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Lecture Economics (9/e): Chapter 16 - David C. Colander

Chapter 16 - Real-world competition and technology. After reading this chapter, you should be able to: Define the monitoring problem and state its implications for economics; discuss why competition should be seen as a process, not a state; summarize how firms protect monopoly; explain why oligopoly is the best market structure for technological change. | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Define the monitoring problem and state its implications for economics Summarize how firms protect monopoly Discuss why competition should be seen as a process, not a state Explain why oligopoly is the best market structure for technological change 2 Short-Run vs. Long-Run Profit Firms care about both short-run and long-run profit Firms may not take full advantage of a potential monopolistic situation in the short run to strengthen their position in the long run Any expenditures on building a brand and a good reputation can reduce short-run profits but increase long-run profits 3 Managers’ Incentives and the Need for Monitoring Managers have an incentive to keep costs down, but their salaries are included in costs To address this problem, firms sometimes give managers incentive-compatible contracts in which the incentives of each of the two parties to the contract are made to correspond as closely as possible This creates a monitoring problem which is the need to oversee employees to ensure that their actions are in the best interest of the firm Employees’ incentives differ from the owner’s incentives 4 What Do Real-World Firms Maximize? Firms have complicated goals that reflect the organizational structure and incentives built into the system Although profit is one goal of a firm, often firms focus on other intermediate goals such as cost and sales Some firms do not push for cost efficiency and become lazy monopolists Lazy monopolists are firms that do not push for efficiency, but merely enjoy the position they are already in 5 The Fight between Competitive and Monopolistic Forces Competition is a process – a fight between the forces of monopolization and the forces of competition Self-interest-seeking individuals don’t like competition for themselves and may use political and social means to fight competition It is important to understand how the invisible | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Define the monitoring problem and state its implications for economics Summarize how firms protect monopoly Discuss why competition should be seen as a process, not a state Explain why oligopoly is the best market structure for technological change 2 Short-Run vs. Long-Run Profit Firms care about both short-run and long-run profit Firms may not take full advantage of a potential monopolistic situation in the short run to strengthen their position in the long run Any expenditures on building a brand and a good reputation can reduce short-run profits but increase long-run profits 3 Managers’ Incentives and the Need for Monitoring Managers have an incentive to keep costs down, but their salaries are included in costs To address this problem, firms sometimes give managers incentive-compatible contracts in which the incentives of each of the two parties to the contract are made to .