<============================================  Perfect Competition Monopoly OLIGOPOLY Monopolistic Competition How close to Adam Smith’s World? Pure Free Market No Competition U.S. Economy

Oligopoly Few interdependent sellers: --the top four firms in the industry make up 70%+ of total sales difficult to enter or leave market Market Characteristics

Oligopoly Examples Car makers Steel industry Aircraft manufacturing Oil industry Airlines Tobacco industry Beer industry Soda industry Home Improvement Music recording industry Textbook industry Wireless communications industry Aerospace industry

Because of Economies of Scale. The most rapidly expanding market structure in USA over last 20 years Why?

Economies of Scale Definition: factors that cause a producer’s average cost per unit to fall as output rises

Economies of Scale Example 1 car 10 cars 100 cars1000 cars 10,000 cars 100,000 cars Cost of building factory (fixed cost) $1 Billion Cost per car produced $1,000,000,000 $100,000,000 $10,000,000 $1,000,000 $100,000 $10,000 $1 Billion

Market Demand & Supply Curves Individual Firm’s Demand Curve D S Market Price D Supply & Demand (Oligopoly) Oligopolists face a KINKED demand curve. --Above market equilibrium, demand is elastic --Below market equilibrium, demand is inelastic elastic inelastic

Cartels S D Price Quantity Inside the world of OPEC & DeBeers

Cartels Cartel –A group of firms acting in unison (colluding) to impact the price of their product –Illegal in USA based on Anti-Trust Laws (legal in other countries)

How Cartels Affect Price They collude to control/restrict the supply of their product By keeping Supply low, they keep price artificially high S2S2

World’s most famous CARTEL Organization of the Petroleum Exporting Countries (OPEC) OPEC’S Effect on Oil Market Controls 2/3 rds of world’s oil reserves 45% of current world oil supply Can influence price by controlling supply of oil uses quotas for each country Does not “set” oil prices OPEC Meeting

Supply: Where is the Oil?

OPEC video clips

Diamonds --what should determine their value? Diamonds were very rare until 1871 But today, diamonds are less rare than other gemstones So why are they so expensive? DeBeers leads a cartel that controls the world’s diamond market

Film Clip 60 Minutes segment on DeBeers

Graphing Supply & Demand S1S1 D1D P1P1 P2P Demand is kept artificially high & inelastic through advertising Supply is kept artificially low by DeBeers End Result: High prices paid & lower Quantity supplied D1D1 S1S1 P1P D2D2 S2S2

Video clip from “Fair Fight in the Marketplace” Offender: Archer Daniels Midland Co. (segment 2) 6 min. 24 sec.