Group 6

No. Full Name StudentID (S2)

1 Nguyễn Hải Âu 22118978
2 Trần Huỳnh Gia Bảo 22119118
3 Nguyễn Bá Gia Khánh 22118875
4 Nguyễn Hoàng Khánh Linh 22119026
5 Trương Huỳnh Bích Ngọc 22118625
6 Thái Hải Như 22119031
7 Lê Hải Yến 22118598
Deadline: 30/10/2023

CHAP 8: MARKET STRUCTURES

Name Part

Daizy LO1

Daizy: Making economic profit, breaking even, and shutting LO2

down in the short-run
Âu: The short-run marginal cost curve is the firm’s own supply
curve

Âu LO3

Khánh + Linh + Yến LO4

- Demand curve and marginal revenue curve for a monopolist //
Marginal revenue equals marginal cost // Monopoly and the
elasticity of demand // Demand and marginal revenue
- Monopoly profit
- Price discrimination
- Natural monopoly

Ngọc LO5

Bảo: Collusion and reaction + Using game theory to model LO6

collusion+Restrictive practices+Consequences of restrictive
practices
Ngọc: Entry deterrence

LO1 - understand what economists mean by ‘competition’ and ‘market

structures’ and the relationship between them
- When economists discussing about the “competitive” markets, they refer to the number of firms (how
many rivals) and how evenly thay are matched in the market.
- Market structure refers to the overall arrangement and the key characteristics of the particular market:
+ Number of buyers and sellers: the quantity of firms (sellers) and consumers (buyers)
 + The degree of differentiation between the goods/services offered by sellers: the degree to which
goods or services offered by firms are either homogeneous (similar) or differentiated (unique) in
the eyes of consumers.
⇒ In the market, with more homogeneous products, competition can be more
intense.
*For.eg: Coca and Pepsi, intensive competition between 2 firms in soft drinks industry,
with the nearly similar in taste of the product.
+ The degree of knowledge possessed by sellers and buyers: (information asymmetry): the
imbalance of the information between 2 parties about the transactions. One party will have more
information or knowledge than the other.
*For.eg: When buying a luxury watch, sellers know more about the history,
functions, attribute of the products than buyers. ⇒ This imbalance knowledge can
lead to the overpaying for the watch due to lack of information.
>< In contrast, when both parties have equal access to the information. Such as stock
market - with equal information to the all traders, markets will become more transparent
and efficient.
+ The extent of barriers/freedom to entry to and exit from a market faced by sellers and buyers: the
ease or difficulty for the new firm to enter the market and for existed firm to exit.
+ Include some factors such as: regulations, costs…

- Perfect competition: in this market, numerous sellers offer the identical products, its easy to entry and
exit the market. Each firm will have the full information about the price, products,.. An individual firm
has no control over the market price.
+ E.g: Agricultural industry, such as wheats, rices or corn where are the huge number of farmers
producing homogeneous products. BUT individual farmers have little control over the market
price, and consumers can be the same products w nearly same prices.
- Monopolistic competition: many firms offer similar but not identical products (just slightly different).
Freedom of entry and many companies have some control over their prices due to product differentiation
and marketing efforts (up branding level for their products).
+ E.g: Fast food industry, there are many fast-food chains in the world, which offers little bit
similar products. ( KFC, Texas, Jolibee, …) each firm has branding and differentia products
( unique menu, branding, marketing, history…)
- Oligopoly: small number of large firms dominating the industry. Due to the economies of scale,
regulation from government, branding… Their products can be similar or differentiate.
 + Global soft drink industry. Just having 2 significant brands such as Coca and Pepsi, these
companies control significant portion of the markets.
+ Or in smartphone industry, there are just few dominant brands such as Apple, Samsung,
Xiaomi,...
- Monopoly: Just 1 firm dominates the whole market, giving the firm absolute control over the both
products and prices. The entry acting is blocked due to legal or economics barriers
+ Vietnam electricity group (EVN) is the monopoly company in the electricity market in Vietnam,
without any competing of other company. This firm donominate whole market ( can be some
existence of solar power system offered by household)

