Turn to your partner and tell them three words you think of
when you hear the word
COMPETITION
Competition and Markets
Every business firm operates in a
MARKET STRUCTURE
Copy this chart on a full sheet or 2 of paper:
Market
Structure
Perfect
Competition
Monopoly
Monopolistic
Competition
Oligopoly
# of
Sellers
Types of
Products
Barriers to Control
Entry
Over Price
Examples
Perfect Competition
• Many buyers and many sellers
• The market is perfectly transparent
– Everyone has access to all relevant information
Perfect Competition
• All firms sell identical products.
Perfect Competition
• It’s easy to get into and out of the market.
Perfect Competition
• Sellers are price takers. They must sell
their product at the equilibrium price and
not one penny more
Perfect Competition
• A market may not satisfy one or more of
the four conditions and still be perfectly
competitive
• What determines whether a market is
perfectly competitive or not is if firms
(sellers) in the market are price takers.
Perfect Competition
• Wheat Market, Corn Market, Stock Market,
other agricultural markets
Critical Thinking
• Some of the 200 firms in Market X, a
perfectly competitive market, are incurring
losses. How will these losses influence….
– seller’s entrance/exit to the market?
– the supply of the good produced in the market?
– the price of the good?
• How can a seller determine whether or not
they are a price taker?
• Can he/she sell any of the product for
even one cent more than equilibrium
price?
Turn to your partner and tell them three words you think of
when you hear the word
MONOPOLY
Monopoly
• there is 1 seller.
Monopoly
• The product sold is UNIQUE – there are
no close substitutes
Monopoly
• Extremely high barriers to entry…it’s hard
to get into a monopoly market.
• Legal Barriers
“government monopolies”
– public franchise
– patents
– copyrights
• Extremely Low Per-Unit Costs
– a natural monopoly
“market monopoly”
• Exclusive ownership of an essential resource
Monopoly
•
•
•
•
US postal service 1st class mail
Vista Irrigation District
Cox Cable
historically:
– Alcoa
– DeBeers
– Standard Oil
– AT&T
Monopoly
• Monopolists are price searchers. They
can sell some of their product at various
prices.
• The demand curve will determine how
much they can sell and at what price.
• Price will be determined based upon their
decision on how much to produce.
Market
Structure
# of
Sellers
Perfect
Competition
many identical Low or Price
none
takers
1
Unique Extremely Price
Monopoly
Types of
Products
Barriers to Control
Entry
Over Price
high
Monopolistic
Competition
Oligopoly
searchers
Examples
OXYMORON ???
•
•
•
•
•
•
•
•
CONSTANT VARIABLE
TERRIBLY GOOD
VEGETARIAN MEATBALL
THUNDERING SILENCE
GOING NOWHERE
JUMBO SHRIMP
ANTI-MISSILE MISSILE
HOPELESSLY OPTIMISTIC
Monopolistic Competition
• shares characteristics of both perfectly
competitive and monopoly markets.
Monopolistic Competition
• there are many buyers and sellers
Monopolistic Competition
• Firms sell slightly differentiated products
Monopolistic Competition
• Easy entry and exit from the market
Monopolistic Competition
• Price Searchers
• They can sell some of their products at
various prices because they sell slightly
differentiated products.
• They decide how much to produce by
searching for the price where they can sell
all of their output
Monopolistic Competition
•
•
•
•
•
•
•
Burgers
Clothing
Coffee Houses
Gas Stations
Cosmetics
Movie Theaters
Auto Mechanics
Competitors and Monopoly
•
Many businesses would like to become a
monopoly
– they advertise perceived differences
•
Competition depends on two factors:
1. How close to unique the product is
2. How easy it is for sellers to enter the market
With your neighbor…
• Think about a monopolistically competitive
company from which you have made a
recent purchase.
– What are the substitutes’ prices?
• Why can there be a range of prices?
– Why did you purchase the one you did?
Oligopoly
•Name five American car
manufacturers
Oligopoly
• There are few sellers.
• A few sellers account for a large
percentage of sales
Oligopoly
• Firms produce identical or slightly
differentiated products.
Oligopoly
• Entry into the market is difficult.
• low per-unit costs
• patents
• control of resources
Oligopoly
• Price Searchers
• slightly differentiated products
• difficult to get in the market
• the few sellers may be able to control price through
agreement or cooperative action
– cartel agreements (illegal)
Oligopoly
•
•
•
•
cars
cereal
airlines
entertainment
Identifying Oligopoly Industries
• Economist determine whether a market is an oligopoly by
looking at the percentage of sales accounted for by the top four
firms in the industry
– 6 major film studios = 90% of revenue
• 20th century, Warner Brothers, Paramount, Columbia, Universal, Walt Disney
• Dreamworks (Viacom bought—owned by Paramount)
– 2008 became independent again but distributed by Disney
• Leading Indies: Lionsgate, Summit Entertainment, MGM (former Biggie!)
– 4 music companies = 80% of revenue
• Sony, EMI, Universal, Warner
– 6 book publishers
– 3 television networks (1950-1970)
•
•
•
•
ABC/Disney
CBS
NBC Universal
2 added since
– Time Warner
– News Corporation (FOX)
– Food processors: Kraft, Nestle, PepsiCo
Market
Structure
# of
Sellers
Perfect
Competition
many identical Low or Price
none
takers
1
Unique Extremely Price
Monopoly
Types of
Products
Monopolistic
Competition
Many
Slightly
differentiated
Oligopoly
Few
sellers
Identical or
slightly
differentiated
Barriers to Control
Entry
Over Price
high
searchers
Easy
entry
Difficult
entry
Price
searchers
Price
Searchers
Examples
Review
• Firm A is a perfectly competitive firm. Why
can’t it sell its product for one penny
higher than equilibrium price?
• Buyers would know that they could buy
that identical product for the cheaper price.
Why would they pay one penny more?
Review
• To become an attorney, a lawyer must
pass the bar examination. Is the bar
examination a barrier to entry in the law
market?
• Yes
Review
• Firms in a monopolistic competitive market
produce slightly differentiated products. How
might these products be differentiated?
• Besides differences in product, they could be
sold in different locations, by different people, in
a store, online or by phone. They can be
bundled with different services or sales
conditions.
Review
• How can profits be “competed away” in a
perfectly competitive market?
• It’s an easy market to enter. When
businesses see the high profits, they enter
the market. More supply lowers the
price…
Review
• What are the two major factors that decide
how much competition a firm faces?
• How close to unique is the product?
• How easy is it to get into the market for
this product?
“Stupid is as stupid does.”
As you watch the clip from “Forest Gump,” note the
process related to Bubba Gump Shrimp’s position in
the shrimping market.
1. Before the hurricane, how does the shrimping
industry resemble a perfectly competitive market?
2. How does the hurricane change the market price
and quantity of shrimp? (Use supply & demand
graphs to illustrate.)
3. How did the hurricane create a monopoly for Bubba
Gump Shrimp? Use the characteristics of a
monopoly to support your answer.
4. Do you think Forest can maintain his monopoly
status over time? (In other words, are there barriers
to entry?) Explain.
Homework
MyVote California
• Research your assigned topic.
– Be prepared to develop a short 2-3 minute
presentation with your group outlining the five parties
on the gubernatorial and senatorial race.
• Select one:
»
»
»
»
American Independent
Green
Peace and Freedom
Libertarian
• Democratic and Republican--all
• Company Analysis Sheets (Stock Market Part I)
due Friday, October 22.