Chapter 23 (10 Micro)
Price-Searcher Markets with Low Entry Barriers
OUTLINE
I. Competitive Price-Searcher Markets
A. Firms in price-searcher markets with low entry barriers face a downward-sloping
demand curve.
2. Competition exists from existing firms and potential rivals.
B. An alternative term for such markets is monopolistic competition.
C. Product Differentiation
1. Price-searchers produce differentiated products-products that differ in design,
dependability, location, ease of purchase, or etc.
a. Rival firms produce similar products (good substitutes) and so each firm
confronts a highly elastic demand curve.
D. Price and Output in Competitive Price-Searcher Markets
1. Price and Output
(1). Its price will be lowered in the process and will continue until MR = MC.
b. The price charged by a price searcher will be greater than its marginal cost.
E. Profits and the Long Run
1. If existing firms are making economic profits, then rival firms will be attracted to
the market.
a. The entry of new firms will expand supply and lowering price.
F. Losses and Long Run
1. Economic losses will cause price searchers to exit from the market.
a. The demand for remaining firms will rise until the losses have been eliminated.
2. Price searchers can make either profits or losses in the short run, but only zero
economic profits in the long run.
II. Contestable Market and the Competitive Process
A. Contestable Markets
1. A contestable market is one in which entry and exit costs are low and there are no
2. Actual and potential competition from causes:
a. Zero economic profits.
216 Chapter 23 (10 Micro)/Price-Searcher Markets with Low Entry Barriers
b. Efficient production.
III. Evaluating Competitive Price-Searcher Markets
A. Allocative Efficiency
1. Allocative efficiency is achieved when most desired goods are produced at the
lowest possible cost.
2. Traditional economic theory criticized competitive price-searcher markets.
3. Recently economists have been more positive about competitive price-searcher
markets.
a. Consumers may value wider variety of quality and styles.
IV. A Special Case: Price Discrimination
A. Price Discrimination
2. Price discrimination can occur when a price searcher can:
3. Sellers may gain from price discrimination charging:
4. Price discrimination generally leads to more output and more gains from trade than
otherwise would occur.
V. Entrepreneurship and Economic Progress
A. Entrepreneurs
1. Entrepreneurial judgment is necessary when no decision rules can be applied with
available information.
B. Economic Progress
1. Entrepreneurs who discover and introduce lower-cost production and new products
promote economic progress.
2. Entrepreneurs also have a strong incentive to discover the type of business
structure, size of firm, and scope of operation that can best keep the per-unit cost of
products or services low.
C. Dynamic Competition, Innovation, and Business Failures
1. Business failures are usually reported as bad news about the economy.
Chapter 23 (10 Micro)/Price-Searcher Markets with Low Entry Barriers 217
OBJECTIVES
This chapter focuses on the intermediate cases between price takers (pure competition) and price
searchers with high barriers to entry (pure monopoly). Such price searchers face a downward–
sloping demand curve. However, they also face the ever-present threat of competition in the rivalry
sense. Price and output under these conditions are analyzed. Many economists believe that this
(monopolistic competition) model is highly relevant to broad segments of our economy, including
retail trade, housing construction, and small-scale manufacturing.
IMPORTANT POINTS AND TEACHING SUGGESTIONS
1. Although the term monopolistic implies a stranglehold, price searcher competition in the sense
of rivalry is the dominant characteristic of monopolistically competitive markets (price
2. Note that there are many similarities between price taking and price searching with low barriers
to entry. In neither case are there significant entry barriers to protect existing firms from new
3. For several decades, economists have debated the implications of the competitive price
searcher model for efficiency. Critics argue that they are inefficient because the firms fail to
4. Although it does not appear in our models, the role of the entrepreneur is important in making
5. The theory of contestable markets is a relatively recent development in economic theory and
6. It is important to note that the competitive price searcher model does not require zero profits
for all firms; it only must be true for the expectations (in present value terms) for marginal
potential entrants (though to the extent that inter-firm differences become expected, the
218 Chapter 23 (10 Micro)/Price-Searcher Markets with Low Entry Barriers
difference will be capitalized into the value of the asset or assets thought to be responsible).
7. Go through the logic of why price searchers (whether with high or low barriers to entry) have
8. Make sure that your classroom emphasis is on the competitive process, not on equilibrium
9. When the firm faces a downward-sloping demand curve, the relationship between product price
and marginal revenue is difficult for students to understand. Point out that MR will be less than
GAMES
1. Price Discrimination and Time Travel
Type: In-Class demonstration
Topics: price discrimination, consumer surplus
Textbook: Chapter 22 Price-Searcher Markets with Low Entry Barriers
Chapter 23 Price-Searcher Markets with High Entry Barriers
Materials Needed: none
Time: 10 minutes
Class limitations: works in any size class
Purpose
This example illustrates how a price discriminating price searcher can earn even higher profits
than a price searcher charging a single price. The example uses an imaginary time machine to look
at profits and consumer surplus. The cases of competition, monopoly, and price discriminating
monopoly are examined.
