Market Structures

 What is Perfect Competition?

 A Market Structure is basically an economic model that allows economists to examine competition among businesses in the same industry.  Perfect Competition is the ideal model of a market economy. It is basically a model because real markets are never perfect.

 There are 5 traits of Perfect Competition –  1. Numerous buyers and sellers – no 1 buyer or seller has control over market  2. Standardized Product – a product that is considered identical in all aspects in a market  3. Freedom to enter and exit markets – No regulations you can buy and sale as you please.  4. Independent buyers and sellers – no one can join together (buyers or sellers) to influence prices  5. Well-informed buyers and sellers – both buyers and sellers are well informed of the product and the market

 Since no markets in the real world have all the qualities of perfect competition they are considered an imperfect competition

 The Impact of Monopoly

 The farthest end of the spectrum from a perfect competition is a monopoly  A monopoly is where only 1 seller sales a product and there are no substitutes for it.  Pure monopolies are as rare as perfect competition  A cartel is formal organization of sellers of products that agree to act together to set prices and limit output.  A monopoly is bad because it is considered a price maker meaning it can decide what it’s own price is with no competition to change it

 There are 3 characteristics to a monopoly :  1. Only 1 seller – A single business controls the industry of an object  2. A restricted, regulated market – Where government will allow a single business to control a market. An example would be local utilities.  3. Control of Prices – Since there is no competition the businesses have complete control of the prices of a market.

 Natural Monopolies – A situation when the costs of production are at their lowest only when 1 firm provides output (example – water company)  Government Monopolies – A monopoly that exists because the government either owns and runs the business or authorizes only 1 producer (example – The Post Office)  Technological Monopolies – A monopoly that exists because the firm controls a manufacturing method, invention, or type of technology. (example – patent / copyright)  Geographic Monopolies – There are no other products or sellers within a certain region. (example – sports teams in areas)

 In order to maximize profit in a monopoly businesses still have to get prices at the best price in order to encourage consumers to purchase their product.

 Other Market Structures

 Monopolistic Competition -is where many sellers offer similar but not standardized products  Product Differentiation and non-price competition are the distinguishing features of monopolistic competition  Product differentiation – the attempt to distinguish a product from a similar product  Non-Price competition – using factors other than price to attract customers (style, service, advertising, giveaways, etc.)

 Monopolistic Competition has 4 major characteristics –  1. Many sellers and buyers – example hamburger joint.  2. Similar but different products – slight differences in hamburgers  3. Limited Control of Prices – prices are not in total control of producers due to large number of sellers  4. Freedom to enter or exit market – If they want to exit the market they can if they want to enter they can with very little barriers

 In an Oligopoly there are very few sellers in the market that offer a similar product  There are fewer firms because there is a higher startup cost in an Oligopoly  There are 4 major characteristics of an Oligopoly –  1. Few sellers and many buyers – breakfast cereal is an example. If 4 firms control atleast 40% of the market it is considered an Oligopoly  2. Standardized or Differentiated Products – There are so few businesses that control the market that the costs of startup and production are generally to high to join the market  3. More control of prices – Since there are fewer sellers they can control the prices much easier  4. Little freedom to enter or exit the market – The costs are so high to startup it is hard to enter and equally as hard to exit the market after making it in the market

 Regulation and Deregulation Today

 The Government will put in regulations to control businesses to ensure a fair market place  Anti-trust legislation laws define monopolies and give Government the power to control them and break them up if necessary  The (FTC) Federal Trade Commission and Department of Justice share the power to break these trusts up

 Businesses work together to ensure unfair practices at times some of the ways they do this is as follows:  1. price fixing – Competing businesses work together to set the prices.  2. market allocations – when competing businesses negotiate the divide up the market  3. Predatory pricing – setting prices below cost in order to keep smaller businesse from being able to compete

 If the Government feels a business is practicing an unfair practice they will send a cease and desist order which is a ruling that requires a firm to stop the unfair practices  In order to prevent this from happening the government requires businesses to have public disclosures where they reveal product information to the public

 Deregulation of industries is where the Government will take regulations away from industries and allow them to work more freely