1. Market Structures
Sharrock 2006

2. IT IS ONLY A THEORY! 1. Perfect Competition BEFORE WE BEGIN!!
This is a theoretical situation. NO TRUE Perfectly Competitive Market exists.
IT IS ONLY A THEORY!
SWS 2006

3. A market is where buyers and sellers:
What Are Markets?
A market is where buyers and sellers:
meet to exchange goods and services.
are affected by some level of competition.
SWS 2006

4. Markets are classified by 4 structures
What Are Markets?
Markets are classified by 4 structures
1. Pure (perfect) Competition
2. Monopolistic Competition (imperfect Competition)
3. Oligopolies
4. Monopolies
SWS 2006

5. 5 Conditions of Perfect competition
LARGE number of SMALL firms.
No single buyer or seller can influence the price.
Buyers and sellers deal in identical products. No product differences. (EXAMPLES: Salt, Flour, Commodity, Corn)
Unlimited Competition: so many firms, that suppliers lose the ability to set their own price.
No Barriers to Entry. Sellers are free to enter the market, conduct business and free to leave the market. (Low cost to enter)
Each firm is a PRICE-TAKER – No control over prices
CONSUMERS HAVE THE LARGEST SELECTION OF BUYERS TO BUY GOODS FROM BECAUSE NO SINGLE GOOD IS MORE APPEALING THAN ANOTHER.
SWS 2006

6. 5 conditions of Monopolistic Competition
LARGE number of large companies
Products are NOT exactly identical, BUT VERY SIMILAR, so companies use PRODUCT DIFFERENTIATION
Sellers can influence the price through creating a product identity to foster brand loyalty
Heavy Competition: Firms must remain aware of their competitor’s actions, but they each have some ability to control their own prices.
Low Barriers to Entry, but not as easy as Pure Competition: harder start b/c the amount of competition.
Monopolistic competition takes its name and its structure from elements of monopoly and perfect competition.

7. 5 Conditions of Oligopolies
Market in which a small number of large sellers control most of the production of a good or service
Very few Sellers that control the entire market.
Products may be differentiated or identical (but they are usually standardized)
Medium/High Barriers to entry: Difficult to enter the market because the competitors work together to control all the resources & prices.
The actions of one affects all the producers.
Collusion = firms act together to fix prices or limit supply of products to maximize profits or eliminate competition. (illegal in U.S.)

8. 4 Distinct Types of Monopolies
Natural Monopoly
Geographic Monopoly
Technological Monopoly
Government Monopoly

9. 4 Distinct Types of Monopolies

10. Natural Monopoly
Created to minimize costs and control distribution by having a single producer of a product.
Government creates Natural Monopolies by Franchising some utilities such as natural gas, water, electricity
Franchise - the right to produce or do business in a certain way and a certain area without competition.
Government franchises come with government regulation. Georgia PSC (Public Service Commission)
WHY… Economies of Scale:
As natural monopolies grow larger, production costs are lower and Companies become more efficient
Example: It is cheaper for the Tennessee Valley Authority (TVA) to provide power in Georgia than two or three companies.

11. EXAMPLE: Only person selling water in the desert.
Types of Monopolies
Geographic Monopoly:
Only business in area due to size or location of market.
Decreasing in the U.S. because of technology and increased mobility.
EXAMPLE: Only person selling water in the desert.

12. Technological Monopoly
Firm has discovered a new process or developed a new or unique product.
Patent: 17 years exclusive rights to a developed technology.
Copyright: (Artists and writers) Life plus 50 years.

13. Types of Monopolies Government Monopoly:
Right to Sell or Distribute Retained exclusively by the Government.
Liquor sales in some places
Uranium production
Water
Military Services

14. Perfect Competition - Example
No Barriers to entry. Sellers are free to enter the market, conduct business and free to leave the market.
Perfect competition is the opposite of monopoly.
Here, any firm can get into the market at very little cost.
Suppose there was a market for dandelions. Growing dandelions requires little start-up cost.
All you need are dandelion seeds, soil, water, and some sunlight.
There is no difference between one dandelion and another, so the market has a similar product.
The agricultural market is the best example of a perfectly competitive market.
SWS 2006

15. Conditions of Monopoly
Exact Opposite of Pure Competition.
A price maker. (set their own price, without regard to supply and demand)
There is a single seller
No close substitute goods are available
High Barriers to Entry: Other sellers cannot enter the Market.
SWS 2006

16. Perfect Competition too small
Each individual firm is to influence prices.
Price becomes fixed to everyone in the industry.
EXAMPLE: the price of a bushel of wheat is set only by the interaction of supply and demand.
Generally speaking, wheat is the same per bushel in North Georgia as it is in Florida.
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17. MARKET POWER = “the ability to set one’s OWN prices”
Perfect Competition
Firms in a perfectly competitive market are price takers. - they take the price they are given, they can’t change the price
Since they have no control over their own prices, they have:
NO MARKET POWER
MARKET POWER = “the ability to set one’s OWN prices”
In other words, no one will buy an overpriced dandelion. Why should they?
A 4-cent dandelion is the same as the 3-cent one, so there is no reason to spend that extra penny.

