Chapter Seven
Market Structures: Why market
competition affects you every time
you shop!
Rule of Business:
The more
competitive the
industry, the more
the consumer
benefits.
Market Structureecon model of
competition among
businesses in the
same industry
Rule of Capitalism:
Encourage
competition between
firms in an industry
(market).
The consumer
benefits:
• $$$
• Variety of products
• Lots of information
about products
Type
Perfect
Competition
Pure
Monopoly
Oligopoly
Monopolistic
Competition
Number Product
Ease
of
Differenti of
Sellers
ation
Entry
Informati
on
available
Control
over price
Examples
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 (5)
Numerous buyers and
sellers
Standardized product
Freedom to enter and
exit markets
Independent buyers
and sellers
Well-informed buyers
and sellers
Numerous Buyers and Sellers:
No single buyer or
seller has enough
power to control
demand, supply or
prices.
Think farming!
Standardized Products
Corn is corn. Apples
are apples.
Buyers choose one
product over
another primarily
based on price – not
on unique
characteristics.
Freedom to enter and exit
markets
For sellers to
compete perfectly,
they must be able to
enter a profitable
market - or exit an
unprofitable market
– EASILY.
THINK FARMING!
Independent buyers and sellers
Buyers can’t join
other buyers and
sellers can’t join
other sellers to
influence the
price
Well-informed Buyers and Sellers
Buyers are
knowledgeable
about products.
Can compare
products easily.
Sellers know what
competitors are
charging
Competition in the Real World
Imperfect Competition-markets have
few sellers or products that are not
standardized.
No perfectly competitive markets.
Examples?
corn
Monopoly
There is only one seller of a product
and there are no close substitutes
Rare
Cartel-group that acts together to set
prices and limit output.
Monopoly
They are the price maker
No competitors to compete with, they
determine prices
Barriers to entry-makes it difficult to
enter the market
Monopoly: characteristics
Only one seller
De Beers
Restricted, regulated market
Local electricity
Control of prices
Created shortage (with-held Diamonds)
Types of Monopolies
Natural-occurs when the costs of
production are lowest with only one
producer
Ex. Electricity
Economies of Scale- the average cost of
production falls as the production grows larger
Types of Monopolies
Governmental- government owns or
runs the business or authorizes only
one producer
Postal Service
Types of Monopolies
Technological- a firm controls a
manufacturing method, invention, or
type of technology
Polaroid Corporation
Patent-gives an inventor the exclusive
property rights to that invention or
process for a certain number of years
Types of Monopolies
Geographic- exists when there are no
other producers within a certain region
Ex. Professional sports teams
Only gas station in poedunk USA
Monopolistic Competition
Differs in ONE key
respect.
Sellers offer
DIFFERENT, rather
than identical,
products.
T-shirts
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
–
Many sellers and buyers
acting independently.
Similar but differentiated
products
Limited control of prices
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
many buyers
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!
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.
Regulation
Regulation-set of rules or laws to control
business behavior
Antitrust legislation-defines monopolies
and give gov’t power to control them
Trust- group of firms combined in order
to reduce competition in an industry
Merger-joining of two firms into one
firm
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.
Unfair business Practices
Price fixing- businesses agree to set
prices for competing products
Market allocation- competing business
divide the market amongst themselves
Predatory pricing- businesses set prices
below costs for a time to drive
competitors out of the market.
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?
Protecting Consumers
Cease and desist order- requires a firm
to stop a unfair business practice.
Public disclosure- a policy that requires
businesses to reveal product
information
Deregulating Industries
Deregulation- reduces or removes
government control of business.
Reaction is mixed (good or bad?)
Airline Deregulation 1978
THE END
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