Market Structures
[How many sellers in each industry]
Greyhound
Natural Monopoly
TXU
Competition would be
chaotic. It is natural
to give it to one co. Waste
Management
Ex: Utilities
Beauty Shops
Barber Shops
Monopolistic Competition
Forney High
Owned & operated by G
Ex: U.S. Mail
State Highways
U.S. Mail
Geographic Monopoly
Only seller in a specific area
Example: Remote Store
Monopoly
[mono(1) poly (seller)]
Control over price: Total
Product: unique
Ex: Comcast Cable TV
Rubik’s
Cube
[Element of monopoly with
“product differentiation”]
“Price Makers”
DART
Government Monopoly
Blue Jeans
Basic Cable Rate
Many [25-75] sellers
Control over price: Some
Ex: Blue Jeans
Monopoly
Oligopoly
Monopolistic Competition
Market
Perfect Competition
Technological Monopoly
[buyer & seller]
“Patent”
Ex: Rubik’s Cube
Structures
Most Competitive
Cable TV
Perfect Competition
[How many sellers]
Very many [100s] of sellers
Perfect
Control over price: None
Competition
Products: Identical
Monopolistic
(Agricultural & fishery)
Competition
Oligopoly
Pure Monopoly
Price Taker
Control
over Price
Oligopoly
Oliogo (few) poly (seller)
[A few control 70% of market
Duopoly
Control over price: Fair Amount
Differentiated or Identical
Reebok
Differentiated Oligopoly
Differentiated Products
Autos & Sneakers
[undifferentiated]
Pure Oligopoly
Identical Products
(steel)
The
“invisible
hand” is
omnipotent.
Many
• 1. Characteristics of the four market structures.
[monopoly, oligopoly, monopolistic competition, & perfect competition]
• 2. Know the four types of monopolies.
[Government, Natural, Technology, and Geographic]
• 3. Know the difference between collusion and price
leadership.
• 4. Know the difference between negative and positive
externalities.
• 5. Summarize anti-trust legislation and review the
circumstances surrounding the Justice Dept. case against
Microsoft.
Market Structure Vocabulary
U.S. States Sue Big Music over Price-Fixing
This price-fixing lawsuit against the 5 major recording labels
charged that they increased the price of CDs in violation of
antitrust laws. “Because of these conspiracies, tens of millions of
consumers paid inflated prices to buy CDs of artists including
Santana, Whitney Houston, Madonna and Eric Clapton.” The FTC
estimated that the recording companies policies[$40 billion industry]
forced U.S. consumers to pay as much as $480 million more than
they should have for CDs and other music over the last three years.
Auto body shops sued paint companies, including Sherwin-Williams,
for fixing prices on paint, primer and fillers.
Four major toy manufacturers (Hasbro, Little Tykes, Mattel, & Toys R’Us)
were sued for conspiring to fix prices of toys. Toys R’Us was accused
of brokering an illegal agreement with toy manufacturers to not sell
their most popular products to the warehouse clubs.
4.0
1.4
1.6
The average child sees 245 ads per day. They
see around 30,000 commercials in 1 year. By age
65, on average, we see 3 mil. commercials, which
is like watching 3 years of non-stop commercials.
3
Perfect Competition – has a very large number
of sellers (hundreds or thousands) of the same
product (any agriculture or fishery product). They
are all selling the same undifferentiated products
(oranges).
4
Competition
5
Market Structure – degree of competition
– economic rivalry among businesses.
among firms operating in the same market (autos).
Four Market Conditions Necessary For Perfect Competition
6A 1. Very large number of sellers (hundreds or thousands).
Each seller will have only a small share of the market.
B
2. Similar or identical products (sweet corn/brocolli/eggs)
which means there is no reason for non-price competition.
C
3. Easy entry and exit into the market.
D
4. Absence of price controls (too many sellers & consumers).
Perfect Competition and Price
No one firm controls price. Lowering price would
lower profits as consumers would buy similar
substitutes. Prices are set by the market rather
than by the firms. These firms are “price takers.”
