Ch. 7 Market Structures
POPE- 2015
What is a Market?
• “An environment in which buyers and sellers
interact to exchange goods and services for
money”
Remember the Product Market?
What Markets Exist?
•
Markets are classified by 4 structures (environments)
1.
Pure (perfect) Competition (PC)
2.
Monopolistic Competition (MC)
3.
Oligopoly
4.
Monopoly
How do we describe them? (5)
1.
Market Power: ability for firm to raise price
without losing sales. (control of price)
2.
Number of Firms in the market
3.
Barriers of Entry: is it easy to enter or exit the
market?
4.
Types of Products/Goods: similar or different?
5.
Level of Competition: how much competition is
there?
1. Perfect Competition (PC)
1.
Infinite number of very small firms.
No single seller owns a large % of the market.
2.
Buyers and sellers deal in identical products.
No product differences. (Ex: salt, flour, wheat, corn)
3.
Unlimited Competition: so many firms, that suppliers lose the
ability to set their own prices.
4.
No Barriers to Entry: sellers are free to enter the market, conduct
business and free to leave the market (Low cost to enter)
5.
Each firm is a PRICE-TAKER: they have no market share.
Perfect Competition
•
Consider the market for salt
•
Firms in a perfectly competitive market are price takers.
•
(They take the price they are given; they can’t change the price) Fixed Prices
No one single producer controls the market
•
Just many small firms. They have no market power.
MARKET POWER = “the ability to set one’s OWN prices”
If you want salt… you get salt no matter the brand.
• A $4 pound is the same as the $3.50 one, so there is no reason to spend that extra money.
•
The AGRICULTURAL MARKET is the best
example of a perfectly competitive market.
Monopolistic Competition (MC)
1.
Large number of large companies (fewer than perfect competition)
Sellers can influence the price through creating a product identity
2.
Products are NOT exactly identical, but very similar.
3.
Heavy competition: firms must remain aware of their competitor's
actions, but they each have some ability to control their own price.
4.
Low Barriers to Entry: easier than Oligopoly and Monopoly to get
started because of the less amount of competition.
5.
Monopolistic competition takes its name and its structure from
elements of monopoly and perfect competition.
Monopolistic Competition
•
The key idea to understand monopolistic competition is that
firms sell products that are similar, but not exactly alike.
EXAMPLE: Hand Soap
•
Essentially, all hand soaps are the same. Yet firms can create a
brand identity that separates their hand soap from their
competitor's
•
This brand identity can be formed through packaging, songs,
product support, and especially advertising.
Monopolistic Competition
Product Differentiation (Brand Identity)
•
The real or imagined differences between competing
products in the same industry.
•
Differentiation may be color, packaging, store
location, store design, store decorations, delivery,
service….
Anything to make it stand out?
Monopolistic Competition
Non-price Competition:
•
Non-Price Competition involves the advertising of a product’s
appearance, quality, or design, rather than its price.
•
Advertising to help the consumer believe that this product is
different and worth more money.
VS
Notice these
commercials never
mention price.
Monopolistic Competition Examples
Auto, Gas, Fast Food, Airlines, etc.
Monopolistic Competition
What happens when companies in a
M.C. Market Fail?
They don’t close their doors, but rather
merge with larger companies.
This is called a Merger!
Mergers of Monopolistic Companies
•
Sometimes companies fall victim to market failure. However, not all businesses close
their doors and empty their factories and stores.
•
Many get “swallowed up” by another company. This “take-over” or “acquisition” of a
company is known as a merger.
Three Types of Mergers:
1.
Horizontal
2.
Vertical
3.
Conglomerate
Three Types of Mergers
1.
Horizontal: involve firms in the same market, such as between two
telecom companies.
Reason: takeover the market
2.
Vertical: involve one firm buying a resource provider
•
Example: automaker buys a steel company
Reason: Cheaper Resources
3.
Conglomerate: a company buys a business in a unrelated industry.
Reason: Diversification
Three Types of Mergers
•
Other examples of Horizontal Mergers…
A company buys a competitor in the market
Reason: ownership of the market
Three Types of Mergers
•
Other examples of Conglomerates…
A company buys a business in a unrelated market.
Reason: Diversification
Oligopoly
•
A market in which a few large sellers control most of the production of a good or service
and they work together on setting prices.
1.
3-4 Firms that control the entire market by setting prices.
2.
Products are generally identical (standardized)
3.
High Barriers to Entry: Hard to enter the market because the competitors work
together to control all the resources & prices. Plus it is very expensive to make the
product.
4.
The actions of one affects all the producers.
5.
Collusion/Collude= (Price Fixing) an agreement to act together or behave in a
cooperative manner
Oligopoly
•
What will happen when Oligopoly goes bad, a Price War will result.
•
Price Wars: series of price cuts that competitors must follow or lose business.