PERFECTLY COMPETITIVE MARKET DEFINED

Characteristics of perfectly competitive market are:
- Numerous buyers and sellers
- There is no product differentiate , aka every firms produce and sell the identical and homogenous
products
- Perfect knowledge: buyers and sellers both have same knowledge about the products.
- Low barriers to entry and exit.
⇒ Due to these characteristics, no individual firm has the power to influence the market price. Firms
are considered "price-takers" as they must accept the market price for their goods or services. The
concept of perfect competition is theoretical and rarely observed in the real world due to variations and
imperfections within markets.

LO2 - identify when a perfectly competitive firm will maximize profit, break-
even and shut down in the Short-run
In the competitive market, firm will be consider a price-taker ( a firm or individual has no control over
the price at goods and services it sells or buys. It must accept the market price, no matter how much
products it produce)
⇒ The firm can sell amap it want at the market-determined price, but CANT influence that price by
altering its output.
- The firm marginal revenue (MR) from selling additional units of output remains constant
and equal to the market price (P) ⇒ MR = P
+ E.g: lets consider about the rice, farmers are the price-taker, so they have no control over
or any influence on the price. If a farmer sells 100 tons rice with 100M VND/ ton, and
100M/ton VND is the market price, he has to sell with 100M/ton vnd no matter he want
to increase the outputs ( from 100 tons to 200 tons) he has to follow up the 100M/ton.
- The marginal revenue curve (MR curve) always has double the slope of AR curve. Cuz the MR curve
shows the change in total revenue from selling 1 more unit of output. (MR = ΔTR / ΔQuantity of product)
While AR curve shows total revenue divide by the quantity of output sold (R/ Quantity of product)
- The AR curve for the firm in perfect competition is horizontal, as the market price remains the same
regardless of the quantity produced. Cuz AR curve is flat (perfectly elastic)
 + The quantity demanded changes infinitely with any change in price. Consumers are
willing to buy any amount of a good at a specific price, but they won't buy any more if
the price increases even slightly.
+ A perfectly elastic demand curve is represented as a horizontal line cuz the quantity
demanded remains the same regardless of the price. Hence, its slope is zero.

⇒ in the figure, the equilibrium price determines the firm’s optimal Q ( MR = MC). Equilibrium
price at 5 which has 25 units. Individual firm’s MR (and AR) will be $5 at every level of output as
indicated by the horizontal marginal revenue curve.

MAKING ECONOMIC PROFIT, BREAKING EVEN, AND SHUTTING DOWN

IN THE SHORT-RUN

(Figure 8.2: A profit-making (and maximising) situation)

- The optimal Q (where MR = MC) is 32.5 units
- The average total cost (ATC) of production is $5.50
Formula: Total economic profit = (AR – ATC) x Q = ($8 – $5.50) x 32.5 = $2.5 x 32.5 = $81
(Figure 8.3: A break-even situation)
- Describe the situation that the firm achieves the zero economic profit.
- In this situation, the AR at $5.4. The MR is also $5.4. This equilibrium output point is identified
as the one where MC equals MR, i.e., the point where the firm maximizes profit. At this
production level, the average total cost (ATC) of production is also $5.40, reflecting the lowest
point on the average total cost curve.
- Both the AR and average TC are equal ($5.40). Therefore, the resulting economic profit at the
output quantity of 28 units is ($5.40 - $5.40) * 28 = $0 * 28 = $0.
⇒ This value of $0 signifies that the firm is neither incurring a loss nor making a profit,
effectively breaking even at the given production level and cost structure.