20 Monopolistic Competition – fairly large
number (25-75) of sellers competing to sell
slightly differentiated products. Product
differentiation (real or imaginary) is vital.
This is the most common market structure.
Sellers try to decrease competition
by making their products different
from the others. Since each firm
attempts to make its product unique,
unique, there is an “element of monopoly”,
thus monopolistic competition.
Product differentiation, when it is successful, enables
a firm to “establish a kind of monopoly” so that loyal
customers will prefer it rather than buy from the
competition. [They try to monopolize a small portion
of the market.]
21 Even virtually identical products may be differentiated
by brand name, packaging, or design but they are still
similar. They have all the conditions of perfect competition
except for product “differentiation.”
22 They use “nonprice” methods of competition such as
advertising and improved service to increase sales.
Reputation is important [builds loyalty]. Most manufactured
goods are made by only a few producers.
4 Market Conditions For Monopolistic Competition
1. 25-75 buyers and sellers must exist. Firms act independently
but no single firm is large enough to change the supply or
price of a good.
2. The products are similar but they emphasize product
differentiation (differences among products). This is the one
thing that separates monopolistic competition from perfect
competition.
The differences may be real or imaginary (a refrigerator with
plastic or metal trays). Aspirin, by federal law, has to have
certain chemicals but people believe highly advertised aspirin
is better. Revlon offers 157 shades of lipstick – 41 are pink.
3. Buyers must be well informed about differences in products.
Monopolistic competitors rely on informative and competitive
advertising.
4. Easy to enter or exit the industry. Few restrictions exist.
Monopolistic Competition
[element of monopoly [differentiation uniqueness] so called
monopolistic competition]
This is the most common market structure – over 99% of all firms.
Examples of Monopolistic Competition
Blue Jeans
Dry Cleaners
Shoe Stores
Toothpaste
Restaurants
Barbershops
Grocery Stores
Rock Concerts
Cassette players
Book Stores
Vacuum Cleaners
Beauty Parlors
Candy Bars
Pizza
Chicken
Soaps and detergents
Furniture Stores
Econ Textbook Co’s
“Econ”
Other Monopolistic Competition Examples
Janitorial Services
Air Conditioning
Auto Dealers
Karate
Body Shops
Pet Shops
Electrical Contractors
Window Cleaners
Dermatologists
Copying
Locksmiths
Pest Control
Alcohol Treatment Centers
Carpet Cleaning
Fingernail Saloons
Upholstery Cleaners
Tire Companies
Masonry Contractors
Dry Wall Contractors
Party Suppliers
Dog Grooming
Accountants
Monopolistic Competition and Price
23 There is some control over price because
differentiation creates buyer loyalty [jeans].
Non-price competition is used to control price. Developing
brand name loyalty will enable a firm to marginally increase
price without losing customers. If the increase is too much,
buyers will switch to a competitor’s product.
The “Real World”
The “real world” of competition involves
monopolistic competition & oligopolies. Over 99%
of all firms are monopolistic competitors. However,
a few thousand oligopolies produce most of the
products in the U.S. So, our big firms are oligopolists
and our smaller firms are monopolistic competitors.
24
Oligopoly
– “the chosen few”
(3 or 4) firms control 70% of the market.
Monopoly – 1 firm industry
(Cable TV)
Duopoly – 2 firm industry.
(Coke & Pepsi)
[P&G (47%) & Kim-Clark
(30%) in diapers]
“Oligo” – few in an industry.
(“Big 3 or 4” or even “Big 5 or 6”)
Two Types of Oligopolies
25 Pure (Undifferentiated) Oligopoly – 3 or 4 producers
dominate the production of an identical product (steel, zinc,
copper, aluminum, lead, cement, industrial alcohol)
Differentiated Oligopoly – 3 or 4 producers dominate the
production of differentiated (similar) products. [typewriters,
tires, soap, cigarettes, refrigerators, cereals, TVs & autos]
Duopoly – when 2 firms dominate an industry.
Coke products have 43% of the market and Pepsi products have 32%.
