CHAPTER 7
MARKET STRUCTURE
7.1 Perfect Competition and Monopoly
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Objectives- Distinguish the features of perfect
competition.
Describe the barriers to entry that can create a
monopoly.
Compare the market structures of monopoly and
perfect competition in terms of efficiency.
Perfect Competition
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Market Structure- Important features of a market,
including the number of buyers and sellers product
uniformity across sellers, ease of entering the
market, and forms of competition.
Market Features
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1. Number of buyers- Are there many, only a few
or just one?
2. Products Uniformity- Do firms in the market
supply identical products, or are products
differentiated across firms.
Market Structure
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3. Ease of buyers into the market- Can new firms
enter easily or do natural or artificial barriers block
them?
4. Forms of competition among firms- Do firms
compete based only on prices, or are advertising
and product differences also important?
Perfect Competition
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Perfect Competition- A market structure with many
fully informed buyers and sellers of an identical
product and ease of entry.
Commodity- A product that is identical across
sellers, such as a bushel of wheat.
EX- There is no “shopping” around for a cheaper
bushel of a commodity. Works like a stock with
price changes up and down.
Monopoly
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Monopoly- A sole supplier of a product with no
close substitutes. Monopoly is a Greek word
meaning “one seller”.
EX- If Coke was the only cola on the market, then
they could charge any price they wanted for Cola.
Monopoly
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Market Power- The ability of a firm to raise its
prices without losing all sales to rivals.
Barriers to Entry- Restrictions on the entry of new
firms into an industry.
There are 3 types of entry barriers: Legal
restrictions, economies of scale and essential
resources.
Barriers of Entry
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Legal Restrictions- Companies that do not have
patents, licenses and other legal restrictions can’t
enter in the market.
EX- A T-shirt company just can’t put a UGA logo on
a shirt and sell it. It has to buy the rights and get
permission to use the logo in order to enter the
market of college t-shirts.
Barriers of Entry
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Economies of Scale- When one business satisfies the
market with lower than average cost per unit.
EX- Cherokee County Water- It is the only one in the
county, but its prices are set and regulated by the
county government. This is also called a natural
monopoly. Also, an example of a natural monopoly
is a grocery store out in the middle of the country.
Barriers of Entry
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Control of Essential Resources- Sometimes the source
of monopoly power is a firm’s control over some
resources critical to production.
China is the main supplier of Pandas. China is the
only country to have Pandas so they control all the
panda distribution of the world.
Monopolies
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Can a monopoly go broke? Yes- Pet Rock, the were
the only ones to make it and have a patent on it.
But, demand was there and the Pet Rock business
went out of business due to lack of demand.
Are TRUE monopolies rare? Yes. There is always
someone making a substitute close to the original
product.
EX- Coke and Pepsi
Monopoly vs. Perfect Competition
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Competition forces business to be efficient. If a
company is not, then the other company will get all
the business because they are doing a better job
with the services.
EX- Some people like Home Depot vs. Lowes
because Home Depot has better in-store customer
service.
Is a Monopoly that bad?
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Power or Water Company- Makes it easy to pick a
company because they are the only ones offered.
Government Regulation- Government does not
allow the power company to gouge anyone because
the prices per unit are controlled by the
government.
Companies will keep prices low to stop government
regulation so the company will get all the money
from the area it is servicing.
7.2 Monopolist Competition and
Oligopoly
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Objectives
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Identify the features of Monopolistic competition.
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Identify the features of Oligopoly and analyze firm
behavior when these firms cooperate and when
they compete.
Monopolistic Competition
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Monopolistic Competition- A market structure with
low entry barriers and many firms selling products
differentiated enough that each firm’s demand
curve slopes downward.
Honda vs. Toyota- Cars are very similar, but differ
enough that each company can control its prices
and not go out of business.
Product Differences
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Physical Difference- The way they look. Some
people like the look of a Civic over a Corolla.
Location- You can stay at a hotel anywhere, but
would you rather stay at a hotel on the beach or a
hotel in the middle of Kennesaw?
Services- Some restaurants deliver, some don’t.
Product Image- Celebrity influences. You may want
to buy something because you heard it in a rap
song.
Oligopoly
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Oligopoly- A market structure with a small number
of firms whose behavior is interdependent.
Oligopoly is a Greek word meaning “few sellers”
Dell, Apple, Acer and E-Machine are examples of
Oligopolies of computer companies. There are not
many who produce computers.
When Oligopolies Collude
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Collude- Is when two companies try and set the
same price in order for both companies to make
money.
Cartel- A group of firms who act as one.
EX- OPEC is a group of oil companies who work
together to set prices so all that are a member of
OPEC make money. They do not try and eliminate
competition.
7.3 Antitrust, Economic Regulation and
Competition
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Objectives:
Explain the goal of U.S. Antitrust Laws.
Distinguish between the two views of government
regulation.
Discuss why U.S. markets have grown more
competitive in recent decades.
Antitrust
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Antitrust Activity- Government efforts to prevent
monopolies.
Antitrust Activities:
Promote the market structure that will lead to
greater competition.
Reduce anticompetitive behavior.
Merger and Antitrust
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Merger- The combination of two or more firms to
form a single firm.
Southwest airlines is merging with AirTran. Why?
Deregulation- A reduction on government control
over prices. Because the government allowed more
airlines to exist, prices dropped and more people
began to fly more often.