Transcript Competition and Market Structures

Competition and Market
Structures
Perfect Competition
Market Structure

Characterized by the degree of
competition among business in the same
industry

Types of Competition:
Pure Competition
Monopolistic Competition
Oligopoly
Monopoly




Perfect (Pure)
Competition

When a large number of buyers and
sellers exchange identical products
under five conditions
1)
There should be a large number of buyers
and sellers
2)
The products should be identical
3)
Buyers and sellers should act independently
4)
Buyers and sellers should be well-informed
5)
Buyers and sellers should be free to enter,
conduct, or get out of business
Perfect Competition

Under a Perfect Competition
 Supply
and demand set the
equilibrium price
 Each
firms sets a level of output that
will maximize its profits at that price

Imperfect Competition
 Refers
to market structures that lack
one or more of the five conditions
Monopolistic Competition


Meets all conditions of perfect
competition except for identical
products
Use product differentiation


Use non-price competition


Real or imagined differences between
competing products in the same industry
Advertising, giveaways, promotional
campaigns
Sell within a narrow price range to try
to raise the price = profit maximization
Oligopoly
A few large businesses dominate an
industry
 When one business makes a move, the
others usually follow



Ex: a price war…cuts in airline ticket
Sometimes results in collusion or pricefixing which is illegal

Collusion: formal agreement to set prices

Price-Fixing: charge the same
Monopoly

One seller of a product that has no close
substitutes

Natural Monopoly

Geographic Monopoly

Technological Monopoly

Government Monopoly
Natural Monopoly

More efficient for only one business to
produce the goods

Ex: Marta, Water co.

Government gives permission
Geographic Monopoly

No other business chooses to compete in
that area

Ex: small town drugstore

Professional sports teams
Technological Monopoly

Results from new discoveries and
inventions.

The government grants these monopolies
through the issue of patents and
copyrights

Patents: inventions

Copyrights: publish
Government Monopoly

Involves products people need that
private industry might not adequately
provide
Vocabulary
1.
Perfect
competition
2.
Non-price
competition
3.
Oligopoly
4.
Collusion
5.
Economies of
scale
A.
Market structure in which a few very
large sellers dominate the industry
B.
Market situation in which a large
number of well-informed and
independent buyers and sellers
exchange identical products
C.
The use of advertising, giveaways,
and other promotional campaigns
to convince buyers one product is
better than another
D.
A situation in which the average
cost of production fails as the firm
gets larger
E.
A formal agreement to set prices or
to otherwise behave in a
cooperative manner
Market Failures
Market Failures
►
►
Four conditions needed
►
Adequate competition must exist
►
Buyers and sellers must be well-informed; opportunities in
the market
►
Resources must be free to move from one industry to
another
►
Prices must reasonably reflect the cost of production,
including rewards
Failure occurs when these are altered
Inadequate Competition

Decrease of mergers and acquisitions

Inefficient resource allocation = no
incentive to use resources carefully

Reduced output = monopoly can retain
high prices by limiting supply

Large business can exert its economic
power over politics
Inadequate Competition

Failures on the Demand side are harder
to correct than failures on the Supply side

Supply side:


No competition exists if a monopolist
dominates
Demand Side

Buyers can be found but….how many want
hydroelectric dams, space shuttles, etc…
Inadequate Information

Consumers, businesspeople, and
government officials must have
adequate information about market
conditions

Information

Easy to find in want ads, sale prices in
newspaper

If difficult to find = market failure
Resource Immobility


Occurs when land, capital, labor, and
entrepreneurs stay with in a market

Returns are slow

Remain unemployed
Resources will not or cannot move to a
better market

The existing market does not always function
efficiently
Externalities


Unintended side effects
Negative


Positive


Harm, cost, or inconveniences suffered by a
third party
Benefits received by someone who had
nothing to do with the activity that created
the benefit
Market failures

Market prices that buyers and sellers pay do
not reflect the cost and/or benefits of the
action
Public Goods

Products that everyone consumes

Use by one individual does not diminish the
satisfaction or value to others

Uncrowded highways, flood control measures,
national defense, police and fire protection

Market is successful in satisfying individual
wants and needs; fails to satisfy them on
a collective basis

Government usually has to supply them
Vocabulary Review
1.
2.
3.
4.
5.
Market failure
Externality
Negative externality
Positive externality
Public goods
A.
B.
C.
D.
E.
An unintended side effect that
either benefits or harms an
uninvolved third party
An unwanted harm, cost, or
inconvenience suffered by a
third party because of actions
by others
Products that are collectively
consumed by everyone
A benefit received by third
party that had nothing to do
with the activity that generated
the benefit
Occurs when any one of the
four conditions necessary for a
competitive free enterprise
economy is significantly altered
The Role of Government
Antitrust Legislation

Trust: legally formed combinations of
corporations or companies

Antitrust laws prevent or break up
monopolies, preventing failures due to
inadequate competition
Federal Trade Commission

Competition in the market is protected
by the government through antitrust
legislation and the creation of the
Federal Trade Commission.

Federal Trade Commission: has the
authority to stop any unfair business
practices that reduce or limit competition
Antitrust Legislation
1890: Sherman Antitrust Act:1st law
against monopolies
 1914: Clayton Antitrust Act: outlawed
price discrimination
 1914: The Federal Trade Commission:
empowered to issues cease and desist
orders, requiring companies to stop unfair
business practices
 1936: Robinson-Patman Act: outlawed
special discounts to some customers

Government Regulation

Goal is to set the same level price and
service that would exist if a monopolistic
business existed under competition

Use: tax system to regulate businesses
with negative externalities

Prevents market failures
Public Disclosure

Requires businesses to reveal information
about

Products

Services to Public:


Banks, corporations, lending institutions
Provides information to prevent market
failures

“Truth in Advertising” laws (false claims)
Indirect Disclosure

Government support of the internet

Availability of Gov’t documents

Businesses post information
Modified Free Enterprise

Government intervention to encourage

competition,

Prevent monopolies

Regulate industry

Fulfill the need for public goods
Modified Free Enterprise

Today’s US Economy

Mixed of different market structures

Different business organization

Varying degrees of government regulation
Vocabulary Review
1.
Trust
2.
Clayton Antitrust
Act
3.
Price
Discrimination
4.
Robinson-Patman
Act
5. Cease and desist
order
A.
B.
C.
D.
E.
Strengthened previous
legislation regarding price
discrimination
Built on Sherman Antitrust
Act by extending
government powers
against monopolies
An FTC ruling requiring a
company to stop an unfair
business practice
Legally formed
combinations of
corporations or companies
Practice of charging
customers different prices
for the same product