Competition and Market Structures Chapter 7 Section 1

Market Structure : the nature and degree of competition among firms operating in the same industry. : the nature and degree of competition among firms operating in the same industry. There are 4 types: There are 4 types:

Perfect Competition 5 conditions: 5 conditions: 1. Large # of buyers and sellers 2. buyers & sellers deal in identical products --since there is no difference in quality, there is no need to advertise or have brand names there is no need to advertise or have brand names

3. each buyer & seller acts independently 3. each buyer & seller acts independently 4. buyers & sellers are well informed 4. buyers & sellers are well informed 5. buyers & sellers are free to enter into, conduct or get out of business 5. buyers & sellers are free to enter into, conduct or get out of business Each individual firm is too small to influence price Each individual firm is too small to influence price There is no real perfect competitionit is used to evaluate other market structures There is no real perfect competitionit is used to evaluate other market structures The closest to P.C. is truck farming The closest to P.C. is truck farming

Monopolistic Competition Has the characteristics of perfect competition except: Has the characteristics of perfect competition except: 1. Product differentiation: real or imagined differences between competing products in the same industry 2. Uses nonprice competition 1. Advertising 2. Giveaways 3. Free interest for a year

Oligopoly 1. very few large sellers dominate the industry 1. very few large sellers dominate the industry 2. products may be differentiated (cars) or standardized (steel industry) 2. products may be differentiated (cars) or standardized (steel industry) 3. single firm can change output, sales & price 3. single firm can change output, sales & price Examples: Pepsi and Coke Examples: Pepsi and Coke McDonalds, Burger King and Wendys McDonalds, Burger King and Wendys

Oligopoly continued 4. Act interdependently 4. Act interdependently *Collusion: a formal agreement to set prices in a cooperative manner *Collusion: a formal agreement to set prices in a cooperative manner *Price-fixing: agreement to charge the same price for a product *Price-fixing: agreement to charge the same price for a product * both are illegal because it restrains competition * both are illegal because it restrains competition

Oligopoly continued Price wars: when one company lowers their price, others will lower theirs and the next firm will lower theirs, etc. Price wars: when one company lowers their price, others will lower theirs and the next firm will lower theirs, etc. Work together to change price so they depend on advertising for competition Work together to change price so they depend on advertising for competition

Monopoly One seller of a product One seller of a product Not many in the US Not many in the US -- Cable & local phone companies are the closest 4 Types of Monopolies:

Natural Monopoly Costs of production are minimized by having one firm Costs of production are minimized by having one firm Home phone companieseach company would need their own wires and poles Home phone companieseach company would need their own wires and poles Water or gas companieseach would need their own pipes Water or gas companieseach would need their own pipes Govt gives these companies a franchise but will regulate price if necessary Govt gives these companies a franchise but will regulate price if necessary

Geographic Monopoly Based on the absence of other sellers in a certain geographic area Based on the absence of other sellers in a certain geographic area One drug store in a town One drug store in a town One gas station for the next 200 miles One gas station for the next 200 miles

Technological Monopoly Govt can grant a patentan exclusive right to produce, use or sell any new invention for 20 years Govt can grant a patentan exclusive right to produce, use or sell any new invention for 20 years Copyrightart and literary works for a lifetime plus 50 years Copyrightart and literary works for a lifetime plus 50 years

Government Monopoly Owned and operated by the govt Owned and operated by the govt Examples: Examples: Water Water Alcoholic beverages Alcoholic beverages Weapons of mass destruction Weapons of mass destruction

Work with a partner or by yourself to complete the following chart (everyone will turn in their own): Work with a partner or by yourself to complete the following chart (everyone will turn in their own):

# of firms Influence over price (y or n) Product Differen- tiation (y or n) Adverti- sing (y or n) Entry into market (easy to hard) Exam- ples PerfectComp. Monop- olistic Comp. Oligop- oly Mono- poly