(Figure 8.4: A loss minimising situation)

- At this output level, ATC of production is $5.50, which is higher than AR of $4.
- The total economic profit is calculated using the formula: (Average Revenue – Average Total
Cost)* Quantity, yielding ($4 - $5.50) x 25 = -$1.50 x 25 = -$37.50. This negative value indicates
an economic loss of $37.50.
(Figure 8.5: A shut down situation)
- Shut down situation happens when average revenue does not cover its average variable cost
- AR < AVC – even at the Q where MR = MC.

Explain the short-run marginal cost curve is the firm’s own supply curve

Marginal Cost Curve (MC) represents the additional cost incurred by a firm when producing one
more unit of output.

Short-Run Supply Curve (Q) *Market Price (P):

- MC(*Q) > P → firms sell a bit more, they have more profit but
the production cost is less than the market price.

- MC(*Q) < P → firm sell less so they loose, better to stop

producing.

Example *Market Price (P): 10 cái bánh (Q) sản xuất vs chi phí 10 đồng (MC)
-MC(*Q) > P → tức là sản xuất nhiều bánh hơn nên chi phí cũng cao
hơn ⇒ tăng lợi nhuận nhưng chi phí sản xuất cao so với P.

- MC(*Q) < P → tức sản xuất ít bánh hơn nên chí phí thấp hơn ⇒
thua lỗ.

⇒ the firm is take pricer, will break even ⇒ maximize profit or minimize losses by producing
the quantity of output at which MC(*Q) = P

LO3 - explain why perfectly competitive firms will tend to break-even in the
long-run

- Break-even → refers to a financial state in which a business or individual's total revenue

equals their total costs, resulting in no net profit or loss, when an entity breaks even, it has
covered all its expenses but has not generated any profit.

- Perfectly competitive firms tend to break even in the long run due to the characteristics and
dynamics of a perfectly competitive market because:
+ Many Competing Firms: numerous firms produce identical or homogenous products -->
no product differentiation, and consumers view the products of all firms as perfect
substitutes for one another.
+ Ease of Entry and Exit: There are no significant barriers to entry or exit --> firms can
enter or exit the market relatively easily in the long run.
+ Price Takers: Perfectly competitive firms are price takers, meaning they cannot influence
the market price. They must accept the prevailing market price for their product,
regardless of the quantity they produce.
⇒ Specific in 2 case below

Case 1 Case 2
High Initial Equilibrium Price Low Initial Equilibrium Price

1. equilibrium price high → firms enter the
market to earn profit
2. firm enter market → the market supply
increase (curve shifts rightward)
3. supply increase → equilibrium price decrease
4. equilibrium price falls → Downward Shift in
AR & MR Curve
5. economic profit decrease
⇒ The process keeps happening while-ever the
firms are making profit → stop when no more
1. equilibrium price low → firm maybe
economic losses → exit the market altogether in
search of profits elsewhere
2. firm exit the market due to these losses → the
market supply decreases (curve shifts leftward)
3. supply decrease →equilibrium market price
increase. As the price rises, it narrows the gap
between the market price and the average total
cost (ATC) for firms.
4. market price rise --> Upward Shift in AR &
MR Curve
 eco profit made by any firm → will run to no 5. economic profit decrease
profits in the long run
⇒ The process will continue until the
equilibrium market price has risen just enough
to cover the minimum long-run average total
costs (breaking even) → no incentive to leave
the market

LO4 - understand the operation of a market where there is no competition at

all (i.e. monopoly)
DEFINITION AND CURVES
• Monopoly: the operation of a market where there is no competition at all.
• So the monopolist who doesn't face competition can benefit from much higher selling prices (the market
power is maximised under monopoly conditions).
• Monopoly faces a downward sloping demand curve, so setting higher prices at a lower level of output is
possible.
• Under a monopoly, the marginal revenue is not equal to market price.

