Chapter 06 - Market Structure
CHAPTER 6
MARKET STRUCTURE
CHAPTER SUMMARY
This chapter presents an economic analysis of market structure. It starts with perfect
competition as a benchmark. Potential barriers to entry, that might limit competition, are
examined. Subsequently, the chapter analyzes monopoly, monopolistic competition, and
oligopoly. The chapter provides a brief introduction to elementary game theory. (Chapter
9 provides a more comprehensive treatment of game theory.)
CHAPTER OUTLINE
MARKETS
COMPETITIVE MARKETS
Firm Supply
Short-Run Supply Decisions
Long-Run Supply Decisions
Competitive Equilibrium
Strategic Considerations
Managerial Application: Entry in Low Carb Food
Superior Firms
Academic Application: Phantom Freight
BARRIERS TO ENTRY
Incumbent Reactions
Specific Assets
Scale Economies
Reputation Effects
Excess Capacity
Historical Application: Excess Capacity at ALCOA
Managerial Application: Entry in Consumer Electronics
Incumbent Advantages
Precommitment Contracts
Licenses and Patents
Learning-Curve Effects
Pioneering Brand Advantages
Exit Costs
Managerial Application: Government Restrictions on Exit
MONOPOLY
Profit Maximization
Unexploited Gains from Trade
6-1
, Chapter 06 - Market Structure
MONOPOLISTIC COMPETITION
Managerial Application: Monopolistic Competition in Golf Balls
OLIGOPOLY
Nash Equilibrium
Output Competition
Price Competition
Managerial Application: Price Wars
Empirical Evidence
Cooperation and the Prisoners’ Dilemma
Prisoners’ Dilemma
Cartels
Managerial Application: Collusion in the Lysine Industry
SUMMARY
TEACHING THE CHAPTER
Chapter 6 focuses on market structure, a concept that students must understand so they
can properly assess the business environment, which is an important component of the
analysis presented in later chapters of the text. There are several key concepts in this
chapter that will be referred to throughout the book. Most of the material in this chapter
is likely to be review, so instructors can determine the appropriate mix of class discussion
and problem solving that is needed for their students and the goals of the course. The
basics of game theory are presented in this chapter using the prisoner’s dilemma.
The Self-Evaluation Problems are graphical and quantitative in nature, serving as a good
review of the tools presented in the chapter. The Review Questions provide a good
review of the characteristics of market structure and other main concepts in the chapter.
There are several questions that provide additional review of the quantitative and
analytical concepts presented in the chapter and a few questions that review the concept
of a Nash Equilibrium, which is covered more fully in Chapter 9.
There are three Analyzing Managerial Decisions scenarios presented in this chapter.
The first, “United Airlines”, asks students to evaluate the costs of production and
determine which costs are most relevant in determining whether the airline should
continue to run a particular flight. The second, “Pricing and Investment Decisions”, is a
quantitative scenario that asks students to determine the profit-maximizing output for a
good and to consider how short-run capacity constraints might affect their choice of
output. Students are also asked to consider how they might behave in the long-run in this
industry. The third scenario “Entry Decision” asks students to evaluate how they would
behave as a Cournot competitor including determining whether there a first-mover
advantage exists in the market. (See the Solutions Manual for the answers to these
problems).
6-2
CHAPTER 6
MARKET STRUCTURE
CHAPTER SUMMARY
This chapter presents an economic analysis of market structure. It starts with perfect
competition as a benchmark. Potential barriers to entry, that might limit competition, are
examined. Subsequently, the chapter analyzes monopoly, monopolistic competition, and
oligopoly. The chapter provides a brief introduction to elementary game theory. (Chapter
9 provides a more comprehensive treatment of game theory.)
CHAPTER OUTLINE
MARKETS
COMPETITIVE MARKETS
Firm Supply
Short-Run Supply Decisions
Long-Run Supply Decisions
Competitive Equilibrium
Strategic Considerations
Managerial Application: Entry in Low Carb Food
Superior Firms
Academic Application: Phantom Freight
BARRIERS TO ENTRY
Incumbent Reactions
Specific Assets
Scale Economies
Reputation Effects
Excess Capacity
Historical Application: Excess Capacity at ALCOA
Managerial Application: Entry in Consumer Electronics
Incumbent Advantages
Precommitment Contracts
Licenses and Patents
Learning-Curve Effects
Pioneering Brand Advantages
Exit Costs
Managerial Application: Government Restrictions on Exit
MONOPOLY
Profit Maximization
Unexploited Gains from Trade
6-1
, Chapter 06 - Market Structure
MONOPOLISTIC COMPETITION
Managerial Application: Monopolistic Competition in Golf Balls
OLIGOPOLY
Nash Equilibrium
Output Competition
Price Competition
Managerial Application: Price Wars
Empirical Evidence
Cooperation and the Prisoners’ Dilemma
Prisoners’ Dilemma
Cartels
Managerial Application: Collusion in the Lysine Industry
SUMMARY
TEACHING THE CHAPTER
Chapter 6 focuses on market structure, a concept that students must understand so they
can properly assess the business environment, which is an important component of the
analysis presented in later chapters of the text. There are several key concepts in this
chapter that will be referred to throughout the book. Most of the material in this chapter
is likely to be review, so instructors can determine the appropriate mix of class discussion
and problem solving that is needed for their students and the goals of the course. The
basics of game theory are presented in this chapter using the prisoner’s dilemma.
The Self-Evaluation Problems are graphical and quantitative in nature, serving as a good
review of the tools presented in the chapter. The Review Questions provide a good
review of the characteristics of market structure and other main concepts in the chapter.
There are several questions that provide additional review of the quantitative and
analytical concepts presented in the chapter and a few questions that review the concept
of a Nash Equilibrium, which is covered more fully in Chapter 9.
There are three Analyzing Managerial Decisions scenarios presented in this chapter.
The first, “United Airlines”, asks students to evaluate the costs of production and
determine which costs are most relevant in determining whether the airline should
continue to run a particular flight. The second, “Pricing and Investment Decisions”, is a
quantitative scenario that asks students to determine the profit-maximizing output for a
good and to consider how short-run capacity constraints might affect their choice of
output. Students are also asked to consider how they might behave in the long-run in this
industry. The third scenario “Entry Decision” asks students to evaluate how they would
behave as a Cournot competitor including determining whether there a first-mover
advantage exists in the market. (See the Solutions Manual for the answers to these
problems).
6-2
