Transcript Market Structures

Chapter 7
Market Structures
How are markets classified?
•
•
•
•
•
•
How many suppliers are there?
How large is each supplier?
Do the firms have any influence over price?
How much competition exists between firms?
What kind of economic product is involved?
Are all firms in the market selling exactly the
same product, or simply similar ones?
• Is it easy or difficult for firms to enter the
market?
Market structure- the type and
amount of competition between
firms operating in the same
industry.
Number of firms in the industry – are
there many firms with equal share
and unable to set the price, like
pizza places, or is it dominated by
a large firm like Wal-Mart?
Nature of the product – is it
homogeneous, which no one will
pay a premium for like salt, or like
Gucci or Coach
Barriers to entry – are there low start
up and maintenance cost, such as
a roadside stand, or does it require
lots of funding
Can the firms control the price? –
pharmaceutical companies can
control the price (for a set time)
because of patents, farmers have
no control and have to accept the
world price.
markets structures
markets structures
Perfect (Pure) Competition -ideal
market structure in which buyers
(consumers) and sellers
(producers), each compete directly
and fully under the laws of supply
and demand.
No one producers is large enough
to set the market price
Output occurs when MC=MB
• Ex. of a Perfectly
1. Large numbers of buyers
Competitive Market
and sellers act independently
• Salt, wheat, potatoes, etc.
4 conditions for pure competition:
2. Sellers offer identical
• However, pure competition is a
products - no difference in
hypothetical situation all
quality or brand names, no
systems are actually imperfect
need to advertise (milk or
• Very efficient in the long run
beef))
3. Buyers and sellers are well
informed about prices.
4. Few barriers: sellers can
enter or exit the market
easily- based on profit.
5. No control over prices. Price
is determined by supply and
demand.
In Perfect Competition:
1. Each sellers controls a very small % of the
market (because there are so many sellers)
2. Each seller can make independent decisions
because their actions will not affect others
3. Since it is exactly the same product, it is highly
elastic (lots of substitutes)
4. Firms can’t control the price (too many firms)
5. It is easy to enter or leave the market, so few
barriers to entry
Monopolistic Competition
Four Conditions:
• Many Firms
• Few barriers to entry
• Slight control over price
• Differentiation- Sellers
offer similar rather than
identical products. Not
perfect substitutes: (NONPRICE COMPETITION)
store location, store
design, manner of
payment, delivery,
decorations, service, etc
EXAMPLES:
• Software
• Fast food burgers
• Computer games
• Soft drinks
• Toothbrushes
• Can you think of more?
In Monopolistic Competition:
1. Each sellers controls a very small % of the
market (because there are so many sellers)
2. Same product but differentiated in some way
3. Since it is almost the same product, it is highly
elastic (lots of substitutes)
4. Non-price competition
5. Limited control over price (too many firms)
6. It is easy to enter or leave the market, so few
barriers to entry
Why are consumers willing to pay
more for one product than they are
for a similar one?
Fad/brand loyalty
Oligopoly
• use interdependent
pricing to respond
to the prices of
competitors
• Ex. NFL or Russian oil
and gas producers.
3 Conditions of Oligopolies:
1. Only a few large sellers. –
very interdependent, so
most complicated
2. Sellers offer:
Identical products - oil
Differentiated products - cars
3. Other seller cannot easily
enter the market. (this is
due to start-up costs,
government regulation,
consumer loyalty to
established products)
In Oligopoly:
1.
2.
3.
4.
Very few firms
Mutually interdependent decisions
Substantial barriers to entry
Potential for long-run profits (brand name is
important)
5. Shared market power
6. Considerable control over prices
How oligopolies control prices-legally
1. Price leadership- one of the largest
sellers in the market takes the lead by
setting a price. Others can then set prices
and control all the prices.
2. Price war- sellers undercut each other’s
prices to try to capture market share.
How
oligopolies
control price
illegally
3. Collusion-
secretly
agree to set production
levels or prices for
products. Is illegal and
carries heavy penalties
and fines.
4. Cartels- create
artificially high prices and
reduce quantity to
maximize profits.
*** illegal in the U.S. but
not in other countries- oil
and diamonds have
cartels- DeBeers
Why do Monopolies exist?
Monopolies exist when the following is true of a
market:
1. One seller of a unique product
2. No adequate substitutes available
3. Others cannot easily
enter the market b/c of entry-barriers
4. Companies have complete control over price
4 Types of Monopolies
Natural Monopolies
Geographic Monopolies
• One seller is most efficient due
•
to economies of scale
• Economies of scale- size of
seller allows them to use
resources more efficiently and
economically than many
different firms could
• Ex. Utilities, electric company,
cable services
Remote areas: the potential
for profit is so small that only
one seller chooses to enter a
market
Technological
Monopoly
• 1 company invents or
changes a product &
they have a monopoly
b/c they are the only
ones with this
technology. (Patent)
Government Monopoly
• provide basic necessities
like public utilities—water
and sewer services, roads,
bridges, canals
• In U.S. : monopolized by
state and federal
governments
In Monopoly:
1.
2.
3.
4.
5.
6.
One firm
No close substitute
Almost impossible to enter the market
Potential for long-run profits
Substantial market share
Absolute control over prices
Franchise
• A contract issued by a local authority that gives a single
firm the right to sell its goods within an exclusive market.
Ex. SCHS having Coca Cola vending machines.
• An individual can also enter into contract with a company
to open and operate a store/location under the companies
guidelines.
Antitrust
Legislation
T. Roosevelt
battling the
Railroad trust
• Trusts: large companies
like a monopoly. They
dominated Steel, Oil,
Sugar, Coal, Sugar,
meatpacking, etc.
• 1880s: gov’t began
regulating big business, to
prevent monopolies from
forming, and broke- up
existing monopolies.
Presidents Teddy
Roosevelt & Taft
Market Regulation
• Laissez-Faire: Prior to the 1880s this was the
relationship between business and the U.S.
government