Perfect Competition

Perfectly competitive markets have many producers and consumers Products are virtually identical. Products that are identical no matter who produces it is called a commodity. (Ex. Cotton, grain, sugar, crude oil) # of Producers Similarity of Products Producers face few restrictions in entering the market. Competition is great. Perfect Competition Producers have no market power, they are price takers. Too many other producers to influence prices. Ease of Entry Control over Prices

Monopolies

One (no competition) very unique (no good substitutes) # of Producers Similarity of Products Price setters (they can set the price of the market without fear of competition) Characteristics of a Monopoly High barriers (prevents other producers from entering the market) Control over Prices Ease of Entry

History of Monopolies Trusts: combinations of firms that worked together to eliminate competition and control prices Standard Oil bought out or bankrupted his competitors until it controlled 90% of U.S. oil sales Congress passed antitrust laws to limit there formation John D. Rockefeller and the Standard Oil Company

Resource Monopolies Resource Monopolies: Single producer owns a key natural resource. Rare because the economy is large and supplies of resources are not usually controlled by one owner Ex. Diamonds

Government Created Monopolies Musicians Robin Thicke, Pharrell Williams, and T.I. forced to pay $7.3 million to family of singer Marvin Gaye for breaking copyright law Patents and Copyrights Legal grant designed to protect intellectual property Creates a temporary monopoly. Blurred Lines vs. Got to give it up

Government Created Monopolies “I get it. You are the only market in town. You are expensive. When my daughter's leg broke out in a rash, you were the only place that had hydrocortisone cream ($4.99) near Zion/Springdale. Oh yeah, and when my ankle had bleeding blisters from the new hiking shoes I just bought, you had those fancy gel bandaids ($6.99) that helped me from rubbing my ankle raw the next day…I know I should have been more prepared and brought all those things with me, but if you're like me and forgot a few things, this place probably has it. You've been warned though, so don't be surprised when your bill comes out to $74 for a few things.” -Review from Trip Advisor April 11, 2014 Public Franchises A contract issued that gives a firm the sole right to provide a good or service in a certain area. The Mighty Five

Government Created Monopolies Licenses Legal permit to operate a business or enter a market Joe’s Auto Parks in Los Angeles

Natural Monopolies Single firm can supply a good or service more efficiently and at a lower cost than two or more competing firms. Utility Industries

Economies of Scale Greater efficiency and cost savings that result from increased production It costs $100,000 to bring a network of pipes to an area It costs $1,000 per home for a meter Price of first home costs $100,100 2nd home-$51,000 50th home-$3,000 3rd home-$34,333

Oligopolies

Small number of producers control the market Small number of producers control the market. The top four companies control 60% of the market. Ex. Airlines, automobile, soft drinks, tennis balls, lightbulbs, etc. # of Producers Similarity of Products Products are essentially the same with only minor differences Difficult to break into an oligopoly because of start up costs and loyalty to known brands Oligopoly Exert some control over prices, often influenced by other firms in the market Control over Prices Ease of Entry

Sometimes an Oligopoly acts like a monopoly If there is a dominate firm in an oligopoly, they may control prices in two ways Two examples: Dominate firm sets the price high, all the other firms do the same. Producers benefit (Price Leadership). Dominate firm sets the price low, takes business away from competitors, other firms may set prices low too (price war). Consumers benefit. Sometimes firms in an oligopoly will get together to set production and price levels, this is called collusion. Collusion is illegal, but still practiced. In an oligopoly, producers may set up an organization to establish production levels and prices called a cartel. Cartels are illegal in the United States, but operate world wide. Organization of the Petroleum Exporting Countries (OPEC) About a dozen countries that set quotas on oil production and exports—major control of the worlds oil prices.

Monopolistic Competition Many producers and sellers Ex. Restaurants and hotels # of Producers Similarity of Products Product differentiation: producers seek to distinguish their goods and services from those of other firms. Monopolistic Competition Start up costs are relatively low, which allows many firms to enter the market Control over Prices Ease of Entry Control over price is limited Producers have control over their own brand, but substitutes are available. Too many producers for collusion.

Monopolistic Competition Each company has a “monopoly” on its own brand. Each brand tries to differentiate themselves from the competition. Consumers may develop brand loyalty, which gives the company some degree of market power. Examples: shoes, banks, auto repair, supermarkets

Nonprice Competition Physical Characteristics: producers market the look of their product as different from the other brands. Ex. shoes Service: some producers offer better service and can charge higher prices. Restaurants vs. fast food Location: a firm may win customers because of a convenient location Gas stations, motels, casinos, etc. Status and Image: producers compete on the basis or their perceived status or trendiness. Usually done through advertising