Transcript Competition & Market Structures

Competition
&
Market Structures
I.
Competition
A. Four basic levels or degrees of
competition
B. There are costs and benefits to
each
C. Consumers benefit most from
vigorous competition
1. What
the
effects
competition?
Lowerare
Improved
Increased
More
efficient
prices
quality
variety
use and
of of
resources
innovation
D. Govt. oversees markets to ensure
adequate levels (FTC)
Levels of Competition Continuum
Most Competitive
Least Competitive
<---l---------------l----------------l--------------l-------->
Perfect
Monopolistic
Oligopoly
Monopoly
(or pure)
Competition
Competition
Each market structure has a series
of differentiating characteristics
Questions:
1. What is the least competitive
market?
2. What is the most competitive
market?
II.
Perfect Competition
A. Theoretically most competitive market
type
B. Conditions:
1.
2.
3.
4.
5.
6.
Large number of small businesses
Identical products
Independent, well-informed buyers & sellers
Free entry to and exit from the market
No advertising
Low profits, closely related to costs
C. Model (theoretical extreme) used to
evaluate other markets
D. Examples:
1. Nothing exactly
reflects perfectly
competitive
markets – close:
a. Local fruit and
vegetable farming
b. Local trucking
c. Computer chips
d. Industrial nuts and
bolts
III. Monopolistic Competition
A. Has all the
conditions of pure
competition, except
identical products
B. Second most
competitive market
structure
C. Conditions:
1.
2.
3.
4.
5.
Many firms
Product differentiation
Non-price competition
a.
Heavy advertising
Market (S&D) largely
sets price
Entry into the market
is easy
b.
relatively low startup costs
Exception is brand name.
D. Examples:
1.
2.
3.
4.
Women’s apparel
Shoes
Restaurants
Law offices
Questions:
3. What is the biggest difference
between perfect and monopolistic
competition?
4. What are the conditions or
characteristics of monopolistic
competition?
IV. Oligopoly
A. Market structure in
which a few large
sellers dominate the
industry
B. Conditions:
1. Few large firms
2. Product differentiation
a. Differentiated
Oligopoly
i.
Fair amount of
differentiation
b. Pure Oligopoly
i.
Homogenous
product
3. Some advertising
4. Entry into market is
difficult (high costs)
C. Examples
1. Auto Industry
2. Airline Industry
3. Iron ore Industry
4. Coal Industry
Differentiated Oligopolies
Pure Oligopolies
V.
Competition in oligopolistic
markets
A. When one oligopolist lowers prices, others follow
B. Collusion: when firms engage in formal
agreements to set prices or supply
1.
Cartels (OPEC)
C. Price-setting: a particular type of collusion
D. Both are illegal
1.
limits effects of competition, hurts consumer
Questions:
5. Why is entry into an oligopolistic
market difficult?
6. Why is it easier to collude in
oligopolies than monopolistically
competitive markets?
7. Why is there less competition in an
oligopoly than perfectly or
monopolistically competitive
markets?
VI. Monopoly
A. Market structure with one seller
dominating the market
B. Least competitive market
C. Conditions:
1.
2.
3.
4.
Extensive influence over price
No differentiation
Some advertising (mostly image)
Entry blocked
VII. Types
A. Natural Monopoly
1. Wasteful,
inefficient to
allow duplication;
cheaper due to
economies of
scale of a larger
firm (economies
of scale)
a. Gas and electric
companies
B. Geographic Monopoly
1. One seller — market won’t support two
due to geographic isolation
a. One drug store or bank in a small town
b. One gas station on a lonely stretch of a
desert highway
C. Technological Monopoly
1. Patent/copyright
2. 20 years
3. To encourage innovation
a. Can be abused (Xerox’s 100s of patents)
Strange Patents
D. Government Monopoly
1. Government owns and operates the
monopoly
Question:
8. How or why is California Edison a
natural monopoly?
VIII. Other limits to competition
A. Mergers
B. Acts of collusion
C. Requiring licensing
1. Beauticians/taxi drivers
a. lobbying
D. Trade barriers
1. Tariffs: tax on imports (domestic
protectionism)
2. Quotas: set number of imports (domestic
protectionism)
3. Embargos: refusing to trade with a country
(political coercion)
4. Blockade: physically blocking trade (political
coercion)
Questions
1. What’s a perfectly competitive market
like?
2. What is the difference between perfect
competition and monopolistic
competition?
3. What’s an oligopoly?
4. What is collusion?
5. Provide two examples of each market
structure
6. How do trade barriers limit competition?
Activity
Create a diagram or picture chart
indicating the unique characteristics
of each market structure on a sheet
of white paper folded into fourths