FOUR MARKET STRUCTURES

Imperfect Competition The seller has NO control over price. FOUR MARKET STRUCTURES Perfect Competition Monopolistic Competition Pure Monopoly Oligopoly Imperfect Competition Characteristics of Perfect Competition: Examples of Perfect Competition: Avocado farmers, sunglass huts, and hammocks in Mexico Many small firms Identical products (perfect substitutes) Easy for firms to enter and exit the industry Seller has no need to advertise Firms are “Price Takers” The seller has NO control over price.

Imperfect Competition FOUR MARKET STRUCTURES Perfect Competition Monopolistic Competition Pure Monopoly Oligopoly Imperfect Competition Characteristics of Pure Monopoly: Examples of Perfect Competition: Avocado farmers, sunglass huts, and hammocks in Mexico Single Firm Unique Good (no close substitutes) Price Maker High Barriers to Entry Some Advertising (Increase Interest)

Examples of Monopolies

Four Origins of Monopolies Geography is the Barrier to Entry Ex: Nowhere gas stations, De Beers Diamonds, Chicago Bears, Cable TV, US Cellular Hot Dogs… -Location or control of resources limits competition and leads to one supplier. 2. The Government is the Barrier to Entry Ex: Water Company, Firefighters, The Army, Pharmaceutical drugs, rubicks cube… -Government allows monopoly for public benefits or to stimulate innovation. -The government issues patents to protect inventors and forbids others from using their invention. (They last 20 years)

Four Origins of Monopolies 3. Technology or Common Use is the Barrier to Entry Ex: Microsoft, Intel, Frisbee, Music Industry, Blu-Ray v HD-DVD… -Patents and widespread availability of certain products lead to only one major firm controlling a market. 4. Mass Production and Low Costs are Barriers to Entry Ex: Electric Companies (Com Ed) If there were three competing electric companies they would have higher costs. Having only one electric company keeps prices low -Economies of scale make it impractical to have smaller firms. Natural Monopoly- It is NATURAL for only one firm to produce because they can produce at the lowest cost.

Characteristics of Monopolistic Competition: Perfect Competition Monopolistic Competition Monopolistic Competition Pure Monopoly Pure Monopoly Oligopoly Oligopoly Characteristics of Monopolistic Competition: Relatively Large Number of Sellers Differentiated Products Some control over price Easy Entry and Exit (Low Barriers) A lot of non-price competition (Advertising)

Characteristics of Oligopolies: FOUR MARKET MODELS Perfect Competition Monopolistic Competition Pure Monopoly Oligopoly Characteristics of Oligopolies: A Few Large Producers (Less than 10) Identical or Differentiated Products High Barriers to Entry Control Over Price (Price Maker) Mutual Interdependence Firms use Strategic Pricing Examples: OPEC, Cereal Companies, Car Producers

The study of how people behave in strategic situations Game Theory The study of how people behave in strategic situations An understanding of game theory helps firms in an oligopoly maximize profit.

SIMULATION! Why learn about game theory? Oligopolies are interdependent since they compete with only a few other firms. Their pricing and output decisions must be strategic as to avoid economic losses. Game theory helps us analyze their strategies. SIMULATION! Princess Bride - http://www.youtube.com/watch?v=U_eZmEiyTo0

What is each player’s dominate strategy? Video: Split or Steal What is each player’s dominate strategy? Firm 2 Split Steal   Split Half, Half None, All http://www.youtube.com/watch?v=S0qjK3TWZE8 (Begin with this one, stop before talk) http://www.youtube.com/watch?v=yM38mRHY150&feature=related (show to end) Firm 1 All, None None, None Steal

Both Deny = 5 Years in jail each Both Confess= 10 Years in jail each The Prisoner’s Dilemma Charged with a crime, each prisoner has one of two choices: Deny or Confess Prisoner 2 Deny Confess   Both Deny = 5 Years in jail each Confess = Free Deny =20 Years Deny Prisoner 1 Confess = Free Deny = 20 Years Both Confess= 10 Years in jail each Confess

Both Confess = 5 Day Suspension The Prisoner’s Dilemma Two students are called into the Dean’s Office. Both were caught on camera entering the room where a crime was committed. Each prisoner has one of two choices: remain Silent or Blame the other. Student 2 Silent Blame   3 day suspension Confess = Free Silent = Expulsion Silent Have two volunteers simulate prisoners with the above scenario If both parties remain silent or collude, both will continue to profit from this situation and their tacit collusion.  However, if one party chooses to blame, this action could precipitate a downward spiral, in which all parties end up with a much less favorable result. The conclusion is the same: when comparing the options of collusion and competition, all parties will obtain a more favorable result if they do not compete with each other. Student 1 Confess = Free Silent = Expulsion Both Confess = 5 Day Suspension Blame

Payoff matrix for two competing bus companies You Try IT! Payoff matrix for two competing bus companies Oligopoly – interdependent decision making Early No, better for them to go late if Roadway goes late $900