- In figure 8.10, a perfectly competitive firm gains or loses exactly the market price (p*) when it changes
the quantity produced by one unit. To maximise profits, the firm produces the quantity where
marginal cost equals marginal revenue, which in the competitive case also equals price.
- A monopolist also chooses the level of quantity where marginal cost equals marginal revenue. For a
monopolist, marginal revenue is lower than price and marginal revenue = marginal cost -> marginal
cost less than price.
- When demand curves are very elastic (relatively flat), prices do not fall much when output increases
(Figure 8.11).

- The larger the elasticity of demand, the smaller the discrepancy between marginal revenue and price
(elasticity càng lớn thì chênh lệch doanh thu và giá càng nhỏ) .

- As the price is lower, goods can be sold more -> increase the demand -> decrease marginal revenue. To
maximize profit by monopolist, marginal revenue = marginal cost (Figure 8.12).

MONOPOLY PROFITS
- Maximise profits by setting MR = MC.
- Profits = difference between revenues and costs → Distance between Total cost curve and Total
revenue curve. (khoảng cách giữa doanh thu và chi phí = lợi nhuận của công ty)
- Pure profit/Monopoly rent (Lợi nhuận thuần túy/Thuê độc quyền): an extra return that monopolist
enjoys because it has been able to reduce its outputs & increase its price from the level that would have
prevailed under competition (nhờ cạnh tranh mà có được lợi nhuận này nên chiếm ưu thế và không bị mất
tiền cost cho produce nhiều output) → Can sustain for long run because it is a monopoly structure so
there are barriers to entering the market → Can retain the monopoly power.
- If the demand curve is lower than the cost curve → Result in loss → firm’s ‘profit-maximising’
output becomes its ‘loss-minimising’ output → The company will fail if demand in the monopoly
market is really low for the product or the cost to produce it is really high.

PRICE DISCRIMINATION
- Charging different prices to different customers or in different markets → Based on income and
geography (học trong PE) → Nhiều nước đang phát triển/kém phát triển không thể mua món đồ đó với
giá như ở các nước phát triển → Có chính sách này sẽ giúp increase profit ở các nước đó.

- Within a country, a monopolist can also practise price discrimination if resale is difficult and if it can
distinguish between buyers with high and low elasticities of demand.
Example: Khi các hãng máy bay phân loại khách đi vì lý do business hay đi chơi/nghỉ dưỡng, thường sẽ
charge tiền vé ở những thời điểm khác nhau như những phút cuối giá sẽ rẻ hơn dành cho những khách đi
công tác đột xuất nhằm raise their use for the next time vì đây là tệp khách hàng thường xuyên sử dụng
service.

NATURAL MONOPOLY
● The technology needed to produce a good can sometimes result in a market with only one or
very few firms. ⇒ công nghệ càng tối tân, hiện đại thì rất outstanding với competitors.

● Natural monopoly occurs whenever the average costs of production for a single firm decline as
output increases up to levels equal to, or beyond, the foreseeable total market demand.

⇒ Sẽ hiệu quả và tiết kiệm chi phí hơn nếu một công ty duy nhất sản xuất và cung cấp G&S
cụ thể thay vì có nhiều công ty cạnh tranh trên thị trường.

⇒ thường sẽ xảy ra trong các ngành có tính quy mô lớn (ngta tận dụng được economics of scale -
có lợi thế về cơ sở hạ tầng chuyên dụng, công nghệ hiện đại bla bla) nên average costs (cost per
unit) sẽ giảm khi quy mô sx tăng.

● A natural monopolist is protected by the knowledge that it can undercut its potential rivals.

● Since entrants typically are smaller and average costs decline with size, the average costs of
new firms are higher ⇒ the monopolist feels relatively immune from the threat of entry.

⇒ monopolist can set lower prices than potential competitors ⇒ difficult for new companies enter
this market vì mới vô thì vẫn là small comp, average costs cao, price thành phẩm cao, giá cả kh
cạnh tranh được với mấy thằng lớn lâu năm trong nghề.

