Chapter 2 Market Structures Warm Up Activity: Analyzing the characteristics of the 4 market structure from the picture. Market Structures • What is the primary goal of businesses? - To earn profits • What is the primary goal of Economics? - To maximize profit • What is competition? • Striving against others to reach an objective Market Structure - Nature & degree of competition among firms in the same industry - identifies how a market is made up in terms of: The number of firms in the industry The nature of the product produced The degree of monopoly power each firm has The degree to which the firm can influence price Profit levels Firms’ behaviour – pricing strategies, non-price competition, output levels The extent of barriers to entry The impact on efficiency Industry Industry (market) – a collection of firms, each of which is supplying products that have some degree of substitutability, to the same potential buyers • Common buyers for sellers • Common sellers for buyers • Relatively homogeneous product 4 Market Structures 1. 2. 3. 4. Pure/Perfect Competition Monopolistic Competition Oligopoly Pure Monopoly 1. Pure/Perfect Competition More Competition Less Competition The Characteristics of Perfect Competition Characteristic 1: Many Buyers and Sellers • No one buyer or seller has power to control price in the market • Many sellers means buyers can choose a producer with better price • Many buyers means sellers can all sell product at market price • lack of demand will not cause sellers to lower prices The Characteristics of Perfect Competition • Characteristic 2: Standardized Product – Standardized product—one producer’s product is identical to another’s – Perfect substitutes include • agricultural products, such as wheat, eggs, milk • basic commodities, such as notebook paper, gold – Price is only basis for consumer choice The Characteristics of Perfect Competition • Characteristic 3: Freedom to Enter and Exit Markets – Producers can enter market when profitable and exit when unprofitable – Regulations do not restrict businesses from entering or exiting The Characteristics of Perfect Competition • Characteristic 4: Independent Buyers and Sellers – Neither buyers nor sellers join together to influence price – Supply and demand set the equilibrium price – Independent action ensures that market stays competitive The Characteristics of Perfect Competition • Characteristic 5: Well-informed Buyers and Sellers – Buyers can compare prices – Sellers know what competitors charge, what buyers willing to pay – Price taker—seller that accepts market price set by supply and demand Pure/Perfect Competition Many buyer/sellers + QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture. Identical Products 2. Monopolistic Competition Monopolistic Competition • Meets all condition of perfect competition except for identical products. – Product differentiation • Monopolistic competitors use nonprice competition – Advertising, giveaways, or other promotions More Competition Less Competition Characteristics of Monopolistic Competition • Characteristic 1: Many Sellers and Many Buyers – Many sellers and many buyers • fewer sellers than perfect competition but enough for true competition – Each seller chooses product to make, amount to make, price to charge • examples include T-shirts, batteries, hamburger restaurants Characteristics of Monopolistic Competition • Characteristic 2: Similar but Differentiated Products – Consumer loyalty gained with unique product or apparent difference – Sellers use market research to decide how to differentiate product – Chains use sophisticated techniques—learn consumer lifestyles, tastes. Characteristics of Monopolistic Competition • Characteristic 3: Limited Control of Prices – Differentiation gives producers limited control of prices • low price distinguishes some products • name brands or better quality priced higher – Consumers pay extra if they perceive important enough difference • will switch to substitute if price goes too high Characteristics of Monopolistic Competition • Characteristic 4: Freedom to Enter or Exit Market – No great barriers to entry in monopolistically competitive markets • when firms earn profit, other firms enter and increase competition • competition can be difficult for small businesses against large ones – Some firms start to take losses • signal that it is time to exit the market Monopolistic Competition Gap Levis Lucky Same as pure competition except for product differentiation Monopolistic Competition Are these shampoos/conditioners different? Pantene $14.50 Frederic Fekkai $54 Monopolistic Competition Are these mascaras different? Maybelline Sisley $4 $43 Oligopoly Oligopoly • Oligopoly—market structure with only a few sellers offering similar product • Less competitive than monopolistic competition – each firm has large market share—percent of total sales in the market • Few firms due to high start-up costs— expenses of entering market More Competition Less