The Four Types of Market Structure Tap water Electricity Monopoly Novels Movies Monopolistic Competition Tennis balls Crude oil Oligopoly Number of Firms? Perfect Wheat Milk Competition Type of Products? Identical products Differentiated products One firm Few firms Many firms

Copyright © 2004 South-Western Types of Markets MonopolyMonopoly Only one firm with one product Monopolistic CompetitionMonopolistic Competition Many firms selling products that are similar but not identical. OligopolyOligopoly Only a few sellers, each offering a similar or identical product to the others. Perfect CompetitionPerfect Competition Unlimited firms selling products that are identical. __

Copyright © 2004 South-Western MONOPOLY A monopoly firm is a price maker A firm is considered a monopoly if... it is the sole seller of its product. its product does not have close substitutes. __

Copyright © 2004 South-Western WHY MONOPOLIES ARISE The fundamental cause of monopoly is barriers to entry. Barriers to entry have three sources: Ownership of a key resource. The government gives a single firm the exclusive right to produce some good. Costs of production make a single producer more efficient than a large number of producers. __

Copyright © 2004 South-Western Government-Created Monopolies Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets. Patent and copyright laws are two important examples of how government creates a monopoly to serve the public interest. __

Copyright © 2004 South-Western Increasing Competition with Antitrust Laws Two Important Antitrust Laws Sherman Antitrust Act (1890) Reduced the market power of the large and powerful “trusts” of that time period. Clayton Act (1914) Strengthened the government’s powers and authorized private lawsuits. __

Copyright © 2004 South-Western Monopolistic Competition Markets that have some features of competition and some features of monopoly. Attributes of Monopolistic Competition Many sellers Product differentiation Free entry and exit __

Copyright © 2004 South-Western Monopolistic Competition Many Sellers There are many firms competing for the same group of customers. Product examples include books, CDs, movies, computer games, restaurants, fast food, cookies, furniture, etc.

Copyright © 2004 South-Western Monopolistic Competition Easy Entry or Exit Firms can enter or exit the market without restriction. Product Differentiation Each firm produces a product that is at least slightly different from those of other firms. Rather than being a price taker, each firm faces a downward-sloping demand curve. __

Copyright © 2004 South-Western ADVERTISING When firms sell differentiated products, each firm has an incentive to advertise in order to attract more buyers to its particular product. Overall, about 2 percent of total revenue, or over $200 billion a year, is spent on advertising. Critics of advertising argue that firms advertise in order to manipulate people’s tastes. __

Copyright © 2004 South-Western OLIGOPOLY Characteristics of an Oligopoly Market Few sellers offering similar or identical products Interdependent firms Collusion An agreement among firms in a market about quantities to produce or prices to charge. Cartel A group of firms acting in unison. __

Copyright © 2004 South-Western INTERDEPENDENCE Because the number of firms in an oligopolistic market is small, each firm must act strategically. Each firm knows that its profit depends not only on how much it produces but also on how much the other firms produce. __

Copyright © 2004 South-Western Jack and Jill Oligopoly Game Jack’s Decision Sell 40 Gallons Sell 40 Gallons Jack gets $1,600 profit Jill gets $1,600 profit Jill gets $2,000 profit Jack gets $1,500 profit Jill gets $1,500 profit Jack gets $2,000 profit Jill gets $1,800 profit Jack gets $1,800 profit Sell 30 Gallons Sell 30 Gallons Jill’s Decision __

Copyright © 2004 South-Western Perfect Competition A perfectly competitive market has the following characteristics: There are many buyers and sellers in the market. The goods offered by the various sellers are largely the same. Firms can freely enter or exit the market. __

Copyright © 2004 South-Western WHAT IS A COMPETITIVE MARKET? A competitive market has many buyers and sellers trading identical products so that each buyer and seller is a price taker. Buyers and sellers must accept the price determined by the market. __