Chapter 8

Market Structures Defined by the number of sellers, the product, how easy or difficult it is to enter the market

4 Types of Markets Perfectly competitive Monopolistic Monopolistic competitive Oligopolistic

Perfectly Competitive Market Many buyers and sellers All firms sell identical goods Buyers and Sellers have relevant information about prices, product quality, sources of supply and so on. Firms have easy entry into and exit out of the market Example: Wheat

Sellers in a perfectly competitive market are Price Takers Price takers are sellers that can sell all of their output at the equilibrium price but can sell none of its output at any other price

Profit is a signal in perfectly competitive markets

Characteristics of a Monopolistic Market The market consists of one seller The single seller sells a product that has no close substitutes The barriers to entry are high

Monopolies are price searchers Price searchers can sell some of its output at various prices A Monopoly Seller is not Guaranteed Profits

Barriers to Entry Legal Barriers A Public Franchise Ex: U.S. Postal Service Extremely Low Average Total Cost (Low Per-Unit Costs) Natural Monopoly Exclusive Ownership of a Scarce Resource

Antitrust and Monopoly Antitrust Laws – legislation passed for the stated purpose of controlling monopoly power and preserving and promoting competition The Sherman Antitrust Act The Clayton Act Federal Trade Commision Act The Robinson-Patman Act The Wheeler Lea Act The Issue of Natural Monopoly

Characteristics of a Monopolistic Competitive Market The market includes many buyers and many sellers Firms produce and sell slightly differentiated products Firms have easy entry into and exit out of the market They are price searchers

How much competition does a seller face? Perfectly Competitive Market – a competitive situation Monopolistic Market– no competition Monopolistic Competitive Market – some competition, but not all buyers will leave with a raise in price. Example: IPOD

Characteristics of a Oligopolistic Market The market has few sellers Firms produce and sell either identical or only slightly differentiated products High barriers of entry They are price searchers

How much competition? Oligopolists face intense competition, because their goods are either identical (steel) or slightly different (cars)

Identifying Oligopolistic Industries If only a few firms account for a large percentage of sales then it is oligopolistic. Example: US automobile industry. Ford, GM and Daimler Chrysler make up 90% of American made cars sold in US.

Cartel agreement - agreements to restrict competition – ILLEGAL Is it Buyers v Sellers or Sellers v Sellers Price Discrimination – when a seller charges different prices to different buyers Different customers must be willing and able to pay different prices Seller requires a way to tell who will pay more Product can not be resold, by the person paying less