Instructions
Use student names in the demand for time travel shown below.
Steve wants to travel back in time to see the dinosaurs; he is willing to pay as much as $200 to use
the time machine
220 Chapter 23 (10 Micro)/Price-Searcher Markets with Low Entry Barriers
The demand curve for time travel is:
Price Quantity
$200 1
If Time Travel was a competitive industry, price would equal marginal cost ($100) and four trips
Price Quantity Total Revenue Marginal Revenue
$200 1 200 200
The single price monopolist will operate where MC = MR. Marginal cost is constant at 100, so the
Now examine the case of price discrimination. The price discriminating monopolist will charge
Chapter 23 (10 Micro)/Price-Searcher Markets with Low Entry Barriers 221
Prices Quantity Total Revenue Marginal Revenue
$200 1 200 200
The price discriminating monopolist will also operate where MC = MR. Marginal cost is still
constant at 100, but now the marginal revenue is the full amount of price paid by the additional
Points for discussion
The price discriminating monopolist produces more than the ordinary monopolist and earns higher
2. Market Structure Article
Type : Take-home assignment
Topics: market structure
Textbook: Chapter 22 Price-Searcher Markets with Low Entry Barriers
Chapter 23 Price-Searcher Markets with High Entry Barriers
Class limitations: works in any class
Purpose
This assignment integrates several concepts and relates them to a real world case. Students can
easily find examples of oligopoly, monopoly or competitive price-searcher markets. Some have
difficulty choosing the appropriate model to analyze their article, particularly for oligopolistic
industries.
Instructions
Ask the students to complete the following assignment.
222 Chapter 23 (10 Micro)/Price-Searcher Markets with Low Entry Barriers
Points for discussion
Chapter 23 (10 Micro)/Price-Searcher Markets with Low Entry Barriers 223
Name ____________________ Course ______________________
Price Searchers
Find an article in a recent newspaper or magazine that illustrates a market structure other than
pure competition.
Is it an example of monopoly, oligopoly, or a competitive price searcher market?
Do you think the firms in the industry are earning an economic profit? Are new firms likely to
enter this market?
3. Brand Names
Type: In-Class assignment
Topics: product differentiation
Textbook: Chapter 22 Price-Searcher Markets with Low Entry Barriers
Materials Needed: enough copies of the questions for each student
Time: 10 minutes
Class limitations: works in any size class
Purpose
This activity illustrates the importance of product differentiation in consumer products.
Instructions
Give the students the following quiz. Ask them to make their best guess if they are not certain
about a particular product. Assure them their grade will not be affected by their score on these
questions. After they finish, go through the questions product by product, asking the class to raise
their hands if they circled that product.
Common answers and points for discussion
Student answers will be spread across the various brands for each company. All their answers are
Chapter 23 (10 Micro)/Price-Searcher Markets with Low Entry Barriers 225
Name _____________________ Course ______________________
Brand Names
Identify the brands made by each company
1. Margarine. Unilever makes:
a. Imperial b. Promise c. Country Crock
e. Krona g. I
a. Perrier b. Arrowhead c. Poland Spring
d. Ice Mountain e. Vittel f. Contrex
3. Pet Food. Quaker makes:
4. Soap. Proctor and Gamble makes:
a. Safeguard b. Zest c. Ivory
5. Jeans. V.F. Corporation makes:
a. Lee b. Wrangler c. Rustler d. Girbaud
6. Pasta. Borden makes:
7. Coffee. Phillip Morris makes:
8. Consumer Electronics. Matsushita makes:
a. Panasonic b. Technics c. Quasar d. National
9. Vodka. Grand Metropolitan makes:
4. Equilibrium Price for Blue Jeans
Type : In-Class demonstration
Topics: product differentiation
Textbook: Chapter 22 Price-Searcher Markets with Low Entry Barriers
Materials Needed: none
Time: 5 minutes
Class limitations: works in any size class
Purpose
This assignment shows that market supply and demand graphs give an oversimplified picture of
price when products are differentiated.
Instructions
Ask the students to draw a supply and demand graph illustrating the market for blue jeans. After
they have drawn the graph, have them label the equilibrium price with a real dollar figure. This
dollar amount should reflect the price of jeans as accurately as possible.
Draw a standard supply and demand graph on the board. Ask a student for the equilibrium price.
Ask several more students for their prices.
Common answers and points for discussion
The class will have a whole range of prices for blue jeans, reflecting the range of blue jeans in the
HINTS FOR ANSWERING CRITICAL ANALYSIS QUESTIONS
5. Discovery is the primary function of the entrepreneur the discovery of products valued more
highly than costs and the discovery of lower cost methods of production. The models of
6. These answers must be purely subjective!
Chapter 23 (10 Micro)/Price-Searcher Markets with Low Entry Barriers 227
9.
resources are being used in inefficient firms. Firm failures are good for the economy. Business
17.
a. Total revenue: $0; $8,000; $14,000; $18,000; $20,000; $20,000; Total cost: $0; $5,000;
g. Because of the existence of economic profit, more boat dealers will open up in the area.
h.