4 Market Structures
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Perfect
Competition
Monopolistic
Competition
Oligopoly
Monopoly
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4 Market Structures
Perfect
Competition
Perfect Competition
M
L
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Many
Demand is perfectly elastic
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s
Producers
Supply and Demand determine Price
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Suppliers are Price takers
Identical
C
C
products
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m
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Easy Entry
p
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Monopolistic
Oligopoly
Monopoly
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Competition
No control
t
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over Prices
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e Examples:
e
Very few examples
Some stock and commodities Commodity – exactly the same, no matter who makes it
Auctions
Fish and fruits vendors selling at the same market
Commercial fishing and wood pulp and paper industry
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4 Market Structures
M
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C
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Monopolistic
Competition
Many
Producers
Imperfect Competition
Producers have some control over price L
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Producers have market power
s
s
Differentiated
products
C
o
Few Barriers
m
Entry
Perfect
p
Monopolistic
Oligopoly
Monopoly
Competition
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Competition
Some control
t
over Prices
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Examples: Most common form and extremely common in service industry
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- A lot of non-price competition- physical/style, service, location, status symbol e
Shoes, clothing, gas, restaurants
Called Monopolistic because brands seem to be unique- brand loyalty
Company “monopolizes” its brand
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4 Market Structures
Cooperative Pricing:
Imperfect Competition
Oligopoly
Price Leadership
Collusion
Cartel Formation- illegal in US
but not in world - OPEC
M
Few
o Producers have some control over price
Producers
r Producers have market power
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Similar
Price wars
C
products
o
High Barriers
m
of Entry
Perfect
p
Monopolistic
Oligopoly
Monopoly
Competition
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Competition
Some control
t
over Prices
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Preventing lower prices
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v Examples: Arise due to economies of scale rule of thumb (4 top producers supply 60% of
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outputs)
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Bigger producers take advantage of smaller
Soda (Coke, Pepsi, Cadbury Schweppes)
Airlines (Boeing and Airbus)
Automobiles
Light bulbs
Tennis Balls- Wilson, Penn, Dunlop, Spalding
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4 Market Structures
Imperfect Competition
M
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C
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Monopoly
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Producers have some control over price
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Producers have market power
Unique
s
Price Setters
products
s
C
High Barriers
o
of Entry
m
Perfect
Substantial
p
Monopolistic
Oligopoly
Monopoly
Competition
control over
e
Competition
Prices
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t
Examples: The Firm is the Industry, Famous – Standard Oil, Microsoft, Major League
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Baseball
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There Anti Trust laws but there are also Legal Monopolies
One Producer
Resource monopolies- controlling one resources
Government created monopolies (copyrights and patents, public franchise, Licenses)not intended to protect competitors- hair braiding? Preventing lower prices?
Natural Monopolies- when a firm can supply a good or service more efficiently and at
a lower cost- gas, water, electricity, and cable TV- they can take advantage of
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economies of scale.
4 Market Structures
Market Structure
Perfect Competition
Monopolistic
Competition
Oligopoly
Monopoly
Number of
Firms
Control
over Price
Types of
Goods
Barriers to
Entry
4 market structure activity
1.
a.
b.
c.
d.
Divide class into the 4 market structures
Perfect competition- +15 students – all get a small piece of candy to sell to teacher- smarties, candy corn etc.
Monopolistic competition- 4- 6 students (can vary)- each get a similar but slightly different piece of candy- jolly rangers, blow pops
Oligopoly- 3 students- receive similar candy- tootsie roll, mm bag
Monopoly- 1 student who receives a unique piece of candy- candy bar
2. Explain to students that they are sellers and that you will buy the candy for a price a 5 cents to 25 cents and that you will buy from one seller
in each group. To encourage sale and competition offer 1 bonus point for a sale
3.
4.
5.
6.
7.
8.
Instruct students to write price down and hide it from others
Round 1 – perfct comp and mon comp cannot speak with each other, oligopoly may consult
Buy candy – perfect comp price takers, monopoly price setters
Repeat round- allow for discussion amongst perfect comp.
Three rounds- debrief as yoy continue through and at end
When finished- fill in chart
Oligopoly Game (real life prisoner’s dilemma)
Lowes
Lower prices
Maintain prices
Lower prices
120
120
200
100
maintain prices
100
200
150
150
Home
Depot
Payoff represents total profits
What is Home Depot’s dominate strategy? Why?
Does Lowes have a Dominate Strategy?
What will they do? Why?
Lower prices is a Nash Equilibrium
Nash Equilibrium- The best response to knowing what the other the other firm is going to do, it
doesn’t benefit to defect.
Oligopoly Game
Lowes
Lower prices
Maintain prices
Lower prices
100
150
120
130
maintain prices
110
120
150
140
Home
Depot
Payoff represents total profits
What is Home Depot’s dominate strategy? Why?
Does Lowes have a Dominate Strategy?
What will they do? Why?
Lower prices is a Nash Equilibrium
Nash Equilibrium- The best response to knowing what the other the other firm is going to do, it
doesn’t benefit to defect.