Market Structures Chapter 7

Intro Market Structure = the nature or degree of competition among businesses operating in the same industry Example: Soft drinks cars There are four different market structures: 1) Perfect competition Imperfect Competition: 2) Monopolistic competition 3) Oligopoly 4) monopoly

5 conditions that characterize this: Perfect Competition = a large number of well-informed buyers and sellers who exchange identical products 5 conditions that characterize this: 1) many buyers and sellers 2) buyers and sellers deal in identical products 3) each buyer and seller act independently 4) buyers and sellers are reasonably well informed about products and prices 5) buyers and sellers are free to get into, conduct, or get out of business

Very few perfectly competitive markets exist The closest to satisfying all 5 conditions are local vegetable farmers Most US businesses fall into the imperfect competition category: Monopolistic Competition: Has all the conditions of perfect competition except identical products Businesses use product differentiation – real or imagined differences between competing products Example: All the different companies that make jeans

Nonprice competition – using advertising, giveaways, etc Nonprice competition – using advertising, giveaways, etc. to convince buyers their product is best Monopolistic competition and profit maximization – similar products usually sell within a narrow price range Oligopoly = a market structure where few very large sellers dominate the industry These businesses have the power to cause a change in output, sales and prices in the industry Examples: McDonald’s Burger King Wendy's

Since oligopolists are so large, whenever one firm does something, the other firms usually follow Example: Introduction of a new hamburger Pricing behavior = one business changes its price hoping the others will follow Monopoly = a market structure with only one seller of a particular product In the US, only local phone or cable companies come close Americans traditionally dislike monopolies

Types of Monopolies: Natural monopoly = market situation where costs of production are minimized by having a single firm produce the product Water, gas and electric companies fall into this category Competing electric companies would each have to have their own poles and wires To prevent this problem, the gov’t issues a franchise – the right to do business in an area without competition

Geographic Monopoly = monopoly based on absence of other sellers in a certain geographic area Example: A drugstore in a town too small to support two drugstores Technological Monopoly = based on control of a manufacturing method, process or other scientific advance Gov’t may issue a patent for 20 years or a copyright