Chapter 7 – Market Structures TSWBAT: Discuss the criteria for perfect competition Explain why agriculture is our best example of perfect competition Analyze why P.C. is good for society Ms.Hunter Ch. 9.1

What is something you compete in? Is competition a good thing? Bell Ringer What is something you compete in? Is competition a good thing? What is the goal of the game monopoly?

The Origin of Competition Adam Smith: the Invisible hand Laissez Fair (let do) Pure competition = no government intervention in the economy and market Chapter 7 will introduce the various market structures and their degree of competition

Competition is good for consumers The basis for our market structure Provides us with choices Many competitors leads to lower prices through surpluses

Market Structure Market structures are a way to categorize businesses by the amount of competition they face. Four basic market structures in the American economy are perfect competition monopolistic competition Oligopoly monopoly

Comparing Market structures Perfect competition & pure monopolies are rare In the US most markets are in the middle

Conditions of Perfect Competition Products identical Many buyers and sellers Easy to enter and exit market (low start up costs, easy to learn industry) Info about Price, quality and sources are easy to get Buyers are well informed about products S & D determine price and quantity

Why would it be hard for an industry to achieve perfect competition? Because it is hard to have all the factors. Ms.Hunter Ch. 9.1

Example: Agriculture The agriculture market is close to a perfectly competitive industry. No single farmer has control over price. Supply and demand for the entire market determines price. Individual farmers have to accept market price. Demand for agriculture is unique; inelastic.

Why is agriculture often considered an example of perfect competition? many farmers and many buyers of farm products farm products are fairly similar; costs of renting farmland is relatively low farming methods can be learned information about farm prices readily available possibility of thousands of farmers banding together to control price is fairly small.

Barriers to Market Entry Start Up Costs Markets with high costs not usually perfect competition Technology Need a lot of preparation and study, technological know-how, in some industries Ex. Electrical, mechanics, doctors, etc.

Price and Output Perfect Competition markets are efficient Keeps prices and production costs down Companies use ALL inputs – land, labor, organizational skills, machinery and equipment – wisely

Monopolies Imperfect Competition Monopoly Oligopoly Monopolistic Competition

Monopoly Most extreme form of imperfect A single seller controls the supply and price of product. No substitutes: no competitor offers a good or service that closely replaces what the monopoly sells. Barriers to entry: a competitor cannot enter the market due to government regulations, large initial investment, or ownership of raw materials.

Monopoly, Cont. Almost complete control of market price.  Can raise prices with no fear of competition.  Not as much of a concern today than in the past

Government Monopolies Created/allowed by government then regulated Technological monopolies are the result of inventions that are patented and copyrighted. Patent – exclusive rights to sell a good for a specific time period Encourage companies to research and develop new technologies Copyright - exclusive rights to literary, musical, or artistic work, (printed, audio, video, etc)

Franchise and Licenses Franchise – agreement to sell its goods within a market Ex. Coca Cola products at school, food vendors at national parks Ex. Brand name establishments – Dunkin Donuts, McDonalds, Subway These companies allow private ownership of their products Licenses – government can control licenses to operate a business Ex. Radio and TV (FCC)

Other Monopolies Geographic monopolies Natural monopolies are created due to geographic barriers for competition. Natural monopolies are providers of utilities, bus services, cable, and have economies of scale, producing the largest amount for the lowest cost.

Natural monopoly & Economies of Scale Economies of scale = single firm can produce any given amount at a lower cost than multiple producers Example: Town Water If two companies had water pipes going to every house both companies would have to pay the fixed costs of building the pipes and the price would be higher for each companies customers.

Problems with Monopoly General law of supply and demand People buy most at lowest prices Companies profit most at higher prices – but people less willing and able to buy Monopolies set prices that reflect highest profits

Price Discrimination Companies target groups of buyers and offer different pricing Targeted Discounts – Discounted airline fares – advance purchase Rebates – people who are willing to take time and fill out rebate forms get money back Senior and Student Discounts – based on age/status Children’s promos – kids stay free, kids eat free

Oligopoly characteristics Dominated by several suppliers and a few sellers who control 70 to 80 percent of the market.  Capital costs are high and it is difficult for new companies to enter market.  Goods/services provided by the few sellers are nearly identical. 

Competition is not based on price but product differentiation is based on consumer perception of the value of one over the other. All the companies are interdependent; change in one will affect the others.  Interdependence can lead to price wars or the illegal act of collusion or teaming up to raise prices.  Cartels are international groups that use collusion to seek monopoly power.

Examples of Oligopolies

Bell Ringer What is perfect competition? List the different types of Market structures Define monopolistic competition

Monopolistic Competition Numerous sellers  Easy entry into market  Differentiated product  Non-price competition  Some price control by the seller  Advertising tries to convince consumers of the superiority of given product, enabling companies to charge more than the market price for a product

Advertising is SO Important Burger King - “Have it your way” McDonalds - “I’m Lovin’ it” Wendy’s - “Do what tastes right” Arby’s - “I’m thinking Arby’s” IHOP - “Come hungry, leave happy”

Have you ever thought: “How can they charge this price for this product?” Why is this possible in Monopolistic Competition?

Monopolistic Competition Must compare on non-price factors Consumer bases decision to buy on Advertising Quality & value Reputation Monopolist because they can alter price by changing supply. Different from perfect competition in that the products are slightly different

Regulation and Deregulation Government steps in to promote competition and lower prices Also deregulates markets to also promote competition

Breaking Trusts Trusts discourage competition Sherman Antitrust Act (1890) prevented new monopolies or trusts from forming and broke up existing ones. Clayton Act (1914) sought to clarify the laws in Sherman Antitrust Act by prohibiting or limiting a specific number of business practices

Anti-Trust Legislation Federal government must determine whether merging of two companies will significantly lessen competition.

Mergers 1. Horizontal merger is the merging of two corporations in the same business. One business can buy out another business (at least 52%) 2. Vertical merger is merging of two or more corporations in same chain of supply. 

3. Conglomerates Conglomerates are the merging of two corporations involved in at least four or more unrelated businesses. Examples: Proctor & Gamble, Clear Channel, Tyco Gulf & Western Industries Paramount Pictures, Catalina Clothing, Madison Square Garden, Miss Universe, TV Shows, Caribbean Sugar Plantations (note – some areas have since been sold)

Types of Mergers Which type hurts the consumer the most?

Regulation Companies have to prove that mergers will lower costs and help consumers May block based on future speculation of what may happen Deregulation Government no longer decides role of companies in the market Ex. Airlines, trucking, banking, railroads

Some Examples of Reg. Agencies Federal Trade Commission Food and Drug Administration Federal Communications Commission Securities and Exchange Commission Equal Employment opportunity Com. Occupational Safety and Health Admin. Environmental Protection Agency Nuclear Regulatory Commission