Market Structure- How businesses compete A power point by Dan Mumbrue

1)Perfect Competition-Many buyers/sellers dealing with IDENTICAL products. truckloads o’ competition

Why so much competition? No barriers to entry or exit. Anybody can easily enter/exit the market. There is perfect knowledge for consumers.

Perfect competition deals with commodities Commodities-the same product regardless of who produces it. If you can’t tell the difference between products, you won’t pay more for one over another. Sellers are price takers

Perfect competition does not actually happen that often Usually more factors than price. (selection, location, convenience) We do not buy that many commodities Exception- the stock market is perfectly competitive (are you planning for your retirement?)

2)Monopolistic Competition-Many buyers/sellers dealing with SIMILAR products. Carloads o’ competition

How can you have competition and monopoly? Sellers have a monopoly on their product, but there are many close substitutes.

Not quite as much competition No artificial barriers to entry/ exit, but start-up costs are more substantial. Since products are not identical, product differentiation is important. What makes a brand of gas or fast food different from another? Nonprice competition is also important. Things like location, service, selection, warranty become important.

Examples of monopolistic competition

A little more on Monopolistic Comp. Limited ability to set price since differentiation. Most retail falls into this category. This is common in this area. We participate in this on a regular basis.

3)Oligopoly- A few large firms dominate the market Bikeloads o’ competition Maybe not this More like this

Oligopoly There may be many companies involved, but only a few really matter. Less competition means more ability to set prices Very significant barriers to entry (start-up costs are high) There is a fundamental shift with these producers. Bigger is more efficient. Economies of scale is important.

I want to start my own airline. Problems I want to start my own airline. Problems? Can I easily compete with Delta Airlines? This costs $368 million This costs $1.8 million

Other examples

Some problems appear with Oligopoly Collusion- Less firms means it becomes easier to NOT compete. Cartels may form to prevent competition (this is illegal). Examples, the drug cartels and OPEC.

Monopoly-a single seller dominates the market no loads o’ competition

4) Monopoly-why no competition? May have insurmountable barriers to entry. Patents (good for usually 20 years) or copyrights Government license Franchise

Natural Monopoly-is most efficient with only a single provider Government monopoly is regulated by the gov. May get the monopoly, but must meet requirements for customer service Public utilities such as water, natural gas, electricity

Price discrimination Monopolies would like to charge you the price you are willing to pay, so there may be different prices for different groups.

Examples of Price Discrimination Discount at Cedar Point for young kids The “senior” drink at Burger King Airlines charge different prices for the same seat at different times Discounts for college students Will see more of this as businesses track data on your spending habits. Different coupons sent to different houses

Now the minor one: Monopsony- a single buyer but with multiple sellers. Examples-the government is often involved. Military equipment, aerospace, supercomputers. The government pays for road construction, but many construction companies bid to do the work. Company town, like the Pullman town or town with only a coal mine for employment. The labor market can sometimes approach this. Amazon and book sellers approaches monopsony.