Topic 4: Competition and Market
Structure
I.
Perfect Competition
A. Conditions for Pure Competition
*Def: Pure Competition
1. Many buyers and sellers participate in market
2. Sellers offer identical products
3. Buyers & sellers are well informed about products
4. Sellers are able to enter and exit the market easily.
*What controls price in a market with pure
competition?
I.
Perfect Competition
B. Barriers to Entry & Competition
* Barriers to entry can lead to imperfect competition
1. High Start-Up Costs
2. Complex Technology
*Ex of business with high start up costs? Low start up
costs?
I.
Perfect Competition
C. Price, Output, and Purely Competitive Markets
1. Purely competitive markets are efficient.
2. Competition keeps both prices and production costs
low.
3. Output in a purely competitive market will reach the
point where suppliers just covers its costs and makes
minimal profit
*Who likes a purely competitive market more, consumers or
producers? Why?
II.
Monopolies
A. Characteristics of a Monopoly
Definition:
•
•
•
•
Single seller controls the entire market
Barriers prevent firms from entering the mkt
Supplies a unique product can’t get anywhere else; no close
substitute
Monopolies can take advantage of the market power and
charge high prices
II.
Monopolies
A. Characteristics
1. Economies of Scale
*Def: factors that cause a producer’s average cost per
unit to fall as output arises
• Figure 4.2
• Bigger is better
• Ex: hydroelectric plant
II.
Monopolies
A. Characteristics
* Natural Monopolies: a market that runs most
efficiently when one large firm provides all the
output. Ex: water companies
• What is the one characteristic
all types of monopolies have in common?
II.
Monopolies
B. Price Discrimination
1. If monopolist sets price at the max price in the mkt, can limit
who will be able to purchase good
2. Offers different prices: price discrimination
3. Target discounts
* Discounted airline fares
* Manufacturer’s rebate offers
* Senior citizen/student discount s
* Children stay free
III. Monopolistic Competition & Oligopoly
A. Characteristics of Monopolistic Competition
* Def: products are similar but not identical
Four Conditions
1.
2.
3.
4.
Many firms
Few artificial barriers to entry
Little control over price
Differentiated products
III. Monopolistic Competition
B. Non-price Competition
* Competition through other ways besides lower prices
1.
2.
3.
4.
Physical Characteristics
Location
Service Level
Advertising
III. Oligopoly
A. Characteristics of Oligopoly
*Def: mkt dominated by a few large, profitable firms.
1. Barriers to Entry
2. Cooperation & Collusion… price war, collusion,
price fixing
3. Cartels: more formal than collusion
• Why is a price war
harmful to producers?
IV.
Government Regulation & Competition
A. Market Power & Predatory Pricing
1. Monopolies & oligopolies have mkt power: the
ability to control prices and mkt output.
2. Will want higher prices and lower output…reduced
competition.
3. Engage in predatory pricing… drive competitors out
of business
IV. Government Regulation
B.
1.
2.
3.
4.
5.
Government & Competition
Anti-Trust Laws: Sherman, Clayton
Regulating Business Practices
Splitting Up Monopolies
Assessing Mergers
Merger Guidelines
*What kinds of rules and regulation does the government use to
break up monopolies?
IV. Government Regulation
C. Deregulation
1. Definition: govt no longer decides what role each company
can play in a mkt.
2. Recent deregulated industries: airline, trucking, banking,
railroad, natural gas, tv.
3. Allowed/ forced firms in these industries to compete by
eliminating price controls and barriers to entry
4. Airline regulation: mixed results
** Deregulation weakens govt controls; anti-trust laws
strengthen it. Same purpose: promote competition