1. Coke Classic
2. Pepsi Cola
3. Diet Coke
4. Mountain Dew
5. Diet Pepsi
6. Sprite
7. Dr. Pepper
8. Caffeine Free Diet Coke
9. Diet Dr Pepper
10. Sierra Mist
Pepsi’s first commercial in 1939 became so popular, it became
a hit record and was played in jukeboxes. A 12-ounce bottle sold
for a nickel. Here it is.
Big 3 Subscribers[mil.]
51.6 M
AT&T
Wireless
47.4 M
Verizon
Wireless
Oligopoly Examples
40.4 M
Sprint
Nextel
Market Share of Phone Sales
Nokia
34% Siemens
7%
Motorola 16% L.G.Telecom 7%
Samsung 11% Sony
6%
Autos – “Big 3” – GM, Ford, Daimler-Chrysler-Benz
Athletic Shoes–“Big 4”–Nike, Reebok, New Balance, Adidas,
[Nike made $10 billion in 2004] Shox is Nike’s latest
Beer – “Big 3” – Anheuser-Busch, hot seller. It is modeled
on a 10,000 year old
Miller, & Coors sandal discovered in
an Oregon cave.
Cereals – “Big 3” – Quaker Oats,
General Mills, & Kelloggs
TV Networks – “Big 4” – NBC, CBS, ABC & Fox
There are also oligopolies in chewing gum,
light bulbs, typewriters, photocopiers, and
sewing machines.
And Who Is Winning The Sneaker Wars?
1.
2.
3.
4.
Nike
36.4%
Reebok
12.5%
New Balance 10.9%
Adidas
9.1%
Four Market Conditions For Oligopolies
1. A few sellers control over 70% of market.
2. Firms offer identical or differentiated
products (real or imaginary). Advertising important.
3. Product information must be easily available. They
use informative advertisement (price, quality, and
special features) to introduce new products.
4. There are huge barriers to entry into the industry.
The three major barriers are technological
knowledge, money, & brand name loyalty.
In 1980, it cost Ford $3 billion to equip a factory
that would produce two new subcompacts.
Entry is difficult because many have patents or
own essential raw materials. This makes it difficult for
new firms to try to compete.
Oligopoly and Price
Oligopolies control price to some degree by creating
brand name loyalty and using non-price competition.
26 Price Leadership – when one firm, usually the largest
and most powerful in the industry, offers a new product at a
certain price. The others then follow because they fear a
price war or because they would be better off financially by
doing so.
In other words, oligopolists play the game, “follow the leader”.
Price leadership is legal (unlike collusion) because it does
not involve any agreement among competitors. If the
competition does not follow the leader’s price, the leading firm
may be forced to change its price and fall in line with the prices
of the competition.
27 Collusion – a formal price agreement among competitors.
This is illegal because it presents a danger to free competition.
Even one email from one manager to another is illegal.
Price-fixing
In 1996, Archer Daniels Midland Company, one
of the country’s most influential corporations,
pleaded guilty to criminal price-fixing charges
and was fined $100 million. That fine was by
far the largest ever obtained by the Justice
Department in a price-fixing case. The charge
was that Archer Daniels conspired to fix the
prices of lysine, a feed additive, and citric acid,
used in a number of food products.
Price-Fixing Fines
Vitamin Makers
Hoffman La Roche 40% $500 million fine
BASF AG
20% $225 million fine
Rhone-Paulene
15% Spilled the beans on co-conspirators
Both had to pay a total fine of $725 million because of massive
price-fixing that inflated the cost of everything from breakfast
cereal to hamburgers over the past decade. The suits were
brought by livestock farmers and other purchasers of bulk
vitamins who allege they were forced to pay illegally inflated
prices. It hurt every American consumer who took a vitamin,
drank a glass of milk, or had a bowl of cereal.
What was the result of the MIT
1993 Price-Fixing Case?
Eight Ivy League schools agreed
to stop colluding to fix prices, and
MIT was found guilty of price fixing.
PalmTran
Basic Cable Rate
SRCHS
Greyhound
Waste
DART
Management
Government Monopoly
Owned & operated by G
Ex: U.S. Mail
State Highways
U.S.Mail
“Price Makers”
Monopoly
Rubik’s
Cube
Natural Monopoly
Competition would be
chaotic. It is natural
to give it to one co.
