MARKET STRUCTURES
10/21/15
What do you ask yourself when determining the
characteristics of a market structure?
Number of Firms in Industry
How many businesses/firms are in this
industry?
Type of Product Offered
What type of product is offered? Is there
any differentiation?
Ability to Control Prices
Do they take the market price or can they
set/make their own price?
Ease of Entering the Industry
If I wanted to create a business and
compete in this industry, would it be easy
or difficult (barrier to entry)?
Existence of Non Price
Competition
Is there any non price competition
(competing in ways other than lowering
prices)?
• In a purely competitive market, there are large
numbers of firms producing a standardized
product.
• Market prices are determined by consumer
demand; no supplier has any influence over the
market price, and thus, the suppliers are often
referred to as price takers.
• The primary reason why there are many firms is
because there is a low barrier of entry into the
business.
• The best examples of a purely competitive
market are agricultural products, such as corn,
wheat, and soybeans.
Perfect competition – large number of firms/businesses produce
same product
Type of
Market
Number
of Firms
in
Industry
Similar or
Different
Products
Ability to
Control
Prices
Ease of
Entering
the
Industry
Existence of
Non-price
Competition
Examples
Pure/Perfect
Competition
Many
Identical
No
Very easy
No
Rarely seen
in real world
Price
Taker
(supply
and
demand)
Close
examples:
commodities,
stocks,
currency
• Monopolistic competition is much like pure competition
in that there are many suppliers and the barriers to entry
are rather low. However, the suppliers try to achieve some
price advantages by differentiating their products from
other similar products.
• Most consumer goods, such as health and beauty aids, fall
into this category. Suppliers try to differentiate their
product as being better so that they can justify higher
prices or to have a larger market share than the
competition.
• Monopolistic competition is only possible, however, when
the differentiation is significant or if the suppliers are able
to convince consumers that they are significant by using
advertising or other methods that would convince
consumers of a product's superiority.
• For instance, suppliers of toothpaste may try to convince
the public that their product makes teeth whiter or helps to
prevent cavities or periodontal disease.
Type of
Market
Number
of Firms
in
Industry
Similar or
Different
Products
Ability
to
Control
Prices
Ease of
Entering
the
Industry
Existence of
Non-price
Competition
Examples
Monopolistic
Competition
Price Maker
Many
Similar but
different
http://www.
youtube.com
/watch?v=29
wNCH4RBrk
Some
control
Fairly easy
A LOT (next
slide)
Fast foods,
hair salons,
gas stations,
car
dealerships,
banks
next
• Nonprice competition – a way to attract
customers through style, service, or location,
BUT NOT PRICE (in other words, ways you
compete for business other than price)
– Quality of beef
– Playgrounds/toys/happy meals
– Safety
– Customer service
– Rewards cards
– Substitutions (salad instead of fries)
Go back
• An oligopoly is a market dominated by a few
suppliers.
• A high barrier to entry limits the number of
suppliers that can compete in the market, so the
oligopolistic firms have considerable influence
over the market price of their product.
• However, they must always consider the actions
of the other firms in the market when changing
prices, because they are certain to respond in a
way to neutralize any changes so that they can
maintain their market share.
• Auto manufacturers are a good example of an
oligopoly, because the fixed costs of automobile
manufacturing are very high, thus limiting the
number of firms that can enter into the market.
Type of
Market
Number
of Firms
in
Industry
Similar or
Different
Products
Ability to
Control
Prices
Ease of
Entering
the
Industry
Existence of
Non-price
Competition
Examples
Oligopoly
Price Maker
Few
Identical or
different
Significant
control
Difficult
If products
different, yes
(product
differentiation)
Soap,
cereal,
airlines,
cars
Prisoner’s Dilemma (A Beautiful Mind
clip)
• http://www.youtube.com/watch?v=2d_dtTZQ
yUM (clip from A Beautiful Mind)
• So…
http://www.econclassroom.com/?p=3131
Preston Tucker
• As you watch the clips, think about
the following questions…
– What unique features did the
Tucker car have? How did he
make it DIFFERENT?
– This is called: (know this term)
Product differentiation –
making a product different
from other similar products
Example: Henry Ford said you
can have any color car as long as
it is black. Chrysler/GM came
along and started offering red
cars (made product different to
compete with Ford company)
•
•
http://www.youtube.com/watch?v=z
q54a8yWu50\
http://www.youtube.com/watch?v=e
G8vU1fs7_s&feature=related
Preston Tucker
• http://www.youtube.com/wat
ch?v=lFydjt_SJqc
• The Big Three put up “barriers
to entry”:
– Put a “squeeze” on steel: it was
very difficult for Tucker to get
steel; was costing him a lot
more than the Big 3
– Accused him of fraud which
was downfall of Tucker
corporation (Tucker found not
guilty)
– In order for the Big 3 to be
profitable, they were going to
have to invest billions of dollars
to innovate (product
differentiation)
• A pure monopoly has pricing power within the market.
