Market Structures & Failures Econ. Ch. 7

Market Characteristics Number of producers The more producers, the more competitive Similarity of products The more similar the products, the more competitive If the product is very unique, there’s not much competition for it Ease of entry The easier it is to enter the industry, the more competitive it will be Control over prices If the market is competitive, producers will not have much control Things like supply & demand will control prices

Types of Market Structures Perfect competition Many producers Similar (or identical) products Commodity – product that is the same no matter who produces it. Examples? Grain, cotton, sugar, crude oil, milk Easy entry Little or no control over prices Supply & demand will determine prices Customers determine the market price

Types of Market Structures Monopoly – a single producers controls all or most of an industry Their products have no close substitute Characteristics: Producers = 1 Similarity of products = little similarity, often unique Ease of entry = high barriers to entry Control over prices = HIGH

Types of Monopolies Illegal monopolies Rare today. Why? Government regulation Eventually will face competition Historical examples? Standard Oil Carnegie steel/ U.S. Steel Bell telephone DeBeers Diamond Company Microsoft

Types of Monopolies What monopolies are legal? Resource monopolies If the producer owns a key natural resource Example: if one company owned the only zinc mine for thousands of miles Very rare – usually natural resources are spread out

Types of Monopolies What monopolies are legal? Government-created monopolies 3 types: patents/copyrights, public franchises, licenses Patents & copyrights – gov’t gives the producer legal privilege if they invented something new Designed to encourage innovation Examples: new medicines & pharmaceutical products In the U.S., patents give the creator sole rights for 20 years

Types of Monopolies What monopolies are legal? Government-created monopolies 3 types: patents/copyrights, public franchises, licenses Public franchises: gov’t issues a contract that gives a company the sole right to provide a good/service in a certain area Example = schools may allow a certain company to stocks it’s vending machines, thus giving a monopoly in that school

Types of Monopolies What monopolies are legal? Government-created monopolies 3 types: patents/copyrights, public franchises, licenses Licenses: legal permit to operate a business in an area Example: city gov’t might only license one company to operate a towing service in the city

What monopolies are legal? Types of Monopolies What monopolies are legal? Natural monopolies When a single firm can supply a good/service more efficiently and/or cheaper than other firms Examples? Most utilities: gas, water, cable TV, electricity Economy of scale – good/service becomes cheaper by the company increasing its output over a larger area

Types of Market Structures Oligopoly Industry dominated by a few firms with similar products Generally considered an oligopoly if the top companies control 60% or more of the industry Characteristics? Few producers Similar (or identical) products High barriers to entry Some control over prices Examples? Cereal industry (Kellogg’s, General Mills, Post, Quaker) – almost 90% U.S. auto industry (until 1980s) – GM, Ford, Chrysler (basically 100%) Hollywood – Sony, Disney, 20th Century Fox, Warner Bros., Paramount (70% - 90%) Beer – Anheuser-Busch, Miller, Coors – 80% Processed Foods – Kraft, Nestle, PepsiCo – about 60% of global share Credit ratings – S&P, Moody’s, Fitch – 100%

Oligopoly practices Price leadership Collusion The biggest firm sets the market price, and others follow suit If the price is set low to steal business or drive others out of business, a price war ensues Collusion When producers get together & make agreements on production and pricing (to avoid price wars and keep prices high) Historical examples? RR in late 1800s Music industry in 1990s and 2000s Cartels – groups created to control production and prices Examples? OPEC

Types of Market Structures Monopolistic competition Many producers Different products Few barriers to entry Some control over prices How is it different from perfect competition? Some producers don’t get capture much of the market, even though the opportunity is there Why not? Brand loyalty!!!

Monopolistic Competition Sometimes firms compete in ways OTHER THAN pricing!!! Physical characteristics Look, feel, or properties of tennis shoes, rain jackets, purses, etc. Service Similar products, but better customer service Location Near neighborhood, highway exit, mall, etc. Status and image How cool the product is Styling and branding Nike, North Face, Uggs, Under Armour, etc.

Externalities Externality – side effects of production or consumption for people OTHER THAN the producer or consumer Positive – neighbors plant new flowers that you get to see every morning when you wake up A new store opens down the street from your restaurant, and you get more customers Also could be technology spillover Negative – neighbors play loud music that keeps you awake Chemical factory opens near your town, lowering property values

Public Goods Things not provided by the markets because they are difficult to deliver or profit from Examples include lighthouses, sewers, fire depts., etc. Often they are provided by gov’t instead of businesses Problems? They are nonexcludable – you can’t filter out who can consume and who can’t (think of a lighthouse – you can’t charge to use a lighthouse – anybody can see it for free) Free-rider problem Sometimes they are difficult to provide Example – the military – private armies would pose a major conflict of interest in society, and are too expensive to maintain