Competition Characteristics of an Oligopoly • Characteristic 1: Few Sellers and Many Buyers – A few firms dominate market • industry is oligopoly if four firms control 40 percent of market – About half of manufacturing industries in United States are oligopolies • include breakfast cereals, soft drinks, movies, industrial products Characteristics of an Oligopoly • Characteristic 2: Standardized or Differentiated Products – Many industrial products standardized such as flat glass, aluminum • firms differentiate by brand name, service, location – Many consumer goods are differentiated • use marketing strategies, such as focus groups, surveys • create brand-name products that can be marketed widely Characteristics of an Oligopoly • Characteristic 3: More Control of Prices – Each firm’s decisions about supply and price affect entire market – If one firm lowers prices, others probably will too • no firm gains market share from price drop; all risk losing profits – If one raises prices, others may not in order to gain market share – Anticipate competitors’ response to price, Characteristics of an Oligopoly • Characteristic 4: Little Freedom to Enter or Exit Market – High start-up costs—such as factories, warehouses—make entry hard • new firm may sell on small scale; hard to compete with established ones – Established firms have resources, patents, economies of scale – High investment by firms in oligopoly make exit difficult Oligopoly Ipod Zune Oligopoly Few producers control supply and price Coca-Cola Classic • • • • • • • • Coca-Cola classic Sprite Dasani Barq's Dannon Nestea Rockstar Evian • • • • • • Fanta Fresca Minute Maid Mr. Pibb Powerade Seagrams Ginger Ale & Mixers • TAB Pepsi-co • • • • • • Aquafina Pepsi Mountain Dew Sierra Mist Sobe Lipton Brisk Tea • • • • • MUG Root Beer Slice Gatorade Dole Juice Tropicana Cadbury Schweppes • • • • • 7 Up Canada Dry Clamato Dr Pepper Hawaiian Punch • Mott's • Orangina • Snapple Toyota • Toyota • Scion • Lexus Chrysler • Chrysler • Jeep • Dodge General Motors • • • • • • • • Chevrolet Buick Pontiac GMC Saturn Hummer SAAB Cadillac Monopoly Monopoly • One seller dominates the market with no close substitutes More Competition Less Competition Monopoly • Only one seller of a particular product, no substitutes for product • Cartel—organization of sellers that agree to set prices, limit output • Price maker—business without competitors, can set prices • Barrier to entry—obstacle to entering market include government regulations, size, resources, technology Characteristics of a Monopoly • Characteristic 1: Only One Seller – Single business controls supply of product without close substitutes – De Beers cartel controlled diamond market in 20th century because • produced over half of world’s diamond supply • bought up diamonds from smaller producers to resell Characteristics of a Monopoly • Characteristic 2: A Restricted, Regulated Market – Government regulations allow single firm to control market – De Beers worked with South African government • restricted access of other producers • controlled supply of diamonds Characteristics of a Monopoly • Characteristic 3: Control of Prices – Monopolists can control prices because there are no close substitutes – During economic downturns, De Beers created artificial shortage • by withholding diamonds from market, kept prices higher Types of Monopolies • KEY CONCEPTS – Natural monopoly—cost of production lowest with only one producer – Government monopoly—government owns and runs or permits only one producer – Technological monopoly—one firm owns invention, technology, method – Geographic monopoly—no other sellers within a region Monopoly • Natural Monopoly efficient production by a single supplier Monopoly • Geographic Monopoly - small town • Ex. One gas station in town Monopoly 1. Technological Monopoly - new invention – Patent: exclusive right for 17 years Segway Monopoly 1. Technological Monopoly - new invention – Copyright: lifetime + 50 years This telecast is copyrighted by the NFL for the private use of our audience. Any other use of this telecast or of any pictures, descriptions, or accounts of the game without the NFL’s consent, is prohibited. Monopoly 1. Government Monopoly government owned businesses - Ex. City water supply Features of the four market structures Type of market Number of firms Freedom of entry Nature of product Examples Perfect competition Very many Unrestricted Homogeneous (undifferentiated) Cabbages, carrots Apple, vegetables etc. Monopolistic competition Very Many Unrestricted Differentiated Builders, convenience stores Undifferentiated Cement or differentiated cars, electrical appliances Oligopoly Pure Monopoly Few One Restricted Restricted or completely blocked Unique Local water company Group Reporting Analyze the effects of contemporary issues enumerated below to the purchasing power of the people. 1. migration 2. fluctuations in the exchange rate 3. oil price increases 4. unemployment, peace and order
