1 Market Structure Chapter 7

2 Competitive Markets Forces of supply/demand promote competition 2 basic types of competitive markets: Perfect Monopolistic

3 Perfect Competition Ideal market structure No one producer/consumer controls demand, supply, or prices Nothing prevents competition

4 Traits of a perfect competitive market 1. Many buyers and sellers Prevents one buyer/seller from controlling the market Each buyer/seller must act independently

5 Traits of a perfect competitive market 2. Identical Products Sellers in same industry must offer identical products (commodity)

6 Traits of a perfect competitive market 3. Informed Buyers Buyers are fully informed about the price, quality, and availability of products.

7 Traits of a perfect competitive market 4. Easy to enter/exit market Nothing prevents new producers from entering market Also have the freedom to switch Means: no obstacles preventing new firms from entering.

8 Traits of a perfect competitive market If these conditions exist in a market, individual buyers and sellers have no control over the price. Market price is determined by supply and demand.

9 NO MARKET IS PERFECTLY COMPETITIVE

10 Monopoly A monopoly is the sole supplier of a product with no close substitutes. Market Power- the ability of a firm to raise its price without losing all sales to rivals. Monopolies have market power, perfect competitors do not.

11 Chap. 7.2 Monopolistic Competition

12 Monopolistic Competition Differs from perfect competition in one key area: sellers offer different (slightly diff.) rather than identical products (restaurants, gas stations, drugstores, etc…) Very common market types

13

14 Coke and Pepsi are Monopolistic Competitors because: They are part of a large cola market in the US; most of the other cola drink manufacturers have smaller more regional markets. Coke and Pepsi can be thought of very much as national colas. They produce slightly different products but compete for the same customers. If one of them changes their price of a product due to a “new” cola, the other will change their price to try to capture to other cola drinkers who become jaded with the “new” product. They are part of a free market where anyone can start selling cola if they want to. One example of a new cola company is Jones cola based in Washington state.

15 Monopolistic Competition Characteristics 1. Can enter or exit market easily. 2. There are just enough sellers that they behave competitively. 3. When deciding price, a particular firm does not worry about how other firms in the market will react to a price change.

16 Product Differentiation Sellers in monopolistic competitive markets differentiate their products in four basic ways. Through: 1. Physical Differences 2. Location 3. Services 4. Product Image

17 Non-Competitive Markets Oligopolies: Market where a few top producers controls most of the market place 3 or 4 firms account for ¾ of the total output of a good. Steel, Oil, & Tobacco industries

18 Traits: Few large producers (2 – 4 producers control at least 70% of the market) Sellers offer identical/similar products (less likely to take a risk on new products) Other sellers can’t easily enter the market (high cost of entry and or government regulations on entry) Usually higher prices

19 How Oligopolies Set Price Interdependent Pricing: this means that oligopolies set the price on their products based on the prices of their competitors. Usually the largest producer will emerge as the price leader. If competitors do not follow the price leader, a price war may result.

20 Oligopolies To decrease competition and increase profit, oligopolistic firms, particularly those that offer identical products, may try to collude, or agree on a price (illegal). Collusion- this is an agreement among firms in the industry to divide the market and fix the price.

21 Collusion Leads to Cartels Cartel- this is a group of firms that agree to act as a single monpolist to increase the market price and maximize the groups benefits. illegal in US Organized way of setting prices in the open Ex: oil (OPEC)/diamonds

22 Chap. 7.3 Antitrust, Economic Regulation, and Competition

23 Antitrust Although competition typically promotes the most efficient use of the nation’s resources, an individual firm would prefer to operate as a monopoly. If left alone, firms may try to become monopolies or oligopolies, in which they are colluding and forming cartels.

24 U.S. Antitrust Activity Antitrust activity- attempts to prohibit efforts to monopolize markets. U.S. Antitrust Activity tries to: 1. Promote the market structure that will lead to greater competition. 2. Reduce anticompetitive behavior.

25 Antitrust Laws Antitrust laws attempt to promote socially desirable market performance. There are three main laws that are the backbone for the U.S. Antitrust Framework: 1. Sherman Antitrust Act of this outlawed the creation of trusts, restraint of trade, and monopolization.

26 Antitrust Laws 2. Clayton Act of outlawed certain practices not prohibited by the Sherman Act and to help government stop a monopoly before it developed. 3. Federal Trade Commission Act (FTC) of established a federal body to help enforce antitrust laws.

27 Mergers and Antitrust Merger- the combination of two or more firms to form a single firm. The federal antitrust officials main job is to approve or deny proposed mergers.

28 Mergers and Antitrust There are two types of mergers: 1. Horizontal Mergers- when firms in the same market merge. 2. Non-horizontal Mergers- All other types of mergers

29 Regulation of Natural Monopolies Natural Monopolies are regulated by Antitrust Laws. This tries to control price, output, the entry of new firms, and the quality of service in industries.

30 2 Views of Gov’t Regulation Why do gov’ts regulate the price and output of certain markets? 2 reasons: 1. Regulation for the Public Interest- this is regulation that promotes social welfare. 2. Regulation for Special Interest- this is regulation in the special interest of producers. (NY Taxis)

31 Competitive Trends in the U.S. Economy The U.S. economy has grown more competitive over the last half century. Causes of increased competition include: 1. Antitrust activity 2. Deregulation- this reduces or eliminates government regulations on previously regulated markets such as airlines and trucking.

32 Competitive Trends in the U.S. Economy 3. International Trade- foreign imports increased competition in many industries, such as foreign cars. 4. Technological Change- Ex: In the last two decades, the prime-time audience share of the three major television networks (NBC, CBS, and ABC) dropped from 91% to 46% as satellite and cable technology delivered many more channels.