Competition and Market Structures Chapter 7.1-4 notes Competition and Market Structures

Market Structure nature and degree of competition among firms operating in the same industry. Economists group industries into four different market structures: 1.Perfect Competition 2.Monopolistic Competition 3.Oligopoly 4.Monopoly

Perfect Competition 5 necessary conditions: 1. large # of buyers and sellers 2. buyers and sellers deal in identical products 3. each buyer and seller acts independently 4. buyers and sellers are reasonably well-informed about products and prices 5. buyers and sellers are free to enter into, conduct, or get out of business. Each firm is too small to influence price; supply and demand set price “price takers”

Examples of p.c. Nothing is “perfect” Closest – corn, ag products, raw beef

Imperfect Competition There are no pure examples of perfect competition, most fall into “imperfect competition” Lacks one of more of the 5 conditions Most firms and industries fall into I.C. There are 3 categories: monopolistic competition, oligopoly, monopoly

Monopolistic Competition has all the conditions of perfect competition except for identical products product differentiation – real or imagined differences between competing products in the same industry nonprice competition – the use of advertising, giveaways or other promotional campaigns to convince buyers that the product is somehow better than another brand can enter the market easily; narrow price range

Examples of mon.comp. How many fast food restaurants can you think of that serve hamburgers?

Oligopoly market structure in which a few very large sellers dominate the industry industry is oligopoly if four firms control 40 percent of market product can be differentiated or standardized interdependent behavior – oligopolies are so large that when one firm acts the other firms usually follow Very difficult to enter market

Cont’d sometimes collusion can occur – formal agreement to price-fix or cooperate on something. Collusion = illegal price wars can occur b/c oligopolists usually act together; but tend to compete on a nonprice basis

Examples of Oligopoly Tennis balls Cereal Soft drinks

Monopoly market structure with only one seller of a particular product (extreme cases) Americans generally do not like monopolies because of price increases, sometimes “price fixing” monopolies are price makers instead of price takers

Types of Legal Monopolies natural monopoly – market situation where the costs of production are minimized by having a single firm produce the product. EX: phone company, utilities geographic monopoly – based on the absence of other sellers in a certain geographic area technological monopoly – based on the ownership or control of a manufacturing method, process, or other scientific advance Ex: patents, copyrights government monopoly – owned and operated by the gov’t, found at all 3 levels

Antitrust Laws Because monopolies can be harmful to consumers and some producers, gov’t created laws against them Late 1800s, trusts dominated oil, steel, railroad industries 1890 Sherman Antitrust Act enabled government to control monopolies

Unfair business practices NO market allocation NO predatory pricing Govt’ can issue and cease and desist order Gov’t requires public disclosure

Federal Agencies FDA – Food and Drug Admin. FTC – Federal Trade Comm. FCC – Federal Communications Commission EPA – Environmental Protection Agency CPSC – Consumer Product Safety Commission

Deregulation In 1970’s, gov’t started to deregulate some industries Example – Airlines Prices fell because of competition, but quality of service also fell, and some airlines went bankrupt