Chapter 7

Prices? Quantity? Efficiency? What happens when markets do not work perfectly?

Market Structures

Market Structure Number of Sellers Similarity of Products Ease of EntryControl over Prices Perfect Competition Monopolistic Competition Oligopoly Monopoly Characteristics used to Determine Market structure

Prices? Quantity Efficiency? Benefits to Competition

Both consumers and producers have a role in determining price. Consumers shop for the best deal. What is the opportunity cost? What can we use today that our parents did not have? Effect on opportunity cost

All parties have equal access to information. Why is having information important in making economic descisions? Key Assumption in Fair Competition

Many buyers and sellers Price Takers Relatively easy to enter and exit the market Identical goods Efficent Qs = Qd. No wasted resources. Perfect Competition - characteristics

One Firm The firm’s graph is the market graph Reason: Market Power Monopoly

Market Structure Number of Sellers Similarity of Products Ease of EntryControl over Prices Perfect Competition ManyHomogeneousFew barriers to trade Price Taker Monopolistic Competition Oligopoly MonopolyOneHomogenousImpossiblePrice Setter Characteristics used to Determine Market structure

Standard Oil Trust John D. Rockefeller cost-cutting led to Control of 90% of the market But what might happen if there is cost-cutting? Example in history

Sherman Anti-Trust Act (1890) Banned any organization from acting in “restraint of trade” Unions ended up being the target Clayton Anti-Trust Act (1913) Listed rules Unions cannot be prosecuted under anti-trust legislation Some Laws

Resource Monopolies DeBeers (Diamond) Government-Created Monopolies Patents, copyrights, public franchise, licenses Natural Monopolies Able to lower costs (economies of scale) Geographic Monopolies Community is isolated so only one business is needed Types of Monopolies

Dominated by a few firms Oligopoly

Market Structure Number of Sellers Similarity of Products Ease of EntryControl over Prices Perfect Competition ManyHomogeneousFew barriers to trade Price Taker Monopolistic Competition OligopolyFewDifferentiated/ Homogeneous Significant Barrier to Trade Some control/ or none MonopolyOneHomogenousImpossiblePrice Setter Characteristics used to Determine Market structure

Price Leadership Play “Game Theory” Prisoner’s dilemna “Golden Balls”Golden Balls Sometimes a price war develops Collusion Cartel OPEC Pricing strategies in Oligopoly

Prisoner 1 Confess Prisoner 1 Not Confess Prisoner 2 Confess 5 years 10 Years Zero Years Prisoner 2 Not Confess Zero Years 10 Years 1 year Prisoner’s Dilemna

Firm 1 Cooperate Firm 1 Cheat Firm 2 Cooperate $5 $10 Zero Firm 2 Cheat Zero $10 $1 Oligopoly Pricing Strategy: Game Theory (Neither knows what the other is going to do)

Oligopolies have an incentive to cooperate They collude – work together to set prices Against the law in US OPEC Oil Cartel colludes to determine price But they sometimes cheat and a price war starts Gas stations and Gas prices Oligopolistic Behavior

Oligopolies are inefficient Prices too high Quantity too low Just like in monopoly

Market Structure Number of Sellers Similarity of Products Ease of EntryControl over Prices Perfect Competition ManyHomogeneousFew barriers to trade Price Taker Monopolistic Competition ManyDifferentiatedFew barriersSome power over price OligopolyFewDifferentiated/ Homogeneous Significant Barrier to Trade Some control/ or none MonopolyOneHomogenousImpossiblePrice Setter Characteristics used to Determine Market structure

Most common market structure Advertising very important Brand Loyalty Why do people still buy Advil? This is called non-price Competition Gain as much of the market share as possible Monopolistic Competition

Market Structure Number of Sellers Similarity of Products Ease of EntryControl over Prices Non-price competition Perfect Competition ManyHomogeneousFew barriers to trade Price TakerNone Monopolistic Competition ManyDifferentiatedFew barriersSome power over price Advertising very important OligopolyFewDifferentiated/ Homogeneous Significant Barrier to Trade Some control/ or none Advertising important MonopolyOneHomogenousImpossiblePrice SetterNone Characteristics used to Determine Market structure

Imperfect competition is considered market failure. Why? Another type of market failure is called an externality Market Failures

Negative Externality Costs of Production “spills over” onto society There is not only a private (firm) cost, but also a cost to society Emissions from a factory Market Failures

What can government do to limit pollution? Should government ban all companies that pollute?

Video: Negative ExternalityNegative Externality 35

You have to take some bad with the good Produce until the marginal benefit to society equals the marginal cost to society MSB = MSC

Positive Externalities Spillover benefit of a good Not enough produced of a good Example: Vaccines How does government encourage companies to provide more vaccines with raining the cost to consumers? Market Failures

Tragedy of the Commons John Stossel on the importance of private property

The difference is about who owns the good Private – Individuals own Public – Government owns Private vs. Public Good

Private Goods Excludable Rival in consumption Public Goods Nonexcludable Non-rival in consumption Private vs. Public Good