Market Structures Ch. 7

Essential Question What are the advantages and disadvantages of different market structures?

Perfect Competition and Monopolies I. Perfect Competition- a market structure with many fully informed buyers and sellers of an identical product and ease of entry. (Ex: Farming- wheat, shares of stock) A. Four main features 1. Many buyers and sellers – no individual buyer or seller can influence price, which is determined by market demand and supply 2. Firms produce a standardized product or commodity (ex: bushel of wheat or a share of Microsoft stock) – buyers are concerned only with price Commodity- a product that is identical across sellers 3. Well informed buyers and sellers- (Ex: learn about farming) 4. Firms can easily enter or exit an industry

Perfect Competition and Monopolies B. Example markets 1. Most agricultural products (wheat, corn, etc.) are the best example 2. Shares of large corporations, and foreign exchange (yen, euros, and pounds) C. Market price 1. Once market price is established, one can sell all they want at that price 2. Try to maximize profit

Perfect Competition and Monopolies II. Monopoly – a sole supplier of a product with no close substitutes- illegal in U.S. - (extreme opposite of perfect competition) A. Features 1. Sole supplier of a product with no close substitutes 2. More market power (but not total power) than any other market structure - Ex: Gas- you do not have to buy it, you could bike to work

Perfect Competition and Monopolies 3. Barriers to entry (3 types)- restrictions on the entry of new firms into an industry a. Legal restrictions -patents, licenses, and other legal restrictions, provide monopolies for some businesses- or government monopolies – Ex: U.S. Postal Service and 1st class mail (competitors are Fed Ex, UPS, etc), sellers of lottery tickets (by state) or liquor (by county)

Perfect Competition and Monopolies b. Economies of scale – a single firm can provide more of something cheaper than 2 or more companies – providers of electricity, gas power have this type of natural monopoly -protect public interests Or another natural monopoly includes geographic monopolies like the only store or gas station for miles. c. Control of essential resources – China is a monopoly supplier of pandas to zoos. Alcoa controlled bauxite, key raw material in aluminum. And DeBeers controls >90% of diamond supply in Africa

Perfect Competition and Monopolies B. Monopolies may not earn a profit. C. True monopolies are rare – railroads controlled shipping goods across country until trucks were invented

Monopolistic Competition and Oligopoly III. Monopolistic Competition – contains elements of monopoly and perfect competition- a market structure with low entry barriers and many firms selling products differentiated enough that each firm’s demand curve slopes downward- (Many competitors/5 or more firms)

Monopolistic Competition and Oligopoly A. Features 1. Low barriers to entry (easy to get into) 2. Slightly different products (product differentiation) -QT v. Shell 3. Importance of advertising and shelf space -Cereal Ex: Raisin Bran (healthy), Luck Charms (better tasting) 4. Often operate with excess capacity B. Examples include: cereals, books, gas stations, fast food restaurants

Monopolistic Competition and Oligopoly IV. Oligopoly (2-4 firms)- a market structure with a small # of firms whose behavior is interdependent (Example- the car/auto industry, cigarettes) -The Big 3 Auto Makers (GM, Ford, Chrysler) B. Features 1. Market is dominated by a few sellers (2-4 firms control > 75% of industry) Ex: Soft drinks (Coke v. Pepsi) 2. Barriers to entry a. economies of scale- buy in bulk b. high cost of entry c. product differentiation costs – Big $ on advertising differentiated- firms sell products that differ -Ex: Ford v. Toyota

Monopolistic Competition and Oligopoly 3. Firms are interdependent – don’t rely on each other 4. Collusion – (ILLEGAL) an agreement among firms in the industry to divide the market and fix the price= set the price 5. Cartels – (ILLEGAL) a group of firms that agree to act as a monopoly to increase market price and maximize their profits- like OPEC What is OPEC? Organization of the Petroleum Exporting Countries (12 countries) (Both collusion and cartels are illegal in the U.S.)