MARKET STRUCTURES AND BUSINESS ORGANIZATIONS

4 Market Structures: Perfect Competition (defn)- aka pure price competition 4 conditions must exist: Many buyers and sellers in the mkt- one company can’t influence the total mkt; they are price takers (defn)- the mkt determines prices Sellers offer identical products- (commodities) buyers will always choose the supplier with the lowest price

Buyers/ sellers are well informed- we go out to find the best deal which means we must have all the info on the product/ the time spent must be worth the amount of money to be saved Easy entry/ exit into the mkt- this means there will be no barriers to entry such as start up costs and technology Examples: farm products, stocks, low grade gas, milk Competition w/in mkts keeps prices low

Monopoly (defn) dominated by a single seller They tend to form when barriers to entry exist and then they can charge whatever price they want; supplies are usually lower when there is a monopoly. Types of monopolies: Natural- firms can only cover costs with no competition such as utilities Govt- created by the govt Example- post office, patents

patents- license giving the inventor exclusive rights (usually for 17 years); this promotes research and development Monopolistic Competition (defn)- 4 conditions: Many firms Few barriers to entry- enter mkt easily and cheaply w/ few or no restrictions Differentiated products-ex: hamburgers Slight control over price- can’t make too many changes b/c of substitutes

4. Oligopoly (defn) Mkt dominated by few large firms 4 largest firms produce at least 70-80% Tend to form when major barriers to entry exist such as high start up costs or an established reputation to compete against Bad practices include price leadership, collusion (defn), and cartels, but they are very difficult to achieve/ maintain Ex- cereal, cola, airlines, cars

Nonprice Competition: using means other than price to compete Physical characteristics- new size, color, shape, texture, etc. Location- very important factor (see next slide) Service level- higher levels of service may allow a company to charge higher prices Advertising, image, or status – product differences are often just a matter of perception

Marketing- 4 Ps : Price- advertising must make clear assertions of a product’s value Place- ads must include directions so consumers will know where to find it Product- ads must provide enough information so consumers will be informed and desire to make purchases Promotion- ads must promote a product in a way that catches attention

Government’s Role: In a free mkt society, does the govt need to regulate business? Why or why not? Isn’t the point of free enterprise to allow the market to regulate itself?

A lack of competition will negatively affect prices and supplies of products The govt passes antitrust laws to out-law monopolies or prevent the forming of them from unfair practices Can break up companies who have a monopoly Can block mergers that would reduce competition

Business Organizations: Sole Proprietorships (defn) Owned by single individual 75% of all firms are SP Advantages vs. Disadvantages (see handout)

2. Partnerships Owned by 2 + people Divide responsibilities and profits About 7% of firms are Partnerships Advantages vs. Disadvantages

3. Corporations Legal entity or being- treated just like a person Owned by stockholders Make up about 20% of all firms but sell about 90% of all goods Advantages vs. Disadvantages

Other Organizations: Non Profit- functions like a business but doesn’t seek to make a profit/ they benefit society ex: charities, colleges, hospitals Govt owned corporations- usually happens only if the mkt doesn’t adequately supply a needed G or S ex: post office, FDIC, public transit

Cooperatives (co-ops)- organization owned by a group of individuals for their shared benefit ex: Ocean Spray, State Farm Ins, Sam’s Franchises (defn)- parent companies sell the right of a firm to use their name and products in a given area Advantages vs. Disadvantages ex: McDonald’s, convenience stores