MARKET STRUCTURES

COMPETITION AND MARKET STRUCTURES  Adam Smith published The Wealth of Nations in 1776 when there were small factories and business was competitive.  Laissez-faire, the idea that government should not interfere with the economy was the primary idea  Laissez-faire is French for “allow them to do”; government should settle disputes, enforce contracts, protect private property, protect domestic business from foreign competition  Today, many markets are dominated by a few large firms

 Economists must ask… -How many buyers and suppliers are in the market? -How large are they? -Does either have any influence over price? -How much competition exists between firms? -What kind of product is involved? -Are the items involved the same or similar? -Is it easy to get into this market?  These answers determine market structure – nature or degree of competition in a particular industry

PERFECT COMPETITION  Economists group industries into four different market structures – perfect competition, monopolistic competition, oligopoly, and monopoly -Perfect competition – a large number of well-informed independent buyers and sellers who exchange identical products -Conditions of perfect competition: - many buyers and sellers (so one doesn’t have enough power to influence price) - Identify products (no need for advertisement; no brand names); table salt is an example because one isn’t better than the other; - buyers and sellers act independently; sellers compete against sellers; buyers compete against each other; keeps prices low - buyers and sellers are well informed; they know the items are the same; sellers must match prices of competition -buyers and sellers are free to enter and leave market; keeps prices competitive *There are very few, or maybe no perfectly competitive markets.

IMPERFECT COMPETITION  Imperfect competition – lacks one or more of the factors of perfect competition -Almost everything in the U.S. market is imperfect competition -monopolistic competition, oligopoly, and monopoly

MONOPOLISTIC COMPETITION  Has all conditions of perfect competition except for identical products; by making a small change, a competitor tries to monopolize a small part of the market  Producers want product differentiation – subtle changes to the original product to increase demand and profit such as Nike v. Under Armour -some are just linked to star athletes  Nonprice competition – producers use advertising and other campaigns to convince buyers that the product is better than another. Is this true?  In monopolistic competition – similar products generally similar products will sell at similar prices; customers will forget modest differences in prices

OLIGOPOLY  Few sellers dominate the industry  ex. Auto industry  Must be able to change output  Ex: Coke, Pepsi; Mcdonalds, Burger King - When one makes changes, the others usually follow ex: airlines; one has as impact; that impacts the industry - Sometimes firms agree on price fixing and they will share profits

OLIGOPOLY  They raise prices in hopes that others will follow the trend; if it doesn’t work, they follow the market; same thing with lowering prices  Price is many times higher than under a monopoly. Why?

MONOPOLY  One seller of a product  There are very few  Our government does not like monopolies  Natural monopoly – costs of production are minimized by having a single firm product a product Ex: utilities; wasteful for multiple pipelines

MONOPOLY  Geographic monopoly – a monopoly because or lack of other sellers; one gas station in an area  Technological monopoly – you own the method or the process; if you own a process it is usually for 20 years; some things can be protected through a copyright;  Government monopoly – monopoly the government owns; such as water or the liquor store

FOUR MARKET STRUCTURES

 Government in the U.S. Economy Government in the U.S. Economy