Chapter 6, Section 2 – Imperfectly Competitive Markets
Oligopolies – market structure in which a few large sellers control most of the production of a good or
service
3 conditions: only a few large sellers
sellers offer identical or similar products
other sellers can’t enter market easily
Oligopolies at work (Oil Companies)
Non-price Competition – differentiation through advertising; development of brand
name loyalty
Interdependent Pricing – responding to pricing actions by competitors in the market
Examples:
If one producer raises prices, others will follow
If one producer offers a new model, others will follow
Price Leadership – when one of the largest sellers in the market takes the lead
by setting a price for its product, causing other producers to change their prices
Price War – when sellers aggressively undercut each other’s prices in an
attempt to gain market share.
Collusion – when sellers secretly agree to set production levels or prices for their
Products.
It is illegal – destroys competition, causes prices to rise, leads to decrease in
choices
Cartels – when companies openly organize a system of price setting and market sharing
It is illegal in the US, but we can’t control other countries.
Example: OPEC (Organization of Oil Exporting Companies) controls oil
production and pricing
Monopolies – market structure where one seller dominates the market. No competition exists.
3 conditions: there is a single seller
no close substitute goods are available
other sellers can’t enter the market easily
Types of monopolies
Natural Monopoly – competition is inconvenient and impractical.
One producer can provide a product or service more efficiently than many.
Usually it is because of economies of scale – the seller’s size allows it to use its
factors of production more efficiently and economically than if the same
resources were divided among several smaller producers.
Examples: public/private utilities (PG&E); cable TV service
Very expensive start-up costs.
If several power companies tried to compete for your business – each would
have to have it’s own transmission lines, transformers, etc.
Geographic Monopoly – exists when a market’s potential profit is so limited by its
geographic location that only a single seller can make enough to stay in business.
This is rare in America now.
Because of communications, mobility of society, etc.
Example: Mom and pop grocery store out in the country.
Technological Monopoly – exists when a producer develops a new technology that
changes the way an existing product is made or allows for the creation of a new product.
Government grants a patent to the company. This protects the company’s
investment in research and development for 17 years. Monopoly for 17 years.
Example: Private companies that develop weapons systems for military.
Government Monopoly – exists when government allows cities, etc. to monopolize
things like water and sewer services. Also US government often monopolizes building
and maintenance of roads, bridges, etc.
Monopolies at Work
Sellers who have a Monopoly have immense power to set production and price levels. But that
power is not unlimited.
Consumer Demand – If seller raises prices too high, at some point the consumer demand will
reach zero. No sales, no profits.
Potential Competition – If profits in a monopoly are high enough, other sellers will decide that
it is worth it to come up with the high market entry costs to join the market.
Government Regulation – Government will protect consumers from excessively high prices
and the quality of the products being produced.