1. Chapter 7 – Market Structures
TSWBAT:
Discuss the criteria for perfect competition
Explain why agriculture is our best example of perfect competition
Analyze why P.C. is good for society
Ms.Hunter
Ch. 9.1

2. What is something you compete in? Is competition a good thing?
Bell Ringer
What is something you compete in?
Is competition a good thing?
What is the goal of the game monopoly?

3. The Origin of Competition
Adam Smith: the Invisible hand
Laissez Fair (let do)
Pure competition = no government intervention in the economy and market
Chapter 7 will introduce the various market structures and their degree of competition

4. Competition is good for consumers
The basis for our market structure
Provides us with choices
Many competitors leads to lower prices through surpluses

5. Market Structure
Market structures are a way to categorize businesses by the amount of competition they face.
Four basic market structures in the American economy are
perfect competition
monopolistic competition
Oligopoly
monopoly

6. Comparing Market structures
Perfect competition & pure monopolies are rare
In the US most markets are in the middle

7. Conditions of Perfect Competition
Products identical
Many buyers and sellers
Easy to enter and exit market (low start up costs, easy to learn industry)
Info about Price, quality and sources are easy to get
Buyers are well informed about products
S & D determine price and quantity

8. Why would it be hard for an industry to achieve perfect competition?
Because it is hard to have all the factors.
Ms.Hunter
Ch. 9.1

9. Example: Agriculture
The agriculture market is close to a perfectly competitive industry.
No single farmer has control over price.
Supply and demand for the entire market determines price.
Individual farmers have to accept market price.
Demand for agriculture is unique; inelastic.

10. Why is agriculture often considered an example of perfect competition?
many farmers and many buyers of farm products
farm products are fairly similar;
costs of renting farmland is relatively low
farming methods can be learned
information about farm prices readily available
possibility of thousands of farmers banding together to control price is fairly small.

11. Barriers to Market Entry
Start Up Costs
Markets with high costs not usually perfect competition
Technology
Need a lot of preparation and study, technological know-how, in some industries
Ex. Electrical, mechanics, doctors, etc.

12. Price and Output Perfect Competition markets are efficient
Keeps prices and production costs down
Companies use ALL inputs – land, labor, organizational skills, machinery and equipment – wisely

13. Monopolies Imperfect Competition Monopoly Oligopoly
Monopolistic Competition

14. Monopoly Most extreme form of imperfect
A single seller controls the supply and price of product.
No substitutes: no competitor offers a good or service that closely replaces what the monopoly sells.
Barriers to entry: a competitor cannot enter the market due to government regulations, large initial investment, or ownership of raw materials.

15. Monopoly, Cont. Almost complete control of market price. 
Can raise prices with no fear of competition. 
Not as much of a concern today than in the past

16. Government Monopolies
Created/allowed by government then regulated
Technological monopolies are the result of inventions that are patented and copyrighted.
Patent – exclusive rights to sell a good for a specific time period
Encourage companies to research and develop new technologies
Copyright - exclusive rights to literary, musical, or artistic work, (printed, audio, video, etc)

17. Franchise and Licenses
Franchise – agreement to sell its goods within a market
Ex. Coca Cola products at school, food vendors at national parks
Ex. Brand name establishments – Dunkin Donuts, McDonalds, Subway
These companies allow private ownership of their products
Licenses – government can control licenses to operate a business
Ex. Radio and TV (FCC)

18. Other Monopolies Geographic monopolies Natural monopolies
are created due to geographic barriers for competition.
Natural monopolies
are providers of utilities, bus services, cable, and have economies of scale, producing the largest amount for the lowest cost.

19. Natural monopoly & Economies of Scale
Economies of scale = single firm can produce any given amount at a lower cost than multiple producers
Example: Town Water
If two companies had water pipes going to every house both companies would have to pay the fixed costs of building the pipes and the price would be higher for each companies customers.

20. Problems with Monopoly
General law of supply and demand
People buy most at lowest prices
Companies profit most at higher prices – but people less willing and able to buy
Monopolies set prices that reflect highest profits

21. Price Discrimination
Companies target groups of buyers and offer different pricing
Targeted Discounts –
Discounted airline fares – advance purchase
Rebates – people who are willing to take time and fill out rebate forms get money back
Senior and Student Discounts – based on age/status
Children’s promos – kids stay free, kids eat free

22. Oligopoly characteristics
Dominated by several suppliers and a few sellers who control 70 to 80 percent of the market. 
Capital costs are high and it is difficult for new companies to enter market. 
Goods/services provided by the few sellers are nearly identical. 

23. Competition is not based on price but product differentiation is based on consumer perception of the value of one over the other.
All the companies are interdependent; change in one will affect the others. 
Interdependence can lead to price wars or the illegal act of collusion or teaming up to raise prices. 
Cartels are international groups that use collusion to seek monopoly power.

24. Examples of Oligopolies

25. Bell Ringer What is perfect competition?
List the different types of Market structures
Define monopolistic competition

26. Monopolistic Competition
Numerous sellers 
Easy entry into market 
Differentiated product 
Non-price competition 
Some price control by the seller 
Advertising tries to convince consumers of the superiority of given product, enabling companies to charge more than the market price for a product

27. Advertising is SO Important
Burger King - “Have it your way”
McDonalds - “I’m Lovin’ it”
Wendy’s - “Do what tastes right”
Arby’s - “I’m thinking Arby’s”
IHOP - “Come hungry, leave happy”

28. Have you ever thought: “How can they charge this price for this product?”
Why is this possible in Monopolistic Competition?

29. Monopolistic Competition
Must compare on non-price factors
Consumer bases decision to buy on
Advertising
Quality & value
Reputation
Monopolist because they can alter price by changing supply.
Different from perfect competition in that the products are slightly different

30. Regulation and Deregulation
Government steps in to promote competition and lower prices
Also deregulates markets to also promote competition

31. Breaking Trusts Trusts discourage competition
Sherman Antitrust Act (1890) prevented new monopolies or trusts from forming and broke up existing ones.
Clayton Act (1914) sought to clarify the laws in Sherman Antitrust Act by prohibiting or limiting a specific number of business practices

32. Anti-Trust Legislation
Federal government must determine whether merging of two companies will significantly lessen competition.

33. Mergers
1. Horizontal merger is the merging of two corporations in the same business. One business can buy out another business (at least 52%)
2. Vertical merger is merging of two or more corporations in same chain of supply. 

34. 3. Conglomerates
Conglomerates are the merging of two corporations involved in at least four or more unrelated businesses.
Examples: Proctor & Gamble, Clear Channel, Tyco
Gulf & Western Industries
Paramount Pictures, Catalina Clothing, Madison Square Garden, Miss Universe, TV Shows, Caribbean Sugar Plantations
(note – some areas have since been sold)

35. Types of Mergers
Which type hurts the consumer the most?

36. Regulation
Companies have to prove that mergers will lower costs and help consumers
May block based on future speculation of what may happen
Deregulation
Government no longer decides role of companies in the market
Ex. Airlines, trucking, banking, railroads

37. Some Examples of Reg. Agencies
Federal Trade Commission
Food and Drug Administration
Federal Communications Commission
Securities and Exchange Commission
Equal Employment opportunity Com.
Occupational Safety and Health Admin.
Environmental Protection Agency
Nuclear Regulatory Commission