Market Structures in a Free Market Economy

Review Economic Systems CommandMarketTraditional

In a free market economy, markets for different products and services may vary from one another based on the level of competition in each market.

Discussion: What is competition? (What defines “competition”?) What makes one situation more competitive or less competitive than another? (Think about situations other than economics – sports for example.)

Free Market Level of Competition MoreLess Pure Competition Monopolistic Competition OligopolyMonopoly

Pure Competition Characteristics: Large number of buyers and sellers Identical products Buyers and sellers act independently Buyers and sellers are well informed Ease of entry into the market and exit out of the market Note: ALL FIVE of the above are needed to have pure competition.

Pure Competition, cont. Results: No single buyer/seller can affect price. No preferred brands, since all are identical No single sellers would raise prices, because most/all consumers would go elsewhere. –Prices therefore tend to be stable.

Pure Competition, cont. Examples: None In practically all markets, at least one of the characteristics for pure competition is lacking.

Group Activity: In groups, discuss and write answers to the following: Imagine the AHS cafeteria as a situation where pure competition exists. –What, specifically, might you see? –List as many answers as possible.

Monopolistic Competition Characteristics: Large number of buyers and sellers Product differentiation –Products are not identical. –Either real or perceived differences Non-price competition –Use of advertising or other promotions

Monopolistic Competition, cont. Results: By making its product different, each competitor tries to attract more customers and monopolize a small portion of the market. Similar products sell within a narrow price range without greatly affecting a seller’s total sales or a competitors’. Charging a higher price depends on convincing consumers that the product is better than others.

Monopolistic Competition, cont. Examples: Athletic footwear –Differences: shock-absorbing soles, lighter weight, additional ankle support, etc. Aspirin –Differences are largely imaginary.

Group Activity: In groups, discuss and write answers to the following: Imagine the AHS cafeteria as a situation where monopolistic competition exists. –What, specifically, might you see? –List as many answers as possible.

Oligopoly Characteristics: Market dominated by small number of large sellers One firm can cause change in output, sales and prices of entire industry Product may be differentiated or standardized

Oligopoly, cont. Results: Still competitive, but further from pure competition than monopolistic competition Interdependent behavior: when one firm does something, others usually follow. Price wars – higher prices discouraged Price leadership – occurs when one firm initiates most of the price changes Non-price competition preferred –May result in collusion (formal cooperation) such as price fixing

Oligopoly, cont. Examples: Auto industry Steel industry Airline industry Some industries are becoming oligopolistic: –Soft drinks (Coke, Pepsi) –Fast food (McDonald’s, Burger King, Wendy’s)

Group Activity: In groups, discuss and write answers to the following: Imagine the AHS cafeteria as a situation where an oligopoly exists. –What, specifically, might you see? –List as many answers as possible.

Monopoly Characteristics: Exact opposite of pure competition One seller of a product with no close substitutes Pure monopolies almost never exist. –Most qualify as near monopolies.

Monopoly, cont. Types: Natural monopoly –Costs minimized by having a single firm produce the product –Firm usually more efficient when larger –Examples: telephone, electricity, water Geographic monopoly –Exists because of location –Competition may eventually exist –Examples: drugstore in small town, gas station at a lonely highway exit

Monopoly, cont. Technological monopoly –Exists when a firm invents a new product –Often protected temporarily by a patent –Example: Microsoft Government monopoly –Govt.-owned business without competition –Usually involve products not adequately provided by private industry –Examples: US Postal Service, water service in some towns

Group Activity: In groups, discuss and write answers to the following: Imagine the AHS cafeteria as a situation where a pure monopoly exists. –What conditions would be necessary for the cafeteria to become a pure monopoly? –What, specifically, might you see? –List as many answers as possible.