Chapter 7 – Market Structures

Section One – Competition and Market Structures i. How many buyers and sellers? ii. How much competition exists? iii. How large are the companies, what influence do they have on price? Perfect Competition – A large number of well-informed independent buyers and sellers who exchange identical products. a. Necessary Conditions i. Large number of buyers and sellers, no one can affect the price ii. They deal in identical products (salt) iii. Each buyer and seller acts independently iv. Buyers and sellers are reasonably well informed v. Free to enter, conduct or get out of the business.

b. Perfect Competition and Profit Maximization i. Each firm is too small to influence price ii. Supply and demand set the equilibrium price iii. Each firm produces where it’s marginal costs equals it’s marginal revenue c. A Theoretical Situation i. Perfect competition is rare but it’s important because it’s how other markets are evaluated ii. The closest we have is farmers markets

Monopolistic Competition – All the qualities of perfect competition except identical products a. Product Differentiation i. real or imagined differences between products in the same industry b. Nonprice Competition i. Advertising, promotions, endorsements c. Monopolistic Competition and Profit Maximization i. Usually sell within confined price ranges (unless convinced it’s better) ii. Produces were MC=MR iii. In time the number of producers stabilizes

III. Oligopoly – Very few large sellers dominate the market III. Oligopoly – Very few large sellers dominate the market. Individual firms can cause a change in output, sales and prices a. Interdependent Behavior i. When one firm acts the others usually follow (car rebates, airline fares) ii. Collusion or price fixing (set prices) - higher than those determined by competition b. Pricing Behavior i. Tend to compete on a non-price basis c. Oligopoly and Profit Maximization i. Prices are usually higher than under monopolistic competition

Monopoly – Only one seller of a product i. Exists only in extreme cases ii. Generally disliked and the govt. has tried to outlaw them a. Types of Monopolies i. Natural Monopoly – A market situation where the costs of production are minimized by having a single firm produce the product - Public Utilities (water, gas, electricity) - A larger firm can use it’s resources to produce efficiently - Results in “economies of scale” - Cost of production falls as the firm gets larger

i. Geographic Monopoly – Based on the absence of sellers in a geographic area. (drug stores in small towns) ii. Technological Monopoly – Based on ownership of control of a particular manufacturing method and a patent iii. Government Monopoly – The government owns and operates these (involve products or services the private industry could not provide) b. Monopoly and Profit Maximization i. Can be a price maker rather than price taker ii. Will still produce where MC=MR iii. Prices are higher than in competition