Chapter Six
Market Structures: Why market
competition affects you every time
you shop!
Rule of Business:
The more
competitive the
industry, the more
the consumer
benefits.
Rule of Capitalism:
Encourage
competition
between firms in an
industry (market).
The consumer
benefits:
• $$$
• Variety of products
• Lots of information
about products
Two types of markets are highly
competitive.
Perfect competition
Monopolistic
competition
Perfect Competition
According to Adam
Smith – the ideal
market structure.
Buyers and sellers
compete fully and
directly under the
laws of supply and
demand.
Conditions for Perfect
Competition
Many buyers and sellers
act independently.
Sellers offer identical
products.
Buyers are well
informed about
products.
Sellers can enter or exit
the market easily.
Many Buyers and Sellers:
No single buyer or
seller has enough
power to control
demand, supply or
prices.
Think farming!
Identical Products
Corn is corn. Apples
are apples.
Buyers choose one
product over
another primarily
based on price – not
on unique
characteristics.
Informed Buyers
Buyers are
knowledgeable
about products.
Can compare
products easily.
Easy Market Entry and Exit
For sellers to
compete perfectly,
they must be able to
enter a profitable
market - or exit an
unprofitable market
– EASILY.
THINK FARMING!
Monopolistic Competition
Differs in ONE key
respect.
Sellers offer
DIFFERENT, rather
than identical,
products.
Monopolistic Competition
Sellers seek to have
monopoly-like power
by selling a “unique”
product.
MOST COMMON
MARKET
STRUCTURE in the
US!
Monopolistic Competition
Like perfect
competition –
Supply / Demand
laws apply.
Many sellers and
buyers acting
independently.
Buyers are well
informed.
Easy to enter / exit
the market.
Product Differentiation – what makes
Monopolistic Competition DIFFERENT.
Sellers in
monopolistic
competition try to
DIFFERENTIATE –
point out differences
– between their
products and
competitors.
Nonprice Competition
Sellers compete on
a basis other than
price.
Compete through
advertising and
emphasis on brand
names.
Nonprice Competition
The main goal of
product
differentiation is to
increase profits.
Convince the buyer
to make decision
based on nonprice
factors – not price
alone.
Examples of Monopolistic
Competition:
Telephone
companies
Airlines
Clothing makers
Hamburger joints
Sodas
Imperfectly Competitive Markets
Oligopolies
Monopolies
Oligopolies
There are a few large
sellers that control the
production of the good
or service.
There are only a few
large sellers.
Sellers offer identical or
similar products.
Other sellers cannot
enter the market easily.
Oligopolies: Few large sellers
A market (industry)
is considered an
oligopoly when
three or four firms
control 70% of the
market’s total
output.
Oligopolies: Identical or similar
products
Each seller has a
large share of the
overall sales in the
market.
So much at stake –
less likely to take
risks.
Not offering new
products.
Oligopolies: Difficult entry and
exit in the market
New sellers cannot
easily enter the
market.
Big start-up costs
Govt. regulation
Consumer loyalty to
established products
Oligopolies at work: legal and
efforts to control prices.
Nonprice competition to
differentiate the
products.
Efforts of Kelloggs,
General Mills, and Post
(80% of the market)
create numerous brand
names to look like they
compete.
Oligopolies at work: legal means
to control price
Interdependent
Pricing: Base prices
on the pricing
actions of
competitors.
Not only similar
products – but
similar prices.
Price leadership
The most common form of
interdependent pricing.
Largest sellers “set” the price of the
product and the competitors follow.
Control the price of the product.
Oligopolies and Monopolies are Price
Setters – not price takers as in perfect
competition / monopolistic competition.
What happens when competing companies
don’t follow along in oligopolies?
PRICE
WAR!
Price Wars:
Opportunity Benefits:
prices can benefit
consumer
Opportunity Costs:
Sellers lose money and
if the price war is on for
long – might be forced
out of the market.
Unemployment up
Even less competition in
the market
Oligopolies Dark Side:
COLLUSION
Sellers secretly agree to
set production levels
and prices for their
products.
ILLEGAL!
Oligopoly behaves like a
monopoly.
Higher prices and lower
quality for consumer.
Oligopolies Dark Side: Cartels
Sellers openly
organize a system of
price setting and
market sharing.
Illegal in the US.
Infamous Cartels
De Beers Diamonds
Creates scarcity by
buying and
stockpiling stones
from other
producers.
OPEC
Been to the gas
pump lately?
The good news about cartels
Often unstable and
short lived.
Greed makes
members break
ranks and try to sell
more.
Price wars break out.
The ultimate bad guy:
Monopolies
There is a single seller
No close substitute
goods are available
Other sellers cannot
enter the market easily
Prices UP and quality of
products DOWN because
NO COMPETITION!
Types of Monopolies
Natural
REMEMBER: Economies
of Scale
Geographic
Technological
Patents: seller gets 17
year monopoly
Copyright protects
written works and art
Government: Public
goods
Monopolies at Work
Monopoly markets
have a great deal of
control over prices.
Three Things Limit Monopoly
Control Over Setting Prices
Consumer Demand
Potential
Competition
Government
Regulation
Market Regulation
Government was
laissez-faire with
business until close
to the 20th century.
The Era of Big Business
Rockefeller,
Carnegie, JP
MorganSmaller companies
were forced out of
business or taken
over by bigger
businesses.
TRUSTS = Big
Business
Antitrust Legislation – Govt.
takes on Big Business
Sherman Antitrust
Act (1890) said
govt. could monitor
and regulate big
business.
Used to break up
Standard Oil’s
monopoly in 1911.
• Today the company is
called EXXON of
EXXON MOBIL.
Clayton Antitrust Act
(1914) – prohibited
specific unfair
business practices.
Price Discrimination
• Offering different
prices to different
customers under the
same circumstances.
Federal Trade Commission
Since 1914 – the
government’s
“police” who
investigate business.
Monopoly Breakups
AT&T (1982)
Standard Oil (1911)
Microsoft????
Is Microsoft a Predatory
Monopoly?
What “proof” is
there that Microsoft
is a predatory
monopoly?
What should be
done?