Ex: Utilities
Cable TV TXU
Cable TV
[mono(1) poly (seller)]
Control over price: Total
Product: unique
Ex: Comcast Cable TV
Technological Monopoly
“Patent”
Ex: Rubik’s Cube
Cable TV
Geographic Monopoly
Only seller in a specific area
Example: Remote Store
Monopoly – the “power of one”
7 Pure Monopoly – one firm industry [“monopolist”]
Pure Monopoly’s Market Condition
1. One firm is the only seller. Advertising promotes image.
2. No close substitute goods are available.
8 3. Prohibitive barriers to entry in the industry. High investment costs and technological expertise prevent others from
entering the market. Legal restrictions make entry in
government-supported monopolies nearly impossible.
4. Almost complete control of market price.
9 Monopolist have much control over price because they are
the only seller. A higher price would hurt demand. The state
may control the price on some legal monopolies. These single
suppliers are “price makers.”
Four Types of Legal Monopolies
11 1. Natural Monopoly – where competition would be
chaotic, it is natural to give the business to one firm. Imagine
the confusion if 5 different busses raced each other
to the corner to pick up a passenger. Competition
would be impractical, inconvenient, & unworkable.
Greyhound
12 Examples: Public Utilities (electric & gas) – privately owned
companies (buses-Continental Trailways) but regulated by the
government. Comcast Cable TV in Plano. The government
monitors the natural monopolies to ensure that they provide
quality service at reasonable rates.
AT&T had a long-distance telephone natural monopoly for
75 years.
Waste Management
TXU Electric
Natural Monopoly
• Where competition
• Ex’s are utility companies would be chaotic,
and cable TV
therefore, it is natural
to give the business
to one firm
• They are privately
owned, but regulated
by the government
• Market where
average costs are
lowest when all
output is produced by
a single firm
13 Government Monopoly – monopoly owned
and operated by the government.
The difference between natural [privately owned]
& government monopolies [government owned] is
that these monopolies are owned operated by any
level of government.
Examples would be interstate highway system,
public libraries, public schools, Postal Service, & DART.
In most cases, government monopolies deal with
economic products needed for the public welfare
but which people would not be provided adequately
by private industry. Most tend to provide goods that
enhance the general welfare rather than seek profits.
Pilot Point High
[Local G]
State G
Federal G
Dart
Dart
Examples of Government Monopoly
• The Government has
control over:
• U.S. Mail,
• State highways, and
• Public schools
Another mugging
at Bryan Adams
Bryan
Adams
14
Geographic Monopoly – when a firm is the
only seller of a good in a specific location.
The “Last Chance Gas Station” is the last one within
50 miles of Mexico. A general Store in a remote
community has a monopoly because the area can’t
support two stores. Geographic monopolies are not
guaranteed.
Examples of Geographic Monopoly
• “Last Chance Gas
Station”
Last Chance Gas
• A general store in the
middle of nowhere
14 4. Technological Monopoly – results from the
invention of a new product (patent) or when
technology changes the way a good is produced.
General Dynamics is the only defense contractor
with the technology to build Trident Submarines.
16 A patent gives an individual
or firm exclusive right to produce, use or dispose of an
invention or discovery for
20 years from the date of filing.
To obtain a patent, you must go to the Patent
Office after doing research to make sure the
patent has not already been patented. Then
You hire a patent lawyer to file your patent.
All of this takes about 18 months. The total
cost for a patent runs about $5,000.
17 It is very expensive to wage a patent
infringement suit, around $300,000.
Polaroid’s camera
patent prevailed
& won $929 million.
Polaroid had accused
Kodak of infringing
on 7 instant photo
patents & it took 10
years to make it to
the Supreme Court.
Fiscal Year
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Applications Filed
116,427
121,611
126,407
137,069
151,331
163,571
167,715
172,539
174,553
186,123
221,304
191,116
220,773
240,090
261,041
293,244
326,081
333,688
333,452
355,527
Why didn’t I think of that?
