Market Structure and Market Failures Unit 7 Essential Question: What happens when markets do not work perfectly?

Market structures There are four market structures – how markets are organized: 4. Monopoly 3. Oligopoly 2. Monopolistic competition 1. Perfect competition Lots of firms, same product, easy entry into market, no control over price Case study: milk Benefits? Low cost, high quality, efficiency!

Cont. 4. Monopoly – market with only a single producer One producer, unique product, high barriers to entry, substantial control over price Case study: Standard Oil, Microsoft? Drawbacks? High cost, low quality (?) Intel vs. AMD ($1700, $900)

Cont. 3. Oligopoly A few producers, similar product, high barriers to entry, some control over prices Case study: airlines, autos, soda, cell phone Some things that might happen… Price leadership – one firm sets prices, others follow Collusion – they work together on prices Cartels – they act like one company (likely to fail though)

Cont. 2. Monopolistic competition Many producers, “differentiated” products, few barriers to entry, some control over prices Firms make their product seem different Brand loyalty matters Case study: shoes, banks, auto repair shop, supermarkets

Externalities Externality—a side effect from production or consumption (it’s external to the transaction between producer and consumer) Negative externality—a cost that hits someone other than producer or consumer Example: A paper mill is built in town. It’s stinky. People sell their house and move, but, house prices are low because it’s stinky. Positive externality—same as above, but it’s a benefit Examples: A birthday party with fireworks is enjoyed by whole neighborhood. Cars that produce less exhaust benefit everyone with cleaner air. Technology externality—one industry’s gains can spillover to others Externalities are frowned upon as inefficient Negative—get over-produced b/c they don’t bear the cost (home cost of stank) Positive—get under-produced b/c people would like more (honey bees pollinate)