Do Now
• Do you believe Wal Mart is “evil”/bad or are
they just a smart corporation?
Models of Competition
Market Structure
Models of Competition
• Def: a description of the type of market that a
particular business or industry operates in.
• Also know as Market Structure.
4 Types of Models of Competition
1.
2.
3.
4.
Perfect competition
Monopoly
Monopolistic competition
Oligopoly
Perfect Competition
• Def: A market structure in which a large
number of firms (businesses) produce the
same product
Four Conditions for Perfect
Competition
1. Many buyers and sellers- people have lots of
options to choose from when they buy.
2. Identical products – No difference in items
they are exactly the same
Four Conditions for Perfect
Competition (cont.)
3. Informed buyers and sellers- buyers know the
prices and qualities of goods.
4. Free market entry and exit- Business can
enter and exit the market when they want
Types of Businesses
•
•
•
•
Farmer’s Market
- Have many buyers and sellers
- Veggies are identical (a carrot is a carrot)
- Buyers can compare prices and quality
(informed)
• - Farmers decide to go or not
Are they many perfectly competitive
business?
• NO- All 4 conditions must be met.
• Ex: Products are rarely identical
Barriers of Entry
• Def- Factors that make it difficult for new firms
to enter a market
• Start up costs- costs needed to create and
enter a market (rent, machines, labor)
• Technology- (ex: software and pharmaceutical
companies)
Monopoly
• Def: A market dominated by a single seller.
• They take advantage of their monopoly power
and charge high prices
• Natural Monopoly- Allowed to exist because
the market runs better with just one firm
Ex: Monroe County Water Authority
Government Monopolies
• Patents: Licenses that give inventors exclusive
rights to sell their product for a time.
Monopolistic Competition
• Def: Many companies compete in an open
market to sell products that are similar but
not identical
Four Conditions of Monopolistic
Competition
1. Many firms- little start up costs=lots of firms
2. Few artificial barriers to entry- low barriers
3. Slight control over price- can raise prices
because products are a little different.
4. Differentiated products-Can distinguish their
product from others
What Types of Businesses are
Monopolistically Competitive?
•
•
•
•
•
•
Lots! Most markets exist in this model.
Ex. Soft Drinks- Coke Pepsi, Wegmans, etc
1. Many firms (choices)
2. Inexpensive to produce (few barriers)
3. Coke more expensive (control Price)
4. Some like Coke more than Pepsi (different
products)
How to get customers?
• Through Nonprice Competition : a way to
attract customers through style, service or
location but not a lower price.
4 Types
• 1. Characteristics of Goods: Firms distinguish
products through size, color taster etc.
• 2. Location of Sale
-Convenience stores
• 3. Service Level- Can charge higher price
because they offer a higher level of
service. Ex McDonalds vs Fancy rest.
• 4. Advertising Image- Advertising creates
differences between products
Monopolistic vs Perfect Comp.
Perfect Competition Monopolistic
Competition
Prices
Lower, firms have no
control
Higher, firms have some
control
Profit
Lower
Higher in short term, but
must work hard to keep
ahead of rivals
Cost and Variety
Low costs, no variety
(identical products)
Higher costs for
differentiation, wide
variety
Oligopoly
• Def: A market dominated by a few, large firms
• Ex: Cartels
• OPEC (Organization of Petroleum Exporting
Countries)- Countries that control the oil
supply and manipulate prices of gas
How do they work?
• Collusion- Agreement between members to
set prices and production levels
• Price Fixing- Agreement to sell at the same or
similar prices
• Both are illegal in US
Do Now
• Please answer the following questions:
• 1) Describe the term monopoly
• 2) What is the MAIN difference between
monopolistic and perfect competition
• 3) What are some barriers of entry to start a
business?
• 4) How do Cartels hurt competition?
Market Power
• Def: the ability of a company to control prices
and output
• Markets dominated by monopolies and
oligopolies have great market power
• Markets with many sellers (mono and perfect
comp) have little to no market power
Predatory Pricing
• Def- setting the market price below cost levels
for the short term to drive out competitors.
Firms in perfect comp. and mono comp. do this
to gain market power
Ex: Open up my pizza shop and sell slices for $1
even though it costs $1.50 to make. I can raise
the price later if I drive out competition.
Government and Competition
• The Government keeps firms from controlling
prices and supply of important goods.
Antitrust Laws are laws that encourage
competition and break up
monopolies/oligopolies in the marketplace.
4 Forms of Anti-Trust Laws
1. Regulating Business Practices-gov’t
intervenes if too powerful
2. Breaking Up Monopolies- (Standard Oil
AT&T)
3. Blocking Mergers- Can stop them
4. Preserving Incentives-must show benefits to
consumer
Deregulation
• Def: The removal of some government
controls over a market. It is used to promote
competition.
• Allows for more competition, lower prices,
increase in variety but can lead to layoffs and
business closings
• EX: Airlines in the 80’s