Chapter 7
Chapter 7 Section 1
Competition and Market Structures
 1700’s – Laissez – faire economics introduced (limited
government)
 Market structure – the nature and degree of
competition among firms doing business in the same
industry
 4 Major Market Structures
Perfect Competition
2. Monopolistic Competition
3. Oligopoly
4. Monopoly
1.
Perfect Competition
 Market structured characterized by a large number of
well informed independent buyers and sellers who
exchange identical products.
 Theoretical situation (no need to advertise)
 Conditions necessary:
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Large number of buyers and sellers
Identical products
Buyers and sellers act independently
Well informed
free to enter, conduct or get out of business
Ex. – perfect competiton rarely exist – “farmer’s market” is the closest example
Perfect Competition
Benefits for society:
1.
Price will drop to a level that will benefit consumer and
suppliers
2. Economic Efficiency
3. Resources are used in most productive manner
4. No need to advertise – which keeps cost low for
consumers
Imperfect Competition
 Most Industries are a form of imperfect competition. They
lack one or more of the necessary conditions of a perfect
competition.
 There are three types of imperfect competitions:
 Monopoly
 Oligopoly
 Monopolistic Competition
Monopolistic Competition
 Market structure that has all conditions of perfect
competition except for identical products
 Product Differentiation
 Real or perceived differences between competing products
 Nonprice Competition
 The use of advertising, giveaways or other promotions to
convince buyers to purchase their products
 Advertising tries to convince consumers of the superiority
of given product, enabling companies to charge more than
market price for product
http://adage.com/century/jingles.html
Oligopoly
 A market structure in which a few large sellers dominate the
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industry – further from perfect competition than monopolistic
competition
All companies are interdependent; change in one will affect the
others
Competition is not solely based on price but product
differentiation (service, convenience, new feature, etc.)
Collusion – formal agreement to set specific prices (sellers
cooperate on price they charge. A.k.a. – price-fixing (illegal)
Inter dependence can lead to price wars or illegal act of “teaming
up” to raise prices – (ex. –cartels)
Best examples – Airline industry; fast food; automobile
Monopoly
 Most extreme form of imperfect competition
 Single seller controls the supply and price of product (ex. – closest
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example - local cable companies)
No entry: a competitor cannot enter the market due to government
regulation, large initial investment, or ownership of raw materials
Almost complete control of market price
Can raise prices with no fear of competition
4 Major Types of Monopolies:
 Natural Monopolies – cost of production is minimized by having a single
firm produce the product
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providers of telephone lines, cable T.V. (economies of scale)
 Geography Monopolies – are created due to geographic barriers for
competition (very small town – only one gas station) ex. Wesco?
 Technological Monopolies – are results of inventions that are patented
and copyrighted
 Government Monopolies – similar to natural monopolies but held by
government – water supply, weapons-grade uranium
Market Structures
Chapter 7 Section 2
Market Failures
 Market Failures – occurs whenever one of the
conditions necessary for competitive markets does not
exist
Inadequate Competition
1.
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Mergers and acquisitions
Legal monopolies are highly regulated by government
Inadequate Information
2.
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Knowledge of a product is essential for both buyers and
sellers
Resource Immobility
3.
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Resources, capital, human labor do not mobilize to highest
profit areas
Natural disasters
4. Public Goods
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Public Goods – collectively consumed by all people
National security, highways
No market pressure to create more or less (legislation)
Externalities
5.
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Negative externality (noise from expanded airport)
Positive externality (jobs created by extended airport)
Chapter 7 Section 3
The Role of Government
 Maintain Competition
 Anti-trust Legislation
 Trust – combination of firms designed to restrict competition
or control price
 Sherman Antitrust Legislation (1890) – 1st significant law
against monopolies
 Clayton Act (1914) – outlawed price discrimination
 Federal Trade Commission Act – authority to issue cease and
desist order
 Improve Economic Efficiency
 Promote transparency
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Public disclosure – requirement that businesses reveal
certain information to public
 (SEC) Securities and Exchange Commission – stock disclosure
 Provide public goods
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Public goods are not always financially rewarding
Government provides museums, highways, libraries
• Modified Free Enterprise
• Congress has passed laws that restrict large companies from
taking over small companies
• Government “interventions” – “Stimulus Package”