Sabtu, 14 November 2020

Managing in
Competitive,
Monopolistic, and
Monopolistically
Competitive Markets
Managerial Economics (ME)
Ahmad Jamli, Drs., M.A.

KELOMPOK 6:
ABSEN 15 : Firman Zahendra
ABSEN 16 : Friska Novrida Banjarnahor
ABSEN 17 : Harry Mosman
OBJECTIVE
• Identify the conditions under which a firm operates as perfectly
competitive monopolistically competitive, or a monopoly.
• Identify sources of (and strategies for obtaining) monopoly
power.
• Apply the marginal principle to determine the profit-
maximizing price and output.
• Show the relationship between the elasticity of demand for a
firms product and its marginal revenue.
• Explain how long-run adjustments impact perfectly
competitive, monopoly, and monopolistically competitive firms;
discuss the ramifications of each of these market structures on
social welfare.
• Decide whether a firm making short-run losses should continue
to operate or shut down its operations.
• Illustrate the relationship between marginal cost, a competitive
firm 筑 s shortrun supply curve, and the competitive industry
supply; explain why supply curves do not exist for firms that
have market power.
• Calculate the optimal output of a firm that operates two plants
and the optimal level of advertising for a firm that enjoys
market power.

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HOW TO DETERMINED MARKET
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MARKET STRUCTURE
Power of
Market Number of Barriers to
Examples Type of product firm over Non-price competition
structure producers entry
price

Perfect Parts of agriculture are

Many Standardized None Low None
competition reasonably close

Monopolistic Advertising and product

Retail trade Many Differentiated Some Low
competition differentiation

Standardized or Advertising and product

Oligopoly Computers, oil, steel Few Some High
differentiated differentiation

Monopoly Public utilities One Unique product Consider-able Very high Advertising

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WHAT IS MARKET STRUCTURE
The competitive environment in the market for any product is the market structure faced by
the firm,
• Is measured in terms of
• the number of the actual buyers and sellers plus potential entrants
• Barriers to entry and exit
• Capital requirements
• Price vs Non-price competition
• Etc
• Potential entrants pose a sufficiently credible threat of entry to affect price/output
decisions of incumbents

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TYPE OF MARKETS

The
Thefirm
firminincompetitive
competitivemarkets
markets Non-perfect
Non-perfectcompetition
competition

Perfect
Perfectcompetition
competition Monopoly
Monopoly

Oligopoly
Oligopoly

Monopolistic
Monopolisticcompetition
competition

Overview
Perfect Competition Monopolies Monopolistic Competition
• Characteristics and profit outlook. • Sources of monopoly power. • Profit maximization.
• Effect of new entrants. • Maximizing monopoly profits. • Long run equilibrium.
• Pros and cons.

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 Perfect
Competition
PERFECT COMPETITION
8
Video

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 Perfect Competition
Environment
• There are many buyers and
sellers in the market, each of
which is “small” relative to the
market.
• Each firm in the market
produces a homogeneous
(identical) product.
• Buyers and sellers have perfect
information.
• There are no transaction costs.
• There is free entry into and exit
from the market
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KEY IMPLICATIONS
• Firms are “price takers” (P = MR).
• In the short-run, firms may earn profits or losses.
• Entry and exit forces long-run profits to zero.

Unrealistic? Why Learn?

• Many small businesses are “price-takers,” and decision rules for such firms are similar
to those of perfectly competitive firms.
• It is a useful benchmark.
• Explains why governments oppose monopolies.
• Illuminates the “danger” to managers of competitive environments.
• Importance of product differentiation.
• Sustainable advantage.
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Profit maximization in a perfectly competitive market
Profit Maximization Imperative
• Normal profit is return necessary to attract and maintain capital investment.

• Efficient firms can earn normal profit.

• Inefficient firms suffer losses.

Role of Marginal Analysis

• Set Mπ = MR – MC = 0 to maximize profits.

• MR = MC when profits are maximized.

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Setting Price of Perfect Competition

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Profit-Maximizing Output Decision
• P = MC

• Marginal cost curve left of shutdown level (min. variable cost) is supply curve

• P = MR = MC = AC

• Firm produces at minimum of average costs! (optimal outcome for industry)

• In a constant-cost industry increase in supply will lead in the long term to constant

prices (i.e. horizontal supply curve.

