4 Market Structures Economics 2016

Perfect Competition Number of Firms:Lots of small Type of Product:Identical Control over Price?:Zero Ease of Entry:Very Easy Non-Price Competition:None Law of Diminishing Returns –When one factor of production is fixed – it takes larger amounts of other inputs to increase output –Costs rise faster than outputs

Industry Structures Perfect Competition –Large number of producers –There is a standardized product –There is no control over prices Only the market decides price of goods –Easy for firms to enter/drop out of market –If Price, Supply, and Prices Law of Diminishing Returns –When one factor of production is fixed – it takes larger amounts of other inputs to increase output –Costs rise faster than outputs

Differentiated Competition Number of Firms:Several Type of Product:Similar, but slightly different Control over Price:Some Ease of Entry:Easy, but… Non-Price Competition:Total

Industry Structures Differentiated Competition –There are many firms, but no standard product –Firms can differentiate to be unique and increase appeal –It is relatively easy to enter market (drawn by profits) which causes profits to fall –Tremendous money spent on advertising, packaging, etc.

Oligopoly Number of Firms:4 = >50% Type of Product:Standard Control over Price:Issues of cartel, collusion, etc… Ease of Entry:Difficult Non-Price Competition:Lots, but… Price “Leadership” VS. Price “War”

Industry Structures Oligopoly –Market controlled by a few large firms 4 firms control > 50% –Can maximize profit by restricting output If a formal agreement, then a cartel –Cooperation among producers is beneficial because prices and profits are kept high (price leadership) –If no cooperation then a price war erupts and prices and profits

Pure Monopoly Number of Firms:One Type of Product:Single Control over Price:Total Ease of Entry:Impossible Non-Price Competition:None Example:

Industry Structures Pure Monopoly –Only on firm exists in the market –Extremely rare, except public utilities –Can or Price to maximize profits –To keep Revenue - producers can Supply and keep prices –“natural monopolies” P Q P2 P1 D1 S2 S1

Regulation of Monopolies

Monopolistic Practices Trusts –Groups of companies in same industry working together as a monopoly - ILLEGAL Consortiums –Groups of firms working together towards a common purpose (i.e. research) - LEGAL Helps regulate costs and facilitate labor Natural Monopolies –Single firm can serve the market/consumers better than multiple firms - LEGAL –Subject to intense regulation

Anti-Trust Policy The goal of government intervention is to prevent or dismantle concentrations of market power. Antitrust policy–government intervention to alter market structure or prevent abuse of market power.

History of Government Regulation Interstate Commerce Act (1887) –Rail rates between states must be fair & reasonable –Firms can’t share traffic or earnings –All rates must be made public Sherman Anti-Trust Act (1890) –Prohibits “conspiracies in restraint of trade” that threaten to monopolize an industry. –No price fixing or contracts that limit competition –No enforcement….there’s going to be trouble…

Clayton Anti-Trust Act (1914) –Put “teeth” in Sherman Act –Can’t accumulate stock in competing companies –NO MERGERS of competing firms –No collusion between competing firms Celler-Kefauver Act (1950) –Designed to prevent competing firms in same industry from merging if it lessens competition –No horizontal mergers History of Government Regulation

Anti-Trust Decisions Antitrust legislation has been used to break up: –The steel and tobacco monopolies in the early 1900s. –The AT&T monopoly in the 1980s. –Microsoft in the 1990s –Time Warner & Comcast?

Deregulation? The challenge for public policy is to decide when any government intervention is justified, then intervene in a way that improves outcomes in the least costly way.

Benefits of Deregulation Lower prices for consumers –Result of increased competition Better service for consumers –“usually” the case Increased access to markets for new firms –Ease of entry much “easier” Wider range & number of services

Problems with Deregulation Older firms pushed out due to increased competition –Unable to compete in tighter market Increased unemployment –Firms run “leaner” and more efficiently Firms often work outside of labor unions Increased customer issues –Just look at Sprint