Chapter 7 Intro – What is the perfect type of competition? Market Structures Chapter 7 Intro – What is the perfect type of competition?

Which of these products has a more competitive market? Tomatoes Cars Electricity Notepaper Water Dairy Farms Baseball Teams Kitchen Appliances Fast Food Arrange these items in a continuum from those that have the greatest to those that have the least competition within their market.

Market Structures – Ch.7 Some companies have almost complete power in an industry while others have almost none. You can determine a companies relative power by looking at the market structure of an industry. Market Structure - This means the number and relative size of the firms in a given industry (auto, food, video games).

Perfect Competition At one end of the spectrum is perfect competition: where no buyer or seller has more power than anyone else and trade is based strictly on supply and demand. Identical products are sold and only the price is different; this does not really exist in the real world.

Where things start to get a little cutthroat Monopolies! Where things start to get a little cutthroat

Let’s be honest If you had the chance to monopolize an industry, would you do it? Why or why not? Even if it meant that you crushed your competition and put thousands out of business? What is market power?

Monopolypolypolypoly Get into groups of two! List 2 monopolies found within every school. List 2 monopolies that come into your home. List the benefits and drawbacks of each of these listed items.

Monopoly! At the other end is a perfect monopoly when a single provider is the exclusive supplier of a good. This also does not really exist but some companies get close; Microsoft in operating systems; also gov’t monopolies like water and electricity.

Important Concepts! Economies of Scale! Producer’s average costs per unit falls as total output rises. A large firm can often produce a good for much cheaper unit cost than a small firm.

Economies of Scale The Norton Foods Corporation, for example, can produce a jar of strawberry jam for much less than Mrs. Beardsley, who produces a hundred jars a year for her family and friends. Norton foods buys glassware, sugar, strawberries, labels, etc. at wholesale prices with quality discounts. Also, they have time-saving efficient equipment. Mrs. Beardsley makes jam only once a year, it doesn't make sense for her to buy a lot of specialized equipment.

Limits on Monopoly Consumer demand – if price too high people may just stop buying it or turn to a black market. Competition – if one supplier makes tons of $ others will find a way into the market. Regulations – if you draw too much attention and are too power hungry the gov’t will step in and try to break you up; like ATT and Microsoft.

Monopolies that Are Allowed: What is one kind of monopoly that the U.S. government generally permits? Natural Monopoly - more efficient and effective when one company controls it. (Public Water) Government monopoly - Monopoly created by the gov’t Patent/franchise – limits entry of other firms, no competition. Professional Sports Teams – control over ticket prices, locations, number of teams, etc.

Every other type of market: Between the two extremes is called imperfect competition and the amount of power varies a bit: Oligopoly – a few firms make most of the market supply; industries like cars, airlines, athletic shoes. (See Oligopoly Picture) Monopolistic competition – many firms produce similar goods and each keeps some independent control over their price. Breakfast cereals are an example; lots of types marketed to lots of people (kids, sweet tooth's, health nuts, elderly)

Price Discrimination Price Discrimination is the practice where businesses divide consumers into different subgroups and charge different prices for each group. This is to maximize profits. For example – If I open a restaurant, I would charge full price for adults. I might give senior discounts to encourage older customers to spend money, and I may give discounts for children to encourage families to attend.

Cooperation and Collusion - Cheating When an oligopoly occurs, firms will act as though they have a monopoly. Price Leaders Can set prices and output for entire industries as long as other member firms go along with the leader’s policy. This can also start a price war (undercutting prices) Collusion An agreement among members of an oligopoly to illegally set prices and production levels. One outcome is called price fixing (same or similar prices) Cartel – Stronger than Collusion, formal An agreement by a formal organization of producers to coordinate prices and production. Illegal in the US, but OPEC exists internationally. These can collapse if output levels are controlled, but most try to produce more (cheat) and prices will eventually fall.

Market Structure Comparison p.170 Perfect Competition Monopolistic Competition Oligopoly Monopoly Number of Firms Many A few dominate One Variety of Goods None Some Control over prices Little Complete Barriers to Entry Low High Examples Wheat, shares of stocks Jeans, Books Cars, movie studios Public Water