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Graphically: Representative Firm’s Output Decision
EXAMPLE:

Profit = (P - ATC)  Q
e f*
• Given
MC • P=$10
$
ATC • C(Q) = 5 + Q2
AVC • Optimal Price?
Pe Pe = D f = • P=$10
MR
• Optimal Output?
ATC • MR = P = $10 and MC = 2Q
• 10 = 2Q
• Q = 5 units
• Maximum Profits?
Qf* Qf • PQ - C(Q) = (10)(5) - (5 + 25) =
NOTE,
ATC = AVERAGE TOTAL COST
$20
AVC = AVERAGE VARIABLE COST
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Sustain Short Run Losses or Shut Down?
Shutdown Decision Rules:

I. A profit-maximizing firm should continue to operate (sustain short-run

losses) if its operating loss is less than its fixed costs.
• Operating results in a smaller loss than ceasing operations.

II. Decision rule:

• A firm should shutdown when P < min AVC.

• Continue operating as long as P ≥ min AVC.

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Sustain Short Run Losses or Shut Down?
Short-run Firm Supply
– Competitive market price (P) is
Profit = (P - ATC)  Q < 0
e f*

MC ATC shown as a horizontal line

$
because P=MR.
AVC – Firm’s marginal-cost curve
shows the amount of output
ATC
Loss the firm would be willing to
P e Pe = Df = MR
supply at any market price.
– Marginal cost curve is the
short-run supply curve so long
Qf* Q f
as P > AVC (average variable
cost) . 17
The Decision to Shut Down • when price is less than the average variable cost of
production, the firm loses less by shutting down its
operation (and producing zero units) than it does by
producing Q* units.
• the market price is so low that it lies below the average
variable cost, as in Figure 8–5. If the firm produced Q*,
where P = MC in the range of increasing marginal cost,
it would incur a loss equal to the sum of the two shaded
rectangles in Figure 8–5. In other words, for each unit
sold, the firm would lose
• Now suppose that instead of producing Q* units of
output, this firm decided to shut down its operation. In
this instance, its losses would equal its fixed costs; that
is, those costs that must be paid even if no output is
produced. Geometrically, fixed costs are represented by
thetop rectangle in Figure 8–5 since the area of this
rectangle is

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Firm’s Short-Run Supply Curve: MC Above Min AVC

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Short-Run Market Supply Curve
Sample: The market supply curve is the summation of each individual
firm’s supply at each price.
Firm 1 Firm 2 Market
P P

S1 S2
SM

10 18 Q 20 25 Q 30 43 Q

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Long Run Decision
• If firms are price takers
but there are barriers to
entry, profits will
persist.
• If the industry is
perfectly competitive,
firms are not only price
takers but there is free
entry.
• Other “greedy
capitalists” enter the
market.
Effect of Entry on Price
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Long-Run Competitive Equilibrium
PRINCIPLE:
In the long run, perfectly competitive
firms produce a level of output such that,
P = MC
 Socially efficient output.
P = minimum AC
 Efficient plant size.
 Zero profits ,
• Firms are earning just enough to
offset their opportunity cost.
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Effect of Entry on the Firm’s Output and Profits for Long Run
• Marginal cost curve is the long-
run supply curve so long as P >
ATC.
• In long run, firm must cover all
necessary costs of production and
earn a normal profit.

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Long Run Equilibrium sample

• Long Run Normal Profit

Equilibrium
• With a horizontal market
demand curve, MR=P.
• P=MR=MC=ATC.
• There are no economic
profits.
• All firms earn a normal rate
of return.

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Breakeven Point
per unit Poff peak – break even price off peak. At
MC this price the firm expects to return
ATC only variable costs and can produce
AVC quantity Qoff peak
Ppeak D
Ppeak- break even price at peak. This is
when the firm expects to return both
B fixed and variable costs producing
Poff peak quantity Qpeak

Q peak
0 Qoff peak
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Competitive Market Supply Curve
• Market Supply With a Fixed Number of
Competitors
• Supply is the sum of competitor output.
• Market Supply With Entry and Exit
• Entry results in more firms, increased
output, a rightward shift in the supply
curve, and drives down prices and profits.
• Exit reduces the number of firms, decreases
the quantity of output, shifts the supply
curve leftward, and allows prices and
profits to rise for remaining competitors.