384,228
Patents Filed
Each Year
Top 20 Patent Recipients in 2006
Patents
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
3,621
2,451
2,366
2,229
2,110
1,959
1,771
1,732
1,672
1,610
1,487
1,463
1,200
1,051
906
Company
IBM
Samsung
Canon
Matsushita
Hewlett-Packard
Intel
Sony
Hitachi
Toshiba
Micron Tech
Fujitsu
Microsoft
Seiko
GE
Fuji Photo
Patents
16. 896
17. 890
18. 880
19. 854
20. 778
Company
Korninklijke
Infineon Tech
TI
Siemens
Honda
Some Sad News Today About
The Pillsbury Doughboy
• A great icon of the entertainment community has died today
at age 71, the Pillsbury Doughboy.
• He died yesterday of a yeast infection and complications from repeated
pokes in the belly.
• Doughboy was buried in a lightly greased coffin. Dozens of celebrities
turned out to pay their respects, including Mrs. Butterworth, Hungry
Jack, the California Raisins, Betty Crocker, the Hostess Twinkies, and
Captain Crunch.
• The gravesite was piled high with flours. Aunt Jemima delivered the
eulogy and lovingly described Doughboy as a man who never knew
how much he was kneaded.
• Doughboy rose quickly in show business, but his later life was filled
with turnovers. He was not considered a very smart cookie, wasting
much of his dough on half-baked schemes. Despite being a little flaky
at times he still, as a crusty old man, was considered a roll model for
millions.
• Doughboy is survived by his wife, Play Dough; two children, John
Dough and Jane Dough; plus they had one in the oven. He is also
survived by his elderly dad, Pop Tart.
18 Copyright – gives the author or artist the
exclusive right to publish, sell or produce his work
for his life + 50 years. So, copyrights protect
written works of art.
Top-Earning Dead Celebrities
1.
2.
3.
4.
5.
6.
7.
Kurt Cobain
$50
Elvis Presley
$42
Charles Schulz
$35
John Lennon
$24
Albert Einstein
$20
Andy Warhol
$19
Theodor Geisel (Dr. Seuss) $10
8. Ray Charles
$10
9. Marilyn Monroe $8
10. Johnny Cash $8
11. J.R.R. Tolkien $7
12. George Harrison $7
13. Bob Marley
$7
14. Jerry Garcia
$5
Practice Quiz
[What kind of monopoly do the following have?]
A. Natural
B. Government
C. Geographic
D. Technological
___
___
___
___
___
___
1.
2.
3.
4.
5.
6.
Rubik’s Cube
Comcast Cable TV in West Boca
Florida Gas
The “Last Chance Gas Station”
SR High School
Constructing a state highway between
Naples and Tampa
___ 7. Nike’s combo athletic shoe & one-wheel
skate
___ 8. Only one man living in an isolated Trailer
Park with 50 women
Monopoly Quiz
A. Natural B. Technological C. Government D. Geographic
1. Palmtran – bus service (supported by taxes)
2. Postal Service (U.S. mail)
3. Boca High School
4. Construction on a state highway
(supported by gasoline taxes)
5. Comcast Cable TV in Plano
6. FPL Electric (privately owned)
“Privately owned”
7. Waste Management (privately owned)
8. Bell Helicopter producing patented
V-22 Osprey
9. Polaroid Instamatic (patent)
10. Remote Drugstore in Podunk, FL
“Remote store”
Competition and the Market Structure
Price Control and the Market Structure
Least control over price
Most control over price
Very
Many
Agric. products
Fishery
Some
Fair
Amount
Extensive
Fair amount
with
differentiated
Extensive
oligopolies
Cable TV
Water
Antitrust Legislation
Since the 1880s, the federal government had aided competition. To promote
efficiency, certain legal monopolies have been allowed to exist.
28 Trusts – legally formed combinations of corporations or companies.
In the latter half of the 1800s, cutthroat competition and mergers created trusts
in steel, meatpacking, oil, sugar, coal, and tobacco. They were actually large cartels.
By the 1880s, the government passed laws to protect competition.