•
•
It is a fierce price competition between sellers, sometimes the price is lower than
the cost of production.
When price wars start, oligopolists would rather like to be independent price
setters.
Market Structures (Environments)
MARKETS
DIVIDED BY TYPE
OF PRODUCTS
DIFFERENTIATED
PRODUCTS
Monopoly
Tap water
TVA
Oligopoly
Autos
Crude oil
Monopolistic
Competition
Shoes
E-Business
IDENTICAL
PRODUCTS
Perfect
Competition
Wheat
Salt
ONE
# OF FIRMS
MANY
NONE
COMPETITION
MORE
IMPOSSIBLE
ENTRY INTO THE MARKET
EASY
TOTAL
MARKET POWER
NONE
NONE
CONSUMER POWER
MORE
EFFICIENT OPERATIONS
MORE
NONE
Monopoly
•
Monopoly is the exact opposite of Pure Competition
1.
There is a single seller
2.
No substitute goods are available
3.
A price-maker: set their own price
4.
Barriers to Entry: impossible
5.
Highly wasteful and inefficient
Types of Monopolies
1.
Natural Monopoly
2.
Geographic Monopoly
3.
Technological Monopoly
4.
Government Monopoly
Natural Monopoly
•
Natural Monopoly: where costs are minimized by having a single
producer of the product.
•
•
Sometimes govt. creates natural Monopolies in the natural gas, water, & electricity
industry by franchising these utilities.
Franchise- the right to produce or do business in a certain area
under the supervision of a larger company or government.
 TVA is the largest government-owned power producer in the
US. Its power facilities include 11 fossil-powered plants, 29
hydroelectric dams, three nuclear plants, and six combustion
turbine plants.
 The corporation transmits electricity to 8.7 million consumers.
Types of Monopolies
Natural Monopolies
© SWS 2010
Natural Monopolies
•
Other times Natural monopolies are created simply
because there is no regulations or one other firms can
get into the market because the monopoly owns all
resources.
DeBeers is an African company that has (over the century)
bought numerous diamond mines across the global. They
provide 90% of the world’s diamonds.
When another diamond company reaches the point when they
must sell stock to raise capital for operations, DeBeers comes
in and buys a majority of the stock.
Natural Monopoly
•
Why would government do this or what are the benefits of a
natural monopoly?
•
Economics of Scale: as natural monopolies grow larger, this
reduces its production costs.
•
Because normally companies become more efficient as the firm
becomes larger over time.
•
Example: It is cheaper for the TVA to provide power in the SE than
two or three companies.
Geographic Monopolies
•
Geographic Monopoly: the only business in a geographic region.
•
Some of these are decreasing in the U.S. because of mobility of consumers.
EXAMPLE: Only
person selling water
in the desert.
EXAMPLE: Turner Field
Technological Monopolies
•
Technological Monopoly: firm has discovered a new process or
product.
•
Constitution has given government the right to grant technological
monopolies (protect property rights)
•
Patent: 20 years exclusive rights to a developed technology.
•
Copyright: Life plus 70 years
Government Monopolies
•
Government Monopoly: operated completely or partially by the
government.
•
•
•
Liquor sales in some GA counties, uranium production, water, etc.
Similar to natural monopolies.
Alcohol Suppliers
in Sweden
Adam Smith would be extremely mad!
Healthcare in
Canada
Uranium in
USA
Government vs. Monopolies
•
Antitrust Legislation
•
Trust: a legally formed combination of companies
•
Since the late 1800s the US have passed laws to restrict and regulate trusts.
•
Government has the power to maintain competition, regulate monopolies,
or to run government-owned monopolies.
Government vs. Monopolies
•
Antitrust Legislation
•
1890 Sherman Antitrust Act: law against those companies
that hindered competition or made competition impossible
because of the “restraint of trade” that was created.
•
•
Basically outlawing monopolies
1914- Federal Trade Commission Act: passed to enforce the
Clayton Antitrust Act. It gave the authority to issue Cease and
Desist Order.
•
Cease and Desist Order: FTC ruling requiring a company to stop unfair
business practice that reduces or limits competition
Market Structures (Environments)
MARKETS
DIVIDED BY TYPE
OF PRODUCTS
DIFFERENTIATED
PRODUCTS
Monopoly
Tap water
TVA
Oligopoly
Autos
Crude oil
Monopolistic
Competition
Shoes
E-Business
IDENTICAL
PRODUCTS
Perfect
Competition
Wheat
Salt
ONE
# OF FIRMS
MANY
NONE
COMPETITION
MORE
IMPOSSIBLE
ENTRY INTO THE MARKET
EASY
TOTAL
MARKET POWER
NONE
NONE
CONSUMER POWER
MORE
EFFICIENT OPERATIONS
MORE
NONE