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Market Price Determination of Perfect Competition
Price per • Negatively sloped demand curve
unit ($) 10 Supply
• Positively sloped supply curve

8 P = –$0.254 + $0.000025
Q
6

4
P = $40 – $0.0001 Q
2
Demand

0 50 100 150 200 250 300 350 400

Quantity per time period (millions)

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Pasar persaingan sempurna adalah suatu pasar di mana jumlah penjual dan pembeli (konsumen) sangat banyak
dan produk atau barang yang ditawarkan atau dijual sejenis atau serupa.
Pasar persaingan sempurna merupakan pasar di mana penjual dan pembeli tidak dapat memengaruhi harga
sehingga harga di pasar benar-benar merupakan hasil kesepakatan dan interaksi antara penawaran dan
permintaan.

Summary of Logic Examples of Competitive Markets

• Short run profits leads to entry.
• Agricultural commodities.
• Entry increases market supply, drives down
the market price, increases the market • Some prominent markets for
quantity.
• Demand for individual firm’s product shifts intermediate goods and services.
down. • Unskilled labor market.
• Firm reduces output to maximize profit.
• Long run profits are zero. 28
Monopoly
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VIDEO
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Monopoly Environment
• Single firm serves the
“relevant market.”
• Most monopolies are “local”
monopolies.
• The demand for the firm’s
product is the market
demand curve.
• Firm has control over price.
• But the price charged affects
the quantity demanded of the
monopolist’s product.

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 8-32

“Natural” Sources of
Monopoly Power
• Economies of scale
• Economies of scope
• Cost complementarities
 8-33

“Created” Sources of
Monopoly Power

• Patents and other legal barriers (like licenses)

• Tying contracts
• Exclusive contracts
• Collusion
Contract...
I.
II.
III.
 8-34

Managing a Monopoly

• Market power permits you to

price above MC
• Is the sky the limit?
• No. How much you sell
depends on the price you set!
 8-35

A Monopolist’s Marginal Revenue

P
TR Unit elastic
100
Elastic
Unit elastic
60 1200
Inelastic
40

20 800

0 10 20 30 40 50 Q 0 10 20 30 40 50 Q
MR
Elastic Inelastic
 8-36
Monopoly Profit Maximization
Produce where MR = MC.
Charge the price on the demand curve that corresponds to that quantity.
MC
$
Profit ATC

PM VIDEO
ATC

QM Q
MR
 8-37
Alternative Profit Computation

  Total Revenue - Total Cost

  P  Q  Total Cost
 P  Q  Total Cost

Q Q
 Total Cost
 P
Q Q

 P  ATC
Q
   P  ATC  Q
 8-38

Useful Formulae

• What’s the MR if a firm faces a linear demand curve

for its product?

P  a  bQ
MR  a  2bQ, where b  0.
• Alternatively,
1  E 
MR  P  
 E 
 8-39

A Numerical Example
• Given estimates of
• P = 10 - Q
• C(Q) = 6 + 2Q
• Optimal output?
• MR = 10 - 2Q
• MC = 2
• 10 - 2Q = 2
• Q = 4 units
• Optimal price?
• P = 10 - (4) = $6
• Maximum profits?
• PQ - C(Q) = (6)(4) - (6 + 8) = $10
 8-40

Long Run Adjustments?

• None, unless the source of

monopoly power is eliminated.
 8-41

Why Government Dislikes Monopoly?

• P > MC
• Too little output, at too high a price.
• Deadweight loss of monopoly.
 8-42

Deadweight Loss of Monopoly

Deadweight Loss MC
$
of Monopoly ATC

PM

D
MC

QM MR Q
 8-43
Arguments for Monopoly
• The beneficial effects of economies of scale, economies of scope, and cost
complementarities on price and output may outweigh the negative effects of
market power.
• Encourages innovation.
 8-44

Monopoly Multi-Plant Decisions

• Consider a monopoly that produces identical
output at two production facilities (think of a firm
that generates and distributes electricity from two
facilities).
• Let C1(Q2) be the production cost at facility 1.
• Let C2(Q2) be the production cost at facility 2.
• Decision Rule: Produce output where
MR(Q) = MC1(Q1) and MR(Q) = MC2(Q2)
• Set price equal to P(Q), where Q = Q1 + Q2.
In conclusion, monopoly is only a seller but many buyers in a market.
A monopolist is selling unique product and the design and idea create by his
own. The seller is 'price maker', he decided to set the product price and
maximize the profit.

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Monopolistic Competition
Video
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Monopolistic Competition
Environment
• Numerous buyers and sellers
• Differentiated products
• Implication: Since products
are differentiated, each firm
faces a downward sloping
demand curve.
• Consumers view differentiated
products as close substitutes:
there exists some willingness
to substitute.
• Free entry and exit
• Implication: Firms will earn
zero profits in the long run.