Anti-trust legislation – designed to monitor and regulate big business,
prevent monopolies and break up existing monopolies.
1. Interstate Commerce Act-1887 – created the ICC to oversee railroad
rates. Today it regulates railroads, motor vehicles, & other freight carriers.
29 2. Sherman Anti-trust Act-1890 – the “cornerstone of anti-trust legislation.”
It prohibited any agreements, contracts or conspiracies that would
restrain interstate trade or cause monopolies to form. This act protected trade
against unlawful restraint & monopoly. It was the 1st significant act against
monopolies. Later legislation defines the principles in this act.
The Sherman Anti-trust’s failure to define key terms such as “trusts” and
30 “restraint of trade” made it somewhat ineffective. It was not clear what was
legal or illegal. This act also ran contrary to the economic theory of
laissez-faire (hands-off by the government) attitude of the past 100 years.
Senator
John Sherman
And What About Microsoft?
Should They Be Broken Up Into The “Baby Bills”?
Microsoft was accused of forcing
computer makers to install its
browser [Internet Explorer] as a
condition of licensing Windows.
31. Economies of Scale [“economies of mass production”]
Exist when firms are large enough to take advantage of mass
production techniques. Or, “Why it may cost only a little more
to produce twice as much.”
Variable costs may not change
Fixed cost
don’t change
much if workers were underworked and the oven was not
being used to capacity.
The End
Name 1. ________________
Name 2.________________ Market Structure Word Scramble
[From the word scramble below, pick out the 5 correct answers for each market structure]
*Write the bold face type.
Oligopoly
1._______________________
2._______________________
3._______________________
Natural, Geographic,
4._______________________
Technological, & Gov.
5._______________________
Perfect Competition
Nike, Reebok, New
1._______________________
Balance, and Adidas
2._______________________
Homogeneous product 3._______________________
4._______________________
[Identical]
5._______________________
Pure Monopoly
Identical (pure) or
differentiated products 1._______________________
2._______________________
3._______________________
Price Leadership
4._______________________
is used
5._______________________
Polaroid Instamatic
Monopolistic Competition
McDonald’s, Wendy’s, 1._______________________
2._______________________
and Burger King
3._______________________
Product differentiation 4._______________________
5._______________________
gives an element of monopoly
A few control 70%
of the market
Very many (100’s) sellers
Price takers
Many [25-75] sellers
One seller
Easiest to enter
Comcast Cable TV
Economics (college)
Textbook Companies
(over 50 of these and they
are differentiated
Black eyed peas
Blue Jean Companies
(dozens and differentiated)
Price Maker
Beauty Shop
Name 1. ________________
Answers
Name 2.________________ Market Structure Word Scramble
[From the word scramble below, pick out the 5 correct answers for each market structure]
*Write the bold face type.
Oligopoly
1. Few control 70%
2. Nike, Reebok, N.Bal., & Adidas
3. Identical or differentiated
Natural, Geographic,
4. Price Leadership
Technological, & Gov.
5. McD’s, Wendy’s, & Burger King.
Perfect Competition
Nike, Reebok, New
1. Easiest to enter
Balance, and Adidas
2. Homogeneous product
Homogeneous product 3. Very many sellers
4. Price Takers
[Identical]
5. Black eyed peas
Pure Monopoly
Identical (pure) or
differentiated products 1. Nat, Geog, Tech, & Gov.
2. Polaroid Instamatic
3. One seller
Price Leadership
4. Comcast Cable TV
is used
5. Price Maker
Polaroid Instamatic
Monopolistic Competition
McDonald’s, Wendy’s, 1. Product differentiation
2. Many sellers
and Burger King
3. Econ Textbook Co’s
Product differentiation 4. Blue jean companies
5. Beauty Shop
gives an element of monopoly
A few control 70%
of the market
Very many (100’s) sellers
Price takers
Many [25-75] sellers
One seller
Easiest to enter
Comcast Cable TV
Economics (college)
Textbook Companies
(over 50 of these and they
are differentiated
Black eyed peas
Blue Jean Companies
(dozens and differentiated)
Price Maker
Beauty Shop