Topic 7 Competition, Market Structures, & the Role of Government

Market structure: The type & degree of competition that exists among companies in a certain industry

Pure Competition Freedom Large numbers of buyers and sellers Buyers and sellers act independently Well informed Identical Products No brand names Same quality No need to advertise

NO influence over price: Supply and Demand A LOT of competition between firms Major Points: Keeps prices low Very few industries Buyers are informed & sellers sell exactly the same productBuyers are informed & sellers sell exactly the same product Examples….

Imperfect Competition If one of the 4 conditions (of perfect competition) is not met you have… Monopolistic, monopoly, oligopoly

Limited price influence; Narrow price differences A LOT of competition between firms Major Points: Monopolizing a Small part of the market Same elements as Pure Comp. EXCEPT type of product Product Differentiation leads to NON-PRICE competition (Location, advertising, packaging)

Non-Price Competition Advertising Catchy slogans Location

Reebok Advertisement- Terry Tate & Super Bowl

Product Differentiation

Some influence on Price: decision mainly based on output A LOT of competition between firms Major Points: Standardized Oligopoly: identical goods produced Differentiated Oligopoly: products are differentiated Generally Higher Prices Can Lead To: Price leadership; Price wars; Collusion; Cartel

Key Terms Cartel: group of firms that gets together to make output & price decisions Firms join to increase their market power Collusion: an agreement among members to set prices & production levels Price War: competitors cut their prices very low to win business Price fixing: agreement among firms to sell at the same or very similar prices

Price Wars Hess vs. USA gas in Ballston Spa (Spring of last year) Monday Hess $2.29 USA $ 2.30 Tuesday Hess $2.29 USA $ 2.29 Wednesday Hess $2.29 USA $ 2.27

No Competition: No other firms! Major Points: High Prices Four Types of Monopolies: Natural Geographic Technological Government Extensive Control in the market

Natural Monopolies A monopoly that occurs naturally Ex. Public utilities, franchise, regulation, economies of scale Telephone Public transportation

Geographic Monopoly Occurs because of isolation or abundance of a natural resource

Government Monopoly Involves products that private industry may not adequately provide Ex. Gov’t monopoly on research marijuana; FAA bills that protect gov’t workers from competition; postal system; schools

Technological Monopoly New invention or technique – no competitors yet OR patents or copyrights

Dangers of Monopolies Can cause artificial shortages High prices Denies benefit of competition Not dependent on the market Can gain political power