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 8-48

Managing a Monopolistically
Competitive Firm
• Like a monopoly, monopolistically competitive firms
• have market power that permits pricing above marginal cost.
• level of sales depends on the price it sets.
• But …
• The presence of other brands in the market makes the demand for your brand more elastic
than if you were a monopolist.
• Free entry and exit impacts profitability.
• Therefore, monopolistically competitive firms have limited market
power.
 8-49

Marginal Revenue Like a Monopolist

P
TR Unit elastic
100
Elastic
Unit elastic
60 1200
Inelastic
40

20 800

0 10 20 30 40 50 Q 0 10 20 30 40 50 Q
MR
Elastic Inelastic
 8-50

Monopolistic Competition:
Profit Maximization
Maximize profits like a monopolist
• Produce output where MR = MC.
• Charge the price on the demand curve that corresponds to that quantity.
 8-51
Short-Run Monopolistic
Competition
MC
$
ATC
Profit

PM
ATC

QM Quantity of Brand X
MR
 8-52
Long Run Adjustments?
• If the industry is truly monopolistically competitive, there is free entry.
• In this case other “greedy capitalists” enter, and their new brands steal market share.
• This reduces the demand for your product until profits are ultimately zero.
 8-53

Long-Run Monopolistic Competition

Long Run Equilibrium
(P = AC, so zero profits) MC
$
AC

P*

P1

Entry D

MR D1
Q1 Q* Quantity of Brand
MR1 X
 8-54

Monopolistic Competition
The Good (To Consumers)
• Product Variety
The Bad (To Society)
• P > MC
• Excess capacity
• Unexploited economies of scale
The Ugly (To Managers)
• P = ATC > minimum of average
costs.
• Zero Profits (in the long
run)!
 8-55

Optimal Advertising Decisions

• Advertising is one way for firms with market power to
differentiate their products.
• But, how much should a firm spend on advertising?
• Advertise to the point where the additional revenue generated from
advertising equals the additional cost of advertising.
• Equivalently, the profit-maximizing level of advertising occurs where
the advertising-to-sales ratio equals the ratio of the advertising
elasticity of demand to the own-price elasticity of demand.

A EQ , A

R  EQ , P
 8-56

Maximizing Profits: A Synthesizing

Example
• C(Q) = 125 + 4Q2
• Determine the profit-maximizing output and price, and
discuss its implications, if
• You are a price taker and other firms charge $40 per unit;
• You are a monopolist and the inverse demand for your
product is P = 100 - Q;
• You are a monopolistically competitive firm and the inverse
demand for your brand is P = 100 – Q.
 8-57

Marginal Cost
• C(Q) = 125 + 4Q2,
• So MC = 8Q.
• This is independent of market structure.
 8-58

Price Taker
• MR = P = $40.
• Set MR = MC.
• 40 = 8Q.
• Q = 5 units.
• Cost of producing 5 units.
• C(Q) = 125 + 4Q2 = 125 + 100 = $225.
• Revenues:
• PQ = (40)(5) = $200.
• Maximum profits of -$25.
• Implications: Expect exit in the long-run.
 8-59

Monopoly/Monopolistic Competition
• MR = 100 - 2Q (since P = 100 - Q).
• Set MR = MC, or 100 - 2Q = 8Q.
• Optimal output: Q = 10.
• Optimal price: P = 100 - (10) = $90.
• Maximal profits:
• PQ - C(Q) = (90)(10) -(125 + 4(100)) = $375.
• Implications
• Monopolist will not face entry (unless patent or other entry
barriers are eliminated).
• Monopolistically competitive firm should expect other firms
to clone, so profits will decline over time.
 8-60

Conclusion
Monopolistic competition involves many buyers and sellers of products that are
closely related, but not identical where entry and exit are easy. It is the dominant
form of competition. Entrepreneurship is the best method for competing in
monopolistically competitive environments.
• Firms operating in a perfectly competitive market take the market price as given.
• Produce output where P = MC.
• Firms may earn profits or losses in the short run.
• but, in the long run, entry or exit forces profits to zero.
• A monopoly firm, in contrast, can earn persistent profits provided that source of
monopoly power is not eliminated.
• A monopolistically competitive firm can earn profits in the short run, but entry
by competing brands will erode these profits over time.
THANK YOU

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