Ch. 7: Market Structures

Section 1: Perfect Competition Competition balances free markets, but certain requirements need to be met for perfect competition to exist.

Perfect Condition Perfect competition requires the following… Many buyers and sellers participate Sellers offer identical products Buyers and sellers are well informed Sellers are able to enter and exit the market freely/easily

1. Many Buyers and Sellers Having many producers and consumers creates choice, which brings down prices and improves products.

2. Identical Products In perfect competition, producers are selling identical products. Commodity- a product that is the same regardless of who produces it (gas, corn, milk)

3. Informed Buyers and Sellers Consumers and producers need to be informed about products and pricing to ensure competition. Internet has greatly advanced consumer information.

4. Easy Entry and Exit Producers need to be able to easily enter the market for there to be many sellers. How easy is it to start a business?

Barriers to Entry Barrier to entry: anything that causes difficulty to businesses trying to enter a market. Excessive barriers to entry reduce the number of producers. Start-up costs Legal/certification requirements

Barriers to Entry With your partner… Consider to barriers to entry for your business. List all start-up costs and legal requirements that you would need to overcome to create your business.

Barriers to Entry High start-up costs and legal requirements make it difficult to enter the market. America is ranked highly on the list of “ease in starting a business” list. Limited number of legal “hoops”.

Section 2: Monopoly Monopolization eliminates competition entirely.

Monopoly A monopoly is a market that only has one supplier/producer. Eliminates competition.

Monopoly examples With a partner, think of examples of markets with only one provider of the good/service.

Microsoft?

How they form Economies of scale: average cost per unit falls as production increases. This makes big businesses more cost effective- enabling them to cut costs and absorb competitors.

John Rockefeller: Standard Oil Practiced horizontal consolidation.

Andrew Carnegie: Carnegie Steel Practiced vertical consolidation.

Natural Monopoly An industry that operates most efficiently with just one provider. Utilities: water, electric, natural gas Roads

Government Monopoly A monopoly created by the government. Patents Contracts

Patents A patent is a license given to an inventor that gives them exclusive rights to sell their product. Good for a limited period of time.

Funny inventions

Contracts and Franchising Government often picks firms to make contracts with. Company “X” is chosen to install and stock all school vending machines.

Section 3: Monopolistic Competition Most markets are neither in perfect competition, nor monopolies, but somewhere in between.

Monopolistic Competition Monopolistic competition is when many companies compete to sell products that are similar, but not identical.

Monopolistic Competition vs Perfect Competition Both have many competing firms/producers Both have few barriers to entry However… Perfect Competition is a market with identical products (commodities). Monopolistic Competition is a market with differentiated products (most consumer goods).

Nonprice Competition Monopolistic competitors can compete on factors other than price… Physical characteristics Location Service level Advertising, image, or status (popularity)

Oligopoly Oligopoly is a market with only a few firms providing goods. Occurs in markets with high barriers to entry. Think: industries that would be realistically impossible for you to enter as a producer.

Collusion Collusion is when members of oligopolies agree to set prices and production levels. Collusion is illegal, because the effects are the same as a monopoly- elimination of competition.

Cartels Cartels are organizations that form to coordinate prices and production. Also illegal, and are often associated with the black market (drug cartel)

Section 4: Regulation and Deregulation Government attempts to balance two competing interests… Open, accessible markets for producers Protection for consumers

Regulation vs. Deregulation Too much regulation can make it difficult for producers to enter markets (raises barriers to entry) Too little regulation can create monopolies and predatory business practices that end up hurting consumers.

Antitrust Laws During the Industrial Revolution, many trusts were formed. Trusts are like cartels and result in monopolization (Standard Oil Trust- Rockefeller) Government eventually broke up these trusts.

Mergers Mergers are when two or more companies combine into one. Mergers are tightly regulated to avoid monopolization.

Deregulation During the 1970s and 1990s, Congress passed numerous laws to deregulate, citing increased inefficiencies as a result of the laws.

Credit Crisis 2007-Present Many cite deregulation of Wall Street investment banks as a cause of the banking collapse in 2007. Lending was loosely regulated, and banks were able to knowingly make faulty loans.