18. Monopolistic Competitive Market
STUDY TIP:
The key idea to understanding monopolistic competition is that firms sell products that are similar, but not exactly alike.
EXAMPLE: Hand Soap
Essentially, all hand soaps are the same. Yet firms can create a brand identity that separates their hand soap from their competitor’s.
This brand identity can be formed through packaging, product support, and especially advertising.
If effective, consumers will positively identify a certain brand and purchase it even if hand soap costs more.
SWS 2006

19. Conditions of Monopolistic Competition
Firms in Monopolistic Competition must use Product Differentiation & Non-price Competition to sell their products.
Product Differentiation:
The real or imagined differences between competing products in the same industry.
Differentiation may be color, packaging, store location, store design, store decorations, delivery, service….. anything to make it stand out!
SWS 2006

20. Conditions of Monopolistic Competition
Firms in Monopolistic Competition must use Product Differentiation & Non-price Competition to sell their products.
Non-Price Competition:
Non-Price Competition - advertising of a product's appearance, quality, or design, rather than its price.
Advertising to help the consumer believe that this product is different and worth more money.
Notice these commercials never mention price. VS
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21. Examples of Monopolistic Competition
Auto, Steel, Gas, Fast Food, Airlines.

22. Oligopolies and Coillusion
Collusion = an agreement to act together or behave in a cooperative manner.
Collusion Agreements:
usually illegal, among producers to fix prices, limit output, or divide markets. (hard to prove that a group of companies is doing this)
Also called Price Fixing: setting the same prices across the industry.
THIS IS IN VIOLATION OF ANTI-TRUST LAWS. WHY?
Basically, the companies are acting a one large monopoly.
SWS 2006

23. Price Behavior in Oligopoly
Sometimes businesses do not agree with each other about the price, and if that happens, a WAR will result.
Price Wars: Series of price cuts that competitors must follow or lose business.
A fierce price competition between sellers, sometimes the price is lower than the cost of production.
Why is that bad???
Oligopolists would like to be Independent Price-Makers:
a firm sets prices based on demand, cost of input and other factors (not based on other companies prices).
SWS 2006

24. 2 Types of Price Behavior in an Oligopoly
Price Leader:
independent pricing decisions made by a dominate firm on a regular basis that results in generally uniform industry-wide prices.
ADVANTAGE: you are the company leading the price.
Independent Pricing:
policy by a competitor that ignores other producer’s prices.
DISADVANTAGE: other firms shut you down by agreeing to set lower prices than yours.
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25. MERGERS OF LARGE COMPANIES
Sometimes companies fall victim to market failure. However, not all businesses close their doors and empty their factories and stores.
Many get “swallowed up” by another company or choose to combine with another company.
This “take-over” or acquisition of a company is known as a merger.
SWS 200

26. MERGERS OF LARGE COMPANIES
There are THREE types of mergers:
HORIZONTAL, VERTICAL, and CONGLOMERATE.
1.) HORIZONTAL: involve firms in the SAME market, such as between two oil companies.
2.) VERTICAL: involve one firm buying a resource provider.
EXAMPLE: an automaker buys steel company or tire company
3.) CONGLOMERATE: a company buys a business in a UNRELATED industry.
Purpose: Diversification of Revenue sources
SWS 2006

27. 3 Conditions of Efficient & Successful Markets
Markets work best when conditions are met:
Adequate competition must exist in all markets.
Buyers and sellers are reasonably well-informed about conditions and opportunities.
Resources must be free to move from one industry to another.
Market Failure occurs when any of the 3 conditions alter significantly.

28. Types & Causes for Market Failure
Inadequate Competition: Dangers to monopolies
Monopolies may waste and misallocate scarce resources because there is no competition.
Inadequate Information: A free enterprise economy requires information.
It is difficult to employ resources for the fullest benefit of society without adequate information.
Resource Immobility: The efficient allocation or resources require that land, labor, capital and entrepreneurs be free to move to markets where returns are the highest
Externalities / Side Effects: A side effect that benefits or harms a third party that was not directly involved in the activity.
Negative Externality: People are harmed or inconvenienced by an economic decision.
SWS 2006

29. The Role of Government
Government has the power to maintain competition, regulate monopolies, or to run government-owned monopolies.
Since the late 1800s the US have passed laws to restrict and regulate monopolies and trusts.
Trust: a legally formed combination of companies.
SWS 2006

30. Antitrust Legislation
The Role of Government
Antitrust Legislation
Interstate Commerce Act: Passed by Congress in It was aimed at the railroads. Charges of unfair pricing prompted Congress to act.
1887
PRESENT
1887: Interstate Commerce Act
SWS 2006

31. The Role of Government
Sherman Antitrust Act - law against monopolies that hindered competition or made competition impossible because of the “restraint of trade” that is created by a monopoly.
1887
PRESENT
1887: Interstate Commerce Act
1890: Sherman Antitrust Act
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32. The Role of Government
Clayton Antitrust Act - outlawed price discrimination - charging different customers different prices for the same product. Further defined Sherman. (preferred pricing)
1887
PRESENT
1887: Interstate Commerce Act
1890: Sherman Antitrust Act
1914: Clayton Antitrust Act
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33. The Role of Government
Federal Trade Commission Act - passed to enforce the Clayton Antitrust Act. It gave the authority to issue Cease and Desist order.
Cease and Desist Order: FTC ruling requiring a company to stop an unfair business practice that reduces or limits competition.
1887
PRESENT
1887: Interstate Commerce Act
1890: Sherman Antitrust Act
1914: Clayton Antitrust Act
1914: Federal Trade Commission Act
SWS 2006