded as a benchmark
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6. Firm demand curve
perfect competition
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7. Firm supply
• Short run
– Marginal cost curve above average
variable cost
– P* = SRMC
• Long run
– Long-run marginal cost curve
above long-run average cost
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

8. The firm’s short-run supply curve
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9. The firm’s long-run supply curve
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10. Competitive equilibrium
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11. Barriers to entry
Incumbent reactions Incumbent advantages
• Specific assets • Precommitment
contracts
• Economies of scale
• Licenses and patents
• Excess capacity • Learning-curve effects
• Reputation effects • Pioneering brand
advantages
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12. Monopoly
• Strong barriers to entry  single
supplier
• Profit maximization
– faces market demand and sets MR=MC
• Unexploited gains from trade
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

13. Monopolist faces market demand
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14. Monopolistic competition
• Multiple firms produce similar products
• Firms face downsloping demand curves
• Profit maximization occurs where MC=MR
• In the limit, firms compete away economic
profits
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15. Monopolistic competitor in the
long run
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16. Oligopoly
• A few firms produce most market output
• Products may or may not be
differentiated
• Effective entry barriers protect firm
profitability
• Firm interdependence requires strategic
thinking
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

17. The Nash equilibrium
• An oligopolist does the best it can,
given expectations of rival behavior
• Behaviors are noncooperative
• Duopolists considering a low price or a
high price must consider rival’s
response
• Nash equilibrium occurs when each firm
does the best it can given rival’s actions
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

18. Determining the Nash equilibrium
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19. The Cournot model
• Duopolists A and B face industry demand
P=100-Q, Q=QA+QB
• Each firm takes the other’s output as fixed
E.g., PA=(100-QB*)-QA
• Marginal revenue for A is
MRA=(100-QB*)-2QA
• If MC=0, profit is maximized if
QA=50-.5QB, which is reaction function
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20. Cournot equilibrium
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21. Comparison of prices and output
among different equilibria
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22. The classic prisoners’ dilemma
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23. The cartel’s dilemma
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