Market Structures SSEMI4c- Identify the basic characteristics of the four market structures

Competition The rivalry among sellers to achieve goals and make the highest profit

Why is competition beneficial for consumers? Lower prices Better products More innovation

Monopolistic Competition Market structure Nature and degree of competition among firms doing business in the same industry Pure Competition Monopolistic Competition Oligopoly Monopoly

Pure Competition Identical A market structure in which a large number of firms all produce the same product. Large number of buyers and sellers (thousands) Identical products – no need for advertising – tomatoes are tomatoes No control over price. Firms are price takers. Few barriers to entry, businesses are free to enter into, conduct, or get out of business

Monopolistic Competition A market structure in which many companies sell products that are similar but not identical. Many Firms, but less than perfect competition (100’s) Products are similar but not identical (fastfood). Characterized by product differentiation (real or perceived) Some control over price because products are not exactly the same. No major barriers to entry. Firms can enter and leave easily.

Which do you prefer?

Non-Price Competition The use of advertising, giveaways, or promotional campaigns to convince buyers that the product is somehow better than another brand http://www.youtube.com/watch?v=TDaLbA3bwPY&list=PLxgUkHTvXNoYSV9JR0UdjV-YEYaHVYssQ http://www.youtube.com/watch?v=gFUUybc_M40

Oligopoly A market structure in which only a few sellers offer similar or identical products. Few very large sellers dominate the industry (10’s of firms) ex. AT&T, Verizon, Sprint, etc. Products can be similar or identical Some control over price When one changes price, the others have to decide whether to follow Significant barrier to entry High start-up cost Costly R & D Control over key resources by a competitor

Oligopoly – Pricing Models Cartels - agreement between competing firms to control prices or exclude entry of a new competitor in a market Collusion – formal agreement to set specific prices or to otherwise behave in cooperative manner (Ex: OPEC) Price Leadership – one firm dominates the market and the others follow their lead (increasing or lowering price)

Monopoly A market with only one seller for a particular product Usually one good or service Unless regulated by the government, firm has full control over price Complete barriers to entry (no new competition)

Types of Monopolies Natural Monopoly – market situation where the costs of production are minimized by having a single firm produce the product ex. Public utility companies – waste to run multiple electric lines, oil pipeline in Alaska Utilizes economies of scale – average cost of production falls as the firm gets larger

Types of Monopoly Geographic Monopoly – based on absence of other sellers in a certain geographic area (gas station, drugstore in small town)

Types of Monopoly Technological Monopoly – based on ownership or control of a manufacturing method, process, or other scientific advance (certain pharmaceutical drugs) Patent – exclusive right to manufacture, use, sell invention – usually good for 20 years Copyright – authors, art – good for their lifetime plus 50 years

Types of Monopolies Government Monopoly - monopoly owned and operated by the government (military, water and sewage)