⇒ kh cần lo gì cạ, đảm bảo cung thì sẽ có cầu ổn định nên setting marginal revenue equal to
marginal cost.(chi phí biên = lợi nhuận biên ⇒ tối đa hoá lợi nhuận)

● The size of the market depends largely on transportation costs. If, somehow, the cost of
transporting were lowered to close to zero, then there would be a national market for that
product.
 ⇒ Many firms then would be competing against each other, the size of the national market is far
larger than the output at which average costs are minimised. (comp vẫn có thể sản xuất nhiều hơn
mức sản lượng tối ưu mà vẫn có khả năng cạnh tranh).

LO5 - understand imperfect competition and explain the model of

monopolistic competition

IMPERFECT COMPETITION
- An economic concept used to describe marketplace conditions that render a market less than perfectly
competitive, creating market inefficiencies that result in losses of economic value.

- Two models of imperfect competition: monopolistic competition and oligopoly.

- The firm faces a downward - sloping demand for its product is the common characteristic that all
types of the markets (perfectly competitive model - monopolies - imperfectly competitive model).

- In the case of a (pure) monopoly, because the monopoly firm is the only firm producing and
supplying the product, the firm’s demand curve is identical to the market demand curve ⇒
Dependable on the elasticity of demand (can less or more).

- In the case of imperfectly competitive firms (i.e. those in markets somewhere ‘between’ the perfectly

competitive and monopolistic ‘extremes’) ⇒ Depend on the elasticity of demand ( much more about
how they differentiate their product with their rival and win the market’s loyalty → to catch
monopoly power).

MONOPOLISTIC COMPETITION
- When an industry has too many manufacturers of the same product, each company's products are
close but imperfect substitutes.

Example: Figure 8.16 - In the clothing market, when we have countless choices and close substitutes,
companies have the same price, the market will be divided equally among everyone → If the demand
curve tends to decrease, companies will not be affected much because they will share profits equally.

However, if a company suddenly lowers its price compared to the equilibrium price, it will win the
market and take away customers from rival companies. On the contrary, if the company raises prices
more than the standard level, the company will lose customers to others.
- MR=MC → Best choice to produce because price > average costs ⇒ Monopoly power.

- Existing firms are earning monopoly profits → More new competitors enter the market until profits
are driven to zero (perfectly competitive model) ⇒ Distinction between monopolies vs monopolistic
competition.

LO6 - understand the model of oligopoly and how it helps to explain the
operation of imperfectly
competitive markets where there are only a few firms.

COLLUSION AND REACTION

Collusion is a secret agreement between two or more businesses to act jointly in order to restrain
competition and maximize profits. It is illegal in many countries, but it is still practiced in some
industries.

Cartels are groups of companies that formally collude. OPEC is a well-known example of a cartel.
However, cartels are relatively rare, as they are difficult to form and maintain.

More common is tacit collusion, which occurs when firms understand that they will all benefit if they
restrict output or raise prices, even if they do not have a formal agreement to do so. Tacit collusion can be
facilitated by a number of factors, such as a small number of firms in the industry, high barriers to entry,
homogeneous products, stable demand, and government policies that support collusion.
Collusion can have a number of negative consequences for consumers, such as higher prices, lower
output, and less innovation. For example, if firms in the oil industry collude to restrict output, this will
drive up the price of oil. This will harm consumers, who will have to pay more for gasoline and other oil-
based products.

1. Challenges of Maintaining Collusion

Maintaining collusion can be difficult, even in industries where the conditions are favorable. Firms have
an incentive to cheat by increasing output or lowering prices, as this can give them a competitive
advantage over the other firms in the cartel.

To deter cheating, cartel members may engage in a variety of strategies, such as monitoring each other's
output and prices, and imposing sanctions on firms that cheat. However, these strategies are not always
effective, and cartels often collapse due to cheating.

