Market Structures

What is a Market Structure? Degree of Competition among firms operating in the same MARKET What is Competition? Economic rivalry among businesses in the same MARKET

Pure/Perfect Competition

A market structure in which a large number of firms all produce the same product Simplest Market Each firm produces so little of supply= no single firm can influence price Seller only controls what they produce

4 Conditions for Pure Competition Large number of sellers. Each with only a small share of market Identical Products: No reason for non-price competition Informed Buyers and Sellers: No influence on Price Controls and no need to advertise Easy Market Entry and Exit

Conditions for Pure Competition A purely competitive market has many suppliers selling identical products called commodities.

Barriers to Entry Can lead to imperfect competition Technology- markets that require a high degree of technology are not found in a perfect competition market Start-up costs- expenses a new business must pay before the first product reaches the customer Markets with high start up costs are not found in a perfectly competitive market Ex.: the start up cost of a sandwich shop is much lower than a lumber mill

Barriers to Entry and Competition A movie production company requires so much equipment that it usually has high start-up costs.

Price, Output, and Purely Competitive Markets One of the primary characteristics of purely competitive markets is that they are efficient. Competition within these markets keeps both prices and production costs low. Firms must use all inputs—land, labor, organizational skills, machinery and equipment—to their best advantage. Prices that consumers pay and the revenue that suppliers receive accurately reflect how much the market values the inputs used to produce the product. In a purely competitive market, prices correctly represent the opportunity costs of each product.

Price, Output, and Purely Competitive Markets In pure competition, suppliers must match the lowest supplier’s price or exit the market. Why are consumers unwilling to pay one supplier’s higher price in such a market?

Non-Price Competition Competition through other ways than by lowering price

Non-Price methods of Competition Advertising Service level (word of mouth and repeat customer Physical Characteristics Location

Monopolistic Competition Fairly large # of sellers Slightly differentiated products Product differentiation is vital Most Common market structure Extensive advertising (need to inform) Sellers decrease competition through different products

Market Conditions for Monopolistic Competition Large # of buyer and sellers Products are similar (emphasize differences among products) Buyers must be informed about differences in products Sellers have slight control over price Few artificial barriers to entry

Market dominated by a single seller Monopolies Market dominated by a single seller

Characteristics of a Monopoly Technology and Change New Technology can cut FIXED COST and make many small companies as efficient as 1 large firm. Much control over price (a high price hurts demand) Market Power: ability of a company to change prices and output (ex: monopolist)

Price discrimination: Division of customers into groups based on how much they will for good

Pure Monopoly’s Characteristics One Firm No Close substitute goods are available Prohibitive barriers to entry: High Investment Costs Technological Expertise Legal Restrictions Ownership of a scarce factor of production Almost complete control of market price No need for advertising

Natural Monopolies Runs most efficiently when one large firm provides all the output Competition would be chaotic, impractical, inconvenient and unworkable Average costs are lowest when all output is produced by single firm 1 or both firms will not be able to cover costs and go out of business Ex: Public Water Company

Government Monopoly Owned and operated by the government Ex: Hwy system, public schools/libraries, Postal service

The Role of Government Franchises and Licenses Contract issued to firm to sell goods to an exclusive market Grants rights to operate (especially with scarce resources) (Land, Radio/TV) Industrial Organizations Gov. allows restriction of firms in market MLB restricts # of locations and teams

Technological Monopoly Results from the invention of a new product (patent) or when technology changes the way a good is produced Patent gives exclusive rights for 20 years Copyright gives authors/artists exclusive rights

Geographic Monopoly A firm is the only seller of a good in a specific location

Economies of Scale “Economies of mass production” Exist when firms are large enough to take advantage of mass production techniques Producers average cost of production drops as production rises

Oligopolies: firms control 70% of the market Few sellers control over 70% of market Firms offer identical/differentiated products Advertisement is important Product info must be easily available (informative advertisement to introduce new products) Huge barriers to entry Technological knowledge, money and brand name loyalty

Control some prices by creating band name loyalty and using non-price competition Must show customers why they should by product instead of competitors

Examples: Cellphones: AT&T, Verizon, Sprint Autos: GM, Ford, Toyota Shoes: Nike, Reebok, New Balance, Adidas Cereal: Quaker Oats, General Mills, Kellogg TV: NBC, CBS, ABC, Fox Others: gum, light bulbs, copy machines, cameras

Price Leadership: 1 firm (largest/most powerful) offers product at a price…others follow out of fear of a price war. Legal because it does not involve agreements among competitors Collusion: formal price agreement among competitors. Illegal because it is dangerous to competition Price Fixing: agreement among competitors to sell at the same/similar prices (output of collusion) Cartel: formal organization of producers that agree to coordinate prices and production (illegal)

Very Many Some Fair Amount Cable TV Water Agric. products Fishery Extensive

Output Decisions The Monopolist’s Dilemma Falling Marginal Revenue Setting a Price Profits

Output Decisions A company that has a monopoly on a particular product, such as a new drug, may find that increasing output lowers its marginal revenue.

Anti-Trust Legislation Trust: Legally formed combinations of corporations or companies Sherman Anti-Trust Act: Designed to monitor and regulate big business, prevent monopolies, block mergers and break up existing monopolies Trend of deregulation: removal of some government controls over market

Federal Trade Commission: 1914 Federal Trade Commission: 1914. Investigate structure and behavior of firms engaging in interstate commerce. Treble Damages: awards to any person or private company that sustains injury or financial loss because of an anti-trust violation (3x the actual damages.