There is only one supplier who has significant market power
and determines the price of its product.
• A pure monopoly faces little competition because of high
barriers to entry, such as high initial costs, or because the
company has acquired significant market influence through
network effects, for instance.
• One of the best examples of a pure monopoly is the
production of operating systems by Microsoft. Because
many computer users have standardized on software
products that are compatible with Microsoft's Windows
operating system, most of the market is effectively locked
in, because the cost of using a different operating system,
both in terms of acquiring new software that will be
compatible with the new operating system and because the
learning curve for new software is steep, people are willing
to pay Microsoft's high prices for Windows.
•
•
•
•
A great disadvantage of a monopoly is that it often does not seek to
improve its products more than it has to, since there is no incentive to do
so. In fact, there could be incentive not to do so.
As mentioned earlier, a good example of this is Microsoft.
Because it has a monopoly in the office software suite and for operating
systems, it makes only small improvements to each version of Microsoft
Office and Windows so that people will continue to buy upgrades.
Another good example of how a monopoly can reduce innovation is again
considering Microsoft with its Internet Explorer browser. During the 1990s,
Microsoft suppressed Netscape by offering its browser as part of the
operating system, and it argued in court that they do not charge for it
because it was part of the operating system. Although many people hated
Internet Explorer 6 because it had many deficiencies, and didn't use
industry standards for HTML, CSS, and JavaScript, Microsoft, nonetheless,
would not spend a lot of money improving the product because they were
giving it away for free, so improving the browser would not yield additional
revenue. However, when other companies started developing browsers
that were much better than Internet Explorer, such as Firefox, Google's
Chrome, Opera, and Apple's Safari, Microsoft started spending a lot more
money to develop Internet Explorer because it did not want to lose its
dominant position as the main tool that people use to browse the Internet.
Type of
Market
Number
of Firms
in
Industry
Similar or
Different
Products
Ability to
Control
Prices
Ease of
Entering the
Industry
Existence of
Non-price
Competition
Examples
Monopoly
Price Maker
One
Unique
Yes
Hard (strong
barriers)
May exist
(through
ads)
Standard
Oil
Types of Monopolies
• Natural Monopoly: more efficient to have one
company due to economies of scale; need large
start-up costs; example: utility companies
• Geographic Monopoly: best location (less
important now due to catalogs and internet);
example: small town auto repair shop
• Government Monopoly/Technological Monopoly:
issuing of patents and licenses; franchises within
businesses (school that sells only Pepsi products)
MERGERS AND REGULATIONS
http://abcnews.go.com/Travel/ameri
can-airlines-us-airways-announceplans-merge/story?id=18498645
COMPETITION
• “Of all human powers operating on the affairs of
mankind, NONE is greater than that of competition.”
Henry Clay, 1832
• Benefits of competition: lower prices, higher output,
more rapid rate of innovation
• One way firms can limit competition is to buy out or
merge with each other.
• Sometimes, however, mergers can be used to make
firms more efficient by lowering costs of production.
• THEREFORE, policymakers and those who enforce
laws designed to maintain competition have to
evaluate whether a particular merger reduces,
increases, or does not significantly affect
competition.
Cartels and Collusion
• Collusion – agreements among members of an
oligopoly to set prices and production levels; outcome
can be price fixing
– Illegal in the United States
• Cartels – stronger than a collusive agreement;
agreement by a formal organization of producers to
coordinate prices and production
– Illegal in U.S.
– Can only survive if every member keeps to its agreed
output levels and no more; otherwise, prices will fall, and
firms will lose profits
– Members have strong incentive to cheat and produce
more than its quota
– If every cartel member cheats, too much product reaches
the market and prices will fall
TYPES OF MERGERS
• Horizontal merger – combining of two
companies in the same field
– Example: bank buys a bank
• Vertical merger – combining of two companies
that include different stages of production
– Natural gas producer buys a company that owns
natural gas pipelines that transport to urban areas
• Conglomerate – unrelated businesses
– Automobile manufacturer buys baseball team
ANTITRUST LEGISLATION
• Sherman Act (1890) – made it illegal to monopolize
(too vague…)
• Clayton Act (1914) – outlawed interlocking
directorates between competitors; outlawed
mergers that substantially lessen competition
• Federal Trade Commission Act (1914) – established
FTC; has power to bring court cases against private
businesses engaging in unfair trade practices
• Hart-Scott-Rodino Antitrust Improvements Act
(1976) – required big corporations planning to
merge to notify FTC and Dept. of Justice; they would
then decide to challenge the merger under the
terms of the Clayton Act
MARKET STRUCTURES
REVIEW
Directions: We have studied the four market
structures in class, discussing examples of each
structure. Number your paper one to ten. Examine
each picture. Determine which market structure is
associated with each picture. The slides are timed;
therefore, if you do not have an answer, write down
the picture so you can go back and make your choice.
Note: click to next slide to start review quiz