Market Structures Economics Chapter 7

Agenda 10/27 CBM # 4 Types of Market Structures Group Activity: Market Structure Case Studies Objective: We will understand the characteristics of competitive and uncompetitive markets when it comes to prices.

Market Structures Nobody Sleeps in Economics Class!!!! Market Structures – degree of competition among producers, depends upon: Number of producers -- helps determine the level of competition more producers = more competition Similarity of products – degree to which producers in a market are similar. The more similar, the greater the competition Ease of entry -- markets that are easy to enter are the most competitive Control over prices -- ability to influence prices = market power the more competitive the market the less market power individual businesses have Nobody Sleeps in Economics Class!!!!

Perfect Competition Many producers and consumers Identical products Easy entry into market No control over prices Prices determined by supply & demand Consumers have easy access to information about products and prices Producers are forced to be efficient Consumers pay equilibrium price

Monopolistic Competition Many producers provide similar but varied goods Price competition Non price competition – differentiation Markets remain competitive Examples: Restaurants Plumbers Health clubs Hairdressers

Oligopoly Small number of producers provide similar but not identical goods Producers have some control over prices – often set in response to decisions of other producers Industry dominated by a few firms producing similar products Bigger producers have advantage over smaller producers – economies of scale Collusion – producers make agreements on production levels and pricing Cartels – set production levels and prices for specific products, example OPEC -- organization of petroleum exporting countries Examples – airlines, automobiles, soda

Monopoly Market in which a single producer provides unique product Producers have: Significant control over prices Less incentive to satisfy consumers High Barriers to entering the market Anti-Trust Laws stop Monopolies Most Monopolies are illegal Types of Monopolies: Resource monopolies – one producer controls a natural resource Government created – protect inventors of products – copyrights/patents , National Park Service, licenses Natural monopolies – single firm provides good or service more efficiently and at a lower cost – utility companies, cable

Economies of Scale Economies of scale: greater efficiency and cost savings that result from increased production Usually associated with natural monopolies Examples: cost of supplying water, cable company operating in neighborhood

Anti-Trust Laws United States antitrust law prohibits anti-competitive behavior – monopoly Encourage competition in the marketplace Make illegal certain practices deemed to hurt businesses or consumers or both Sherman Antitrust Act – limits cartels and monopolies – response to John D Rockefeller’s Standard Oil monopoly (1911)

How else can a market fail??? Externalities & Public Goods Market Failures Occur when markets do not allocate goods and services efficiently: Monopoly, Oligopoly and Monopolistic Competition are all examples of Market Failure How else can a market fail??? Externalities & Public Goods Externalities – things that affect someone other than producer or consumer It is a side effect of production or consumption that has consequences for people other than the producer or consumer. You might think of externalities as spillover effects, either costs or benefits, resulting from the actions of companies or individuals. Examples: When a factory dumps chemical waste into a river and the polluted water affects the health of people who live downstream, that is an externality. If a neighbor plants a new flower garden and the results please you, that is also an externality If that same neighbor holds a party with loud music that keeps you up at night, that is an externality, too. In fact, it is an externality if you hear the music at all, whether you like it or not. Public Goods – good available for everyone – regardless of ability to pay goods and services that are not provided by the market system because of the difficulty of getting people who use them to pay for their use. Streetlights & sidewalks fire and police services, national defense, and public parks. opposite of private goods, or goods and services that are sold in markets. Private firms do not provide us with these public goods for a simple reason: they have no way to make the people who benefit from them pay for them.

Externalities and Public Goods Externalities – things that affect someone other than producer or consumer; spillover effects, either costs or benefits, resulting from the actions of companies or individuals Examples: factory dumps chemical waste into a river, people downstream get sick neighbor plants a new flower garden, results are pleasing to you Public Goods – good available for everyone – regardless of ability to pay (opposite of private goods) goods and services that are not provided by the market system because of the difficulty of getting people who use them to pay for their use. Streetlights and sidewalks fire and police services, national defense, public parks Private firms do not provide us with these public goods because they have no way to make the people who benefit from them pay for them. Externality cont.: If that same neighbor holds a party with loud music that keeps you up at night, that is an externality, too. In fact, it is an externality if you hear the music at all, whether you like it or not.

Market Structures – Case Studies Class Activity – Groups of 4, examine case studies, create posters and present findings to class

Monopolistic Competition Market Structures Perfect Competition Pure Monopoly Monopolistic Competition Oligopoly Monopoly The further right on the scale, the greater the degree of monopoly power exercised by the firm. Perfect Competition Monopolistic Competition Oligopoly Monopoly Perfect Competition: Many producers and consumers Identical products Easy entry into market Prices determined by supply & demand Consumers have easy access to information about products and prices Producers are forced to be efficient Consumers pay equilibrium price Monopolies: Market in which a single producer provides unique product Producers have: Significant control over prices Less incentive to satisfy consumers High Barriers to entering the market Anti-Trust Laws stop Monopolies (standard oil) Most Monopolies are illegal Types of Monopolies: Resource monopolies – one producer controls a natural resource Government created – protect inventors of products – copyrights/patents – public franchise – National Park Service – licensed – car inspections Natural monopolies – single firm provides good or service more efficiently and at a lower cost – utility companies, cable tv Oligopoly: Small number of producers provide similar but not identical goods Producers have some control over prices – often set in response to decisions of other producers Oligopolies dominate markets – collusion occurs Industry dominated by a few firms producing similar products Bigger producers have advantage over smaller producers Examples – airlines, automobiles, soda Collusion – producers make agreements on production levels and pricing Cartels – set production levels and prices for specific products OPEC -- organization of petroleum exporting countries Monopolistic Competition: Many producers provide similar but varied goods Characteristics: Price competition Non price competition – differentiation Markets remain competitive Examples: Restaurants Plumbers/electricians/local builders Lawyers Insurance brokers Health clubs Hairdressers Funeral directors