1. Market Structures

2. What is a Market Structure?
Degree of Competition among firms operating in the same MARKET
What is Competition?
Economic rivalry among businesses in the same MARKET

3. Pure/Perfect Competition

4. A market structure in which a large number of firms all produce the same product
Simplest Market
Each firm produces so little of supply= no single firm can influence price
Seller only controls what they produce

5. 4 Conditions for Pure Competition
Large number of sellers. Each with only a small share of market
Identical Products: No reason for non-price competition
Informed Buyers and Sellers: No influence on Price Controls and no need to advertise
Easy Market Entry and Exit

6. Conditions for Pure Competition
A purely competitive market has many suppliers selling identical products called commodities.

7. Barriers to Entry Can lead to imperfect competition
Technology- markets that require a high degree of technology are not found in a perfect competition market
Start-up costs- expenses a new business must pay before the first product reaches the customer
Markets with high start up costs are not found in a perfectly competitive market
Ex.: the start up cost of a sandwich shop is much lower than a lumber mill

8. Barriers to Entry and Competition
A movie production company requires so much equipment that it usually has high start-up costs.

9. Price, Output, and Purely Competitive Markets
One of the primary characteristics of purely competitive markets is that they are efficient.
Competition within these markets keeps both prices and production costs low.
Firms must use all inputs—land, labor, organizational skills, machinery and equipment—to their best advantage.
Prices that consumers pay and the revenue that suppliers receive accurately reflect how much the market values the inputs used to produce the product.
In a purely competitive market, prices correctly represent the opportunity costs of each product.

10. Price, Output, and Purely Competitive Markets
In pure competition, suppliers must match the lowest supplier’s price or exit the market. Why are consumers unwilling to pay one supplier’s higher price in such a market?

11. Non-Price Competition
Competition through other ways than by lowering price

12. Non-Price methods of Competition
Advertising
Service level (word of mouth and repeat customer
Physical Characteristics
Location

13. Monopolistic Competition
Fairly large # of sellers
Slightly differentiated products
Product differentiation is vital
Most Common market structure
Extensive advertising (need to inform)
Sellers decrease competition through different products

14. Market Conditions for Monopolistic Competition
Large # of buyer and sellers
Products are similar (emphasize differences among products)
Buyers must be informed about differences in products
Sellers have slight control over price
Few artificial barriers to entry

15. Market dominated by a single seller
Monopolies
Market dominated by a single seller

17. Characteristics of a Monopoly
Technology and Change
New Technology can cut FIXED COST and make many small companies as efficient as 1 large firm.
Much control over price (a high price hurts demand)
Market Power: ability of a company to change prices and output (ex: monopolist)

18. Price discrimination: Division of customers into groups based on how much they will for good

19. Pure Monopoly’s Characteristics
One Firm
No Close substitute goods are available
Prohibitive barriers to entry:
High Investment Costs
Technological Expertise
Legal Restrictions
Ownership of a scarce factor of production
Almost complete control of market price
No need for advertising

20. Natural Monopolies
Runs most efficiently when one large firm provides all the output
Competition would be chaotic, impractical, inconvenient and unworkable
Average costs are lowest when all output is produced by single firm
1 or both firms will not be able to cover costs and go out of business
Ex: Public Water Company

21. Government Monopoly Owned and operated by the government
Ex: Hwy system, public schools/libraries, Postal service

22. The Role of Government Franchises and Licenses
Contract issued to firm to sell goods to an exclusive market
Grants rights to operate (especially with scarce resources) (Land, Radio/TV)
Industrial Organizations
Gov. allows restriction of firms in market
MLB restricts # of locations and teams

23. Technological Monopoly
Results from the invention of a new product (patent) or when technology changes the way a good is produced
Patent gives exclusive rights for 20 years
Copyright gives authors/artists exclusive rights

25. Geographic Monopoly
A firm is the only seller of a good in a specific location

26. Economies of Scale “Economies of mass production”
Exist when firms are large enough to take advantage of mass production techniques
Producers average cost of production drops as production rises

28. Oligopolies: firms control 70% of the market
Few sellers control over 70% of market
Firms offer identical/differentiated products
Advertisement is important
Product info must be easily available (informative advertisement to introduce new products)
Huge barriers to entry
Technological knowledge, money and brand name loyalty

29. Control some prices by creating band name loyalty and using non-price competition
Must show customers why they should by product instead of competitors

30. Examples: Cellphones: AT&T, Verizon, Sprint Autos: GM, Ford, Toyota
Shoes: Nike, Reebok, New Balance, Adidas
Cereal: Quaker Oats, General Mills, Kellogg
TV: NBC, CBS, ABC, Fox
Others: gum, light bulbs, copy machines, cameras

31. Price Leadership: 1 firm (largest/most powerful) offers product at a price…others follow out of fear of a price war. Legal because it does not involve agreements among competitors
Collusion: formal price agreement among competitors. Illegal because it is dangerous to competition
Price Fixing: agreement among competitors to sell at the same/similar prices (output of collusion)
Cartel: formal organization of producers that agree to coordinate prices and production (illegal)

32. Very Many Some Fair Amount Cable TV Water Agric. products Fishery
Extensive

33. Output Decisions The Monopolist’s Dilemma Falling Marginal Revenue
Setting a Price
Profits

34. Output Decisions
A company that has a monopoly on a particular product, such as a new drug, may find that increasing output lowers its marginal revenue.

35. Anti-Trust Legislation
Trust: Legally formed combinations of corporations or companies
Sherman Anti-Trust Act: Designed to monitor and regulate big business, prevent monopolies, block mergers and break up existing monopolies
Trend of deregulation: removal of some government controls over market

36. Federal Trade Commission: 1914
Federal Trade Commission: Investigate structure and behavior of firms engaging in interstate commerce.
Treble Damages: awards to any person or private company that sustains injury or financial loss because of an anti-trust violation (3x the actual damages.