What Are Markets? 1. Pure (perfect) Competition Markets are classified by 4 structures 1. Pure (perfect) Competition 2. Monopolistic Competition 3. Oligopoly 4. Monopoly

What determines the type? The number of firms in the industry The nature of the product produced The degree of monopoly power each firm has The degree to which the firm can influence price Profit levels Firms’ behaviour – pricing strategies, non-price competition, output levels The extent of barriers to entry The impact on efficiency

Market Structure Perfect Competition Pure Monopoly More competitive

Market Structure Perfect Competition Pure Monopoly Less competitive

Monopolistic Competition Market Structures Pure Monopoly Perfect Competition Monopolistic Competition Oligopoly Monopoly The further right on the scale, the greater the degree of monopoly power exercised by the firm.

Market Structures How does the degree of competition affect the consumer? the producer?

What type of market structure are the producers of these products operating in? Remember to think about the nature of the product, entry and exit, behaviour of the firms, number and size of the firms in the industry.

Perfect Competition LARGE number of SMALL firms. No single buyer or seller can influence the price. Buyers and sellers deal in identical products. No product differences. (EXAMPLES: Salt, Flour, Commodity, Corn) Unlimited Competition: so many firms, that suppliers lose the ability to set their own price. No Barriers to Entry. Sellers are free to enter the market, conduct business and free to leave the market. CONSUMERS HAVE THE LARGEST SELECTION OF BUYERS TO BUY GOODS FROM BECAUSE THE GOODS ARE IDENTICAL.

The agricultural market perfect competition Suppose there was a market for dandelions. Growing dandelions requires little start-up cost. All you need are dandelion seeds, soil, water, and some sunlight. There is no difference between one dandelion and another, so the market has a similar product. The agricultural market is the best example of a perfectly competitive market.

Perfect Competition Each individual firm is to influence prices. too small Each individual firm is to influence prices. EXAMPLE: the price of a bushel of wheat is set only by the interaction of supply and demand. Generally speaking, wheat is the same per bushel in North Georgia as it is in Florida. SWS 2006

Monopolistic Competition Large companies number of companies Products are VERY SIMILAR, so companies use PRODUCT DIFFERENTIATION Heavy Competition: Firms must remain aware of their competitor’s actions, but they each have some ability to control their own prices. Low Barriers to Entry: harder to get started because of the amount of competition.

Monopolistic Competitive Market Essentially, all hand soaps are the same. Yet firms can create a convince consumers that their product is different or better. This brand identity can be formed through packaging, product support, and especially advertising. If consumers think the product is better, they are willing to pay more for it.

Monopolistic Competition Product Differentiation: The real or imagined differences between competing products in the same industry. Differences may be real or imagined. Differentiation may be color, packaging, store location, store design, store decorations, delivery, service….. anything to make it stand out!

Monopolistic Competition Non-Price Competition involves the advertising of a product's appearance, quality, or design, rather than its price. Advertising helps the consumer believe the product is different and worth more money. Notice these commercials never mention price. VS

Monopolistic Competition SWS 2006

Monopolistic Competition In groups of 4 create another example of monopolistic competition. Each person in the group should find a picture of the business on their phone/computer. Answer this question: How does each business differentiate their product?

Oligopoly A market in which a two-three large sellers control most of the production of a good or service and they work together on setting prices. Very few Sellers that control the entire market. Products may be differentiated or identical Difficult to Enter the market because the competitors work together to control all the resources & prices. Collusion = an agreement to act together or behave in a cooperative manner.

Price Behavior in Oligopoly Sometimes businesses do not agree with each other about the price, undersell each other. Price Wars: Series of price cuts that competitors must follow or lose business. Sometimes the price will go below the cost of production.

Why is this NOT an example of a price war? Is this an example of a price war? Why do you think so?

Why is this an example of a price war?

2 Types of Price Behavior in an Oligopoly Price Leader: independent pricing decisions made by a dominate firm on a regular basis that results in generally uniform industry-wide prices. ADVANTAGE: you are the company leading the price. Independent Pricing: policy by a competitor that ignores other producer’s prices. DISADVANTAGE: other firms shut you down by agreeing to set lower prices than yours.

Monopoly There is a single seller No close substitute goods are available High Barriers to Entry: Other sellers cannot enter the Market.

Types of Monopolies Types of Monopolies: Natural Monopoly: costs are minimized by having a single producer of the product. Gas, water, electricity: government creates Economies of Scale: As natural monopolies grow larger, this reduces its production costs. Because normally companies become more efficient as the firm becomes larger.

EXAMPLE: Only person selling water in the desert. 2. Geographic Monopoly: The only business in a location due to size of market. EXAMPLE: Only person selling water in the desert. SWS 2006

How are concessions at Six Flags and movie theaters geographic monopolies?

Types of Monopolies 3. Technological Monopoly: Firm has discovered a new process or product. Patent: 17 years exclusive rights to a developed technology. Copyright: (Artists and writers) Life plus 50 years. SWS 2006

Types of Monopolies 4. Government Monopoly: Retained by the government. Liquor sales in some counties, uranium production, water, etc. SWS 2006

Negative Externalities Markets work best when: Adequate competition exists. Buyers and sellers are reasonably well-informed. Resources are free to move from one industry to another. Market Failure occurs when any of the 3 conditions alter significantly. Negative Externalities