Micro Chapter 11
Price-Searcher Markets with High Entry Barriers
6 Learning Goals1) Name the reasons why entry barriers can be
high2) Characterize and explain the output decisions
of a monopoly firm3) Identify the characteristics of an oligopoly
market4) Explain the output decisions of an oligopoly
firm5) List the problems caused by high entry barriers6) Consider government policies that can
counteract the problems caused by high entry barriers
Why are Entry Barriers Sometimes
High?
An entry barrier is something that prevents you from opening a business in a particular industry
Preventions:(1) Sometimes you just need to start as a really big firm(2) Another firm may have a license or patent that precludes you (3) Somebody else owns the vital resource
Entry barriers create market power
If no new firms can enter the market to steal customers and profits, the existing firms behave differently
Characteristics of Monopoly
A true case of monopoly is actually rare
No substitute product is a requirement
Similar to monopolistic competition, the firm now decides price and output
The firm is the market (i.e. market demand curve = firm demand curve)
Continue to produce as long as MR > MC
Price
Quantity/time
d
P
MR
q
MC
ATC
C B
A and price P (along the demand curve) will be charged.
Price and Output Under Monopoly• The monopolist will reduce
price and expand output as long as MR > MC.
MR > MCMR < MC
• The monopolist will raise price and reduce output whenever MR < MC.
• Output level q will result …
• At output q the average total cost is C.• As P > C (price > ATC) the firm is making economic profits equal to the area PABC.
Economicprofits
If there is no substitute, why not set price at $1 million?
The firm will set price according to market demand (i.e. willingness to pay)
In the SR the firm can earn positive economic profit
Will LR profits be pushed to zero?
No, because of entry barriers
No new firm can enter and take profit away
Is the monopolist guaranteed SR and LR profit?
SR and LR profit can be positive, negative, or zero
The Characteristics of an Oligopoly
The key characteristic is interdependence among firms which leads to strategic behavior
Game theory is often used to analyze oligopolies
John Nash won the Nobel prize in economics for his pioneering work that was later used in this area
Recall the other 3 industries:
A perfectly competitive firm is not concerned about any other firm
A monopolist doesn’t have another firm to consider
A monopolistically competitive firm is only somewhat concerned about what other firms are doing
An oligopoly firm is greatly concerned about what the other firms in the industry are doing
Each firm will base part of its own decisions on what they think other firms are doing or will do
Price and Output under Oligopoly
Each analysis really becomes a case-study because:
Sometimes oligopolists will act like perfectly competitive firms
Sometimes they’ll act like monopolists
Many times they switch between the two (act one way for awhile then another)
Ceteris paribus, what would make a firm better off?
A higher price for its productHow could this be achieved?If output were kept low, price would generally riseWould one firm voluntarily or even have an incentive to keep output low?Probably not because the other firms would increase production, lower price, and steal customers
What if the firms jointly agreed to keep production low?
This would generally be good for all firms
But the incentive to cheat would be so great that the agreement probably wouldn’t last long
Defects of Markets with High Entry
Barriers
Generally, the outcomes of monopoly and oligopoly are not as desirable as with perfect competition
Output is lower
Price is higher
Some gains from trade are not realized
Variety is lower
Policy Alternatives When Entry Barriers
are High
Four options to “fix” the industry:
1) Antitrust Policy (Sherman Act, Clayton Act, FTC, etc)
2) Reduce artificial barriers
3) Regulate price and output
4) Government production