Managerial

Economics, 6e
Chapter 9: Market Structure
and Long-Run Equilibrium

Froeb
Froeb etet
al.,al., Managerial
Managerial Economics,
Economics, 6th ©
6th Edition. Edition. © 2023AllCengage.
2023 Cengage. All Rights
Rights Reserved. Reserved.
May not May
be scanned, not be
copied scanned, or
or duplicated, copied
postedor
to a publicly
duplicated, or posted
accessible website, toorainpublicly
in whole part. accessible website, in whole or in part. 1
 Icebreaker: Interview Simulation
Think of some products that are likely to be in a more competitive
industry and some products that are likely to be in a more monopolistic
industry. What are the main differences between the two types of
industries?

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 2
 Chapter Objectives
By the end of this chapter, you should be able to:
• 09.01 Describe the rate of returns for firms in a competitive industry.
• 09.02 Identify the mean reversion exhibited by profits.
• 09.03 Differentiate between compensating wage differentials and compensating
risk differentials.
• 09.04 Explain the investor’s decision to move out of risky assets when the risk
premia become too small.
• 09.05 Summarize the impact of entry and imitation on eroding profits for
monopoly firms.

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 3
 Introduction

• Analyzing the success of a firm and the problem with predicting

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 4
 Competitive Industries (1 of 4)
• Characteristics of a perfectly competitive industry:
− Very elastic demand
− Many rivals and no cost advantages
− No entry/exit barriers
− Used as a benchmark to see long-run forces

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 5
 Competitive Industries (2 of 4)
• Fortunes of a perfectly competitive firm are closely tied to the industry
it competes in.
• A firm can earn above-average profit in the short run until the industry
reaches long-run equilibrium.
• In the long run, competitive firms earn only an average rate of return.

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 6
 Knowledge Check Activity 1
In the long run, which of the following outcomes is most likely for a
firm?
a) Zero accounting profits but positive economic profits
b) Zero accounting profits
c) Positive accounting profits and positive economic profits
d) Zero economic profits but positive accounting profits

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 7
 Knowledge Check Activity 1 - Answers
Correct Answer:
c) Positive accounting profits and positive economic profits

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 8
 Competitive Industries (3 of 4)
• When firms are in long-run equilibrium, economic profit is zero
(including opportunity cost of capital).
− ÿ�㕟�㕜�㕓�㕖�㕡 = (ÿ – �㔴�㔶) ∗ Ā
• Profit exhibits mean reversion, where the mean is zero economic profit.
• Short- and long-run analysis should not be confused.

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 9
 Competitive Industries (4 of 4)
• Return on investment revealed a strong tendency to revert to a mean
level.

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 10
 Knowledge Check Activity 2
If a firm in a perfectly competitive industry is experiencing average
revenues greater than average costs, in the long run, some firms will:
a) leave the industry and price will rise
b) enter the industry and price will rise
c) leave the industry and price will fall
d) enter the industry and price will fall

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 11
 Knowledge Check Activity 2 - Answers

Correct answer:
d) enter the industry and price will fall

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 12
 Discussion Activity 1
Relative to managers in more monopolistic industries, are managers in
competitive industries more likely to spend their time on reducing costs
or on pricing strategies?

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 13
 The Indifference Principle (1 of 4)
• Asset mobility moves an industry toward long-run equilibrium and
leads to the indifference principle.
• Labor, capital, and wages may move or adjust to restore equilibrium.
• Compensating wage differentials reflect differences in the inherent
attractiveness of various professions.
• Forces of competition allocate resources to where they are most
valued.

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 14
 The Indifference Principle (2 of 4)
• Impact of the housing meltdown in the late 2000s on labor mobility.
• Movement of capital between investments with different levels of risk.
• The higher return on a risky stock is the risk premium.

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 15
 Discussion Activity 2
At a university faculty meeting in 2020, a proposal was made to increase
the housing benefits for new faculty to keep pace with the high cost of
housing. What will likely be the long-run effect of this proposal?

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 16
 The Indifference Principle (3 of 4)
• In equilibrium, differences in the rate of return reflect differences in
the riskiness of an investment.

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 17
 The Indifference Principle (4 of 4)
• Investors often benchmark expected stock returns against the returns
from <risk-free= government bonds.
• One can make money by predicting how risk changes and anticipating
asset price changes.
• Volatility of today’s stock market gave rise to risk-on and risk-off
investing.

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 18
Think, Pair Share/Breakout Groups Activity
Apply long-run equilibrium analysis to the problem of deciding where to
live. Suppose San Diego, California is a more attractive place to live than
Nashville, Tennessee. What will happen in the short run and the long
run?

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 19
 Case Study Activity 1
Apple iPad
When the Apple iPad was first released, the elasticity of demand was
very low and demand was very high. Over the next several, Apple’s profit
eroded. Why do you think this happened?
Today, Apple is still making iPads very profitably. How do you think this
has been possible?

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 20
 Monopoly
• Monopolies have attributes that protect them from forces of
competition.
• Monopoly firm can earn an above-average rate of return for a relatively
long time.
• Monopolies are not permanently protected from forces of entry and
imitation.
• In the long run, even monopoly profit is driven to zero.

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 21
 Knowledge Check Activity 3
What is the main difference between a competitive firm and a monopoly
firm?
a) The number of customers served by the firms is different.
b) Monopoly firms are more efficient and therefore have lower costs.
c) Monopoly firms can generally earn positive profits for a longer time.
d) Monopoly firms enjoy government protection from competition.

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 22
 Knowledge Check Activity 3 - Answers

Correct answer:
c) Monopoly firms can generally earn positive profits for a longer time.

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 23
 Discussion Activity 3
Discuss and describe an important difference in the way an economist
and a businessperson might view a monopoly.

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 24
 Summary

Click the link to review the objectives for this presentation.

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 25
 Self Assessment Activity
A competitive firm’s profit-maximizing price is $18. At �㕀�㔶 = �㕀ā, the
output is 100 units. At this level of production, average total costs are
$14. The firm’s profits are:
a) $400 in the short run and long run
b) $400 in the short run and zero in the long run
c) $1800 in the short run and long run
d) $1800 in the short run and zero in the long run

Froeb et al., Managerial Economics, 6th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. 26