2. Role of Price Leaders

In some industries, there may be a single firm or a small number of firms that play the role of price
leaders. This means that these firms set prices in the industry, and other firms follow suit. Price leadership
can make collusion easier, as firms do not need to have a formal agreement to collude.

However, price leadership is also not always effective. If the price leader sets the price too high, other
firms may be tempted to cheat by lowering their prices. Additionally, the price leader may not have the
same interests as the other firms in the industry. For example, the price leader may be interested in
maximizing its own profits, even if this means that other firms in the industry lose money.

USING GAME THEORY TO MODEL COLLUSION

Collusion among oligopolists is a complex economic phenomenon in which firms in a concentrated
market cooperate to restrict output or raise prices in order to maximize their collective profits. This can be
achieved through a variety of mechanisms, such as formal agreements, tacit understandings, or industry-
wide norms.

The prisoner's dilemma is a game theory model that can be used to understand the challenges of
maintaining collusion. In the prisoner's dilemma, each player has an incentive to defect, even if
cooperation would be the better outcome for both players. In the context of collusion, this means that each
oligopolist has an incentive to increase output or lower prices, even if this would lead to lower profits for
all oligopolists.

There are a number of factors that can make collusion more or less difficult to maintain. These include the
number of firms in the market, the level of transparency between firms, the ability to monitor and enforce
agreements, and the severity of penalties for cheating.
Despite the challenges, collusion does occur in a variety of industries. Some notable examples include the
US airline price-fixing scandal of 2001, the European bank interest rate rigging scandal of 2007, and the
Japanese LCD price-fixing scandal of 2015.

Collusion can have a number of negative consequences for consumers, including higher prices, lower
output, and less innovation. Governments typically take a strong stance against collusion, enforcing
antitrust laws and making it easier for new firms to enter the market.

RESTRICTIVE PRACTICES
Oligopolistic firms engage in restrictive practices to limit competition and increase profits. These
practices can be either vertical (between firms at different levels of the supply chain) or horizontal
(between firms at the same level of the supply chain).

Vertical restrictions include exclusive territories and exclusive dealing. Exclusive territories give a
wholesaler or retailer the exclusive right to sell a good within a certain region. Exclusive dealing involves
the supply of goods or services on condition that the purchaser buys goods or services from a particular
third party, or a refusal to supply because the purchaser will not agree to that condition.

Horizontal restrictions include predatory pricing and resale price maintenance. Predatory pricing is the
practice of selling a product or service at a very low price, with the intention of driving competitors out of
the market or dissuading them from attempting to compete. Resale price maintenance is a practice in
which a producer insists that any retailer selling his product must sell it at the retail price the producer
specifies.
 ● Consequences of restrictive practices
Firms engaging in restrictive practices often claim that they are doing so to enhance economic efficiency.
However, restrictive practices often have the opposite effect. For example, exclusive territories can limit
the ability of firms to distribute their products efficiently. Exclusive dealing contracts can force rival
firms to set up their own distribution systems, at great cost. Predatory pricing can drive competitors out of
the market, reducing competition and leading to higher prices. Resale price maintenance can also lead to
higher prices, as retailers are prevented from competing on price.

ENTRY DETERRENCE
- Besides restrictive practices, oligopolies can use entry deterrence to prevent the entry of new
companies.

- Limit the number of firms — the fewer the firms to enter the market, presumably the weaker the
competitive pressure → Natural barriers to entry such as possession of a key input.

- Engage in practices to maintain their position (bribery to the government, maintain its

patent as long as possible, etc).

- Predatory pricing - is a pricing policy pursued by one or a group of businesses to harm competitors or
exploit consumers → illegal, but due to changing technology and changing needs → difficult to
distinguish between predatory pricing and price cutting in order to meet competition.

- Firms can also build more production facilities than are currently needed → sends a signal to
potential entrants → It is a fierce price competition (High risk when entering).

- Sunk costs help these strategies are more effective → Does not earn good profits because price =
MC must be set ⇒ Do not want to enter.