Competition and Market Structures Chapter 7 Section 1

Market Structure : the nature and degree of competition among firms operating in the same industry. : the nature and degree of competition among firms operating in the same industry. There are 4 types: There are 4 types:

Perfect Competition 5 conditions: 5 conditions: 1. Large # of buyers and sellers 2. buyers & sellers deal in identical products --since there is no difference in quality, there is no need to advertise or have brand names there is no need to advertise or have brand names

3. each buyer & seller acts independently 3. each buyer & seller acts independently 4. buyers & sellers are well informed 4. buyers & sellers are well informed 5. buyers & sellers are free to enter into, conduct or get out of business 5. buyers & sellers are free to enter into, conduct or get out of business Each individual firm is too small to influence price Each individual firm is too small to influence price There is no real “perfect competition”—it is used to evaluate other market structures There is no real “perfect competition”—it is used to evaluate other market structures The closest to P.C. is truck farming The closest to P.C. is truck farming

Monopolistic Competition Has the characteristics of perfect competition except: Has the characteristics of perfect competition except: 1. Product differentiation: real or imagined differences between competing products in the same industry 2. Uses nonprice competition 1. Advertising 2. Giveaways 3. Free interest for a year

Oligopoly 1. very few large sellers dominate the industry 1. very few large sellers dominate the industry 2. products may be differentiated (cars) or standardized (steel industry) 2. products may be differentiated (cars) or standardized (steel industry) 3. single firm can change output, sales & price 3. single firm can change output, sales & price Examples: Pepsi and Coke Examples: Pepsi and Coke McDonald’s, Burger King and Wendy’s McDonald’s, Burger King and Wendy’s

Oligopoly continued 4. Act interdependently 4. Act interdependently *Collusion: a formal agreement to set prices in a cooperative manner *Collusion: a formal agreement to set prices in a cooperative manner *Price-fixing: agreement to charge the same price for a product *Price-fixing: agreement to charge the same price for a product * both are illegal because it restrains competition * both are illegal because it restrains competition

Oligopoly continued Price wars: when one company lowers their price, others will lower theirs and the next firm will lower theirs, etc. Price wars: when one company lowers their price, others will lower theirs and the next firm will lower theirs, etc. Work together to change price so they depend on advertising for competition Work together to change price so they depend on advertising for competition

Monopoly One seller of a product One seller of a product Not many in the US Not many in the US -- Cable & local phone companies are the closest 4 Types of Monopolies:

Natural Monopoly Costs of production are minimized by having one firm Costs of production are minimized by having one firm Home phone companies—each company would need their own wires and poles Home phone companies—each company would need their own wires and poles Water or gas companies—each would need their own pipes Water or gas companies—each would need their own pipes Gov’t gives these companies a franchise but will regulate price if necessary Gov’t gives these companies a franchise but will regulate price if necessary

Geographic Monopoly Based on the absence of other sellers in a certain geographic area Based on the absence of other sellers in a certain geographic area One drug store in a town One drug store in a town One gas station for the next 200 miles One gas station for the next 200 miles

Technological Monopoly Gov’t can grant a patent—an exclusive right to produce, use or sell any new invention for 20 years Gov’t can grant a patent—an exclusive right to produce, use or sell any new invention for 20 years Copyright—art and literary works for a lifetime plus 50 years Copyright—art and literary works for a lifetime plus 50 years

Government Monopoly Owned and operated by the gov’t Owned and operated by the gov’t Examples: Examples: Water Water Alcoholic beverages Alcoholic beverages Weapons of mass destruction Weapons of mass destruction

5 Reasons Why Markets Fail Chapter 7-2

1. Inadequate Competition Inefficient Resource Allocation Inefficient Resource Allocation inadequate competition usually means a firm does not use resources efficiently inadequate competition usually means a firm does not use resources efficiently Higher Prices & Reduced Output Higher Prices & Reduced Output artificial shortages cause high prices (monopoly) artificial shortages cause high prices (monopoly) Economic & Political Power Economic & Political Power firms back certain politicians that will support their business firms back certain politicians that will support their business

2. Inadequate Information When knowledge that is important to buyers is hard to find, failure may occur When knowledge that is important to buyers is hard to find, failure may occur

3. Resource Immobility The 4 factors do not move to markets where returns are highest The 4 factors do not move to markets where returns are highest Ex. Steel mill closes Ex. Steel mill closes Some will find work in the same town Some will find work in the same town Some people will move to find work Some people will move to find work Some will not be able to sell their houses Some will not be able to sell their houses Some do not want to leave their hometown Some do not want to leave their hometown

4. Externalities (unintended side effect) (unintended side effect) Negative Externality =harm, cost or inconvenience suffered by a 3 rd party Negative Externality =harm, cost or inconvenience suffered by a 3 rd party Ex. Noise pollution caused by a new wing at the airport Ex. Noise pollution caused by a new wing at the airport Positive Externality =benefit received by a 3 rd party that had nothing to do with the activity Positive Externality =benefit received by a 3 rd party that had nothing to do with the activity Ex. Restaurant gets more business because of airport expansion Ex. Restaurant gets more business because of airport expansion

5. Public Goods Need for goods that are collective used by the public Need for goods that are collective used by the public National defense National defense Police Police Fire Fire Highways Highways Difficult to collect $ for everyone’s “fair share” Difficult to collect $ for everyone’s “fair share” Gov’t must provide these things because they cannot be withheld if people can’t pay for them Gov’t must provide these things because they cannot be withheld if people can’t pay for them

The Role of Government Chapter 7 Section 3

Anti-Monopoly Legislation Sherman Antitrust Act Sherman Antitrust Act 1 st law against monopolies 1 st law against monopolies Clayton Antitrust Act Clayton Antitrust Act Outlawed price discrimination (charging different prices for the same product) Outlawed price discrimination (charging different prices for the same product) Federal Trade Commission Act Federal Trade Commission Act Cease and desist order—stop unfair bus. Practices (like price fixing) Cease and desist order—stop unfair bus. Practices (like price fixing) Robinson-Patman Act Robinson-Patman Act Forbade discounts of goods to large buyer unless discounts were available for all Forbade discounts of goods to large buyer unless discounts were available for all

Internalizing Externalities Tax system to lessen some negative externalities Tax system to lessen some negative externalities Example: pollution Example: pollution Say a firm dumps pollution into a local river so they do not have to pay for toxic disposal Say a firm dumps pollution into a local river so they do not have to pay for toxic disposal Who pays the price for the pollution? Who pays the price for the pollution? The public The public Gov’t taxes the producer (use the $ to pay for clean up) Gov’t taxes the producer (use the $ to pay for clean up) Causing the supply curve to shift to the LEFT (Q  and price  ) Causing the supply curve to shift to the LEFT (Q  and price  ) Hoped that the company will pollute less since they have to pay for the pollution Hoped that the company will pollute less since they have to pay for the pollution

Public Disclosure Requirement that businesses reveal information to the public Requirement that businesses reveal information to the public From labels on food to banks and CC explaining interest rates on loans From labels on food to banks and CC explaining interest rates on loans

Reasons for Gov’t Participation 1. promote and encourage competition 1. promote and encourage competition 2. prevent monopolies 2. prevent monopolies 3. regulate monopolies that are best for the public 3. regulate monopolies that are best for the public 4. fulfill the need for public goods 4. fulfill the need for public goods