Managerial Economics Business strategy Chapter 8 Managing in Competitive, Monopolistic, and monopolistically competitive Markets Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Managerial Economics & Business Strategy Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets
Overview I. Perfectly Competition Characteristics and profit outlook Effect of new entrants II. Monopolies a Sources of monopoly power Maximizing monopoly profits Pros and cons III Monopolistic Competition Profit maximization ■ Long run equilibrium Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Overview I. Perfectly Competition Characteristics and profit outlook Effect of new entrants II. Monopolies Sources of monopoly power. Maximizing monopoly profits. Pros and cons III. Monopolistic Competition Profit maximization Long run equilibrium
Perfect competition many buyers and sellers Homogeneous product Perfect information No transaction costs Free entry and exit Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Perfect Competition • Many buyers and sellers • Homogeneous product • Perfect information • No transaction costs • Free entry and exit
Key implications Firms are price takers'(P=Mr) In the short-run, firms may earn profits or losses Long-run profits are zero Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Key Implications • Firms are “price takers” (P = MR) • In the short-run, firms may earn profits or losses • Long-run profits are 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 Iluminates the"danger'"to managers of competitive environments Importance of product differentiation Sustainable advantage Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 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
Managing a Perfectly Competitive firm (or Price-Taking Business) Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Managing a Perfectly Competitive Firm (or Price-Taking Business)
Setting Price Market Firm Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Setting Price Firm Qf $ Df Market QM $ D S P e
Setting Output MR=MC MR=P therefore Set p=mc to maximize profits Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Setting Output: • MR = MC • MR = P, therefore • Set P = MC to maximize profits
Graphically Profit=(Pe-ATC)×Q MC ATC AVc pe=Df= MR ATC Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Graphically $ Qf ATC AVC MC P e = Df = MR Qf* ATC P e Profit = (P e - ATC) Qf*
A Numerical Example GI Iven P=$10 C(Q)=5+Q Optimal Price? P=$10 Optimal Output? MR=P=$10 and MC=2Q 10=2Q Q=5 units Maximum profits? PQ-C(Q=(10(5)-(5+25)=$20 Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 A Numerical Example • Given P=$10 C(Q) = 5 + Q2 • Optimal Price? P=$10 • Optimal Output? MR = P = $10 and MC = 2Q 10 = 2Q Q = 5 units • Maximum Profits? PQ - C(Q) = (10)(5) - (5 + 25) = $20
