1. Market Structure and Market Failures
Unit 7
Essential Question:
What happens when markets do not work perfectly?

2. Market structures
There are four market structures – how markets are organized:
4. Monopoly
3. Oligopoly
2. Monopolistic competition
1. Perfect competition
Lots of firms, same product, easy entry into market, no control over price
Case study: milk
Benefits?
Low cost, high quality, efficiency!

3. Cont. 4. Monopoly – market with only a single producer
One producer, unique product, high barriers to entry, substantial control over price
Case study: Standard Oil, Microsoft?
Drawbacks?
High cost, low quality (?) Intel vs. AMD ($1700, $900)

4. Cont.
3. Oligopoly
A few producers, similar product, high barriers to entry, some control over prices
Case study: airlines, autos, soda, cell phone
Some things that might happen…
Price leadership – one firm sets prices, others follow
Collusion – they work together on prices
Cartels – they act like one company (likely to fail though)

5. Cont. 2. Monopolistic competition
Many producers, “differentiated” products, few barriers to entry, some control over prices
Firms make their product seem different
Brand loyalty matters
Case study: shoes, banks, auto repair shop, supermarkets

6. Externalities
Externality—a side effect from production or consumption (it’s external to the transaction between producer and consumer)
Negative externality—a cost that hits someone other than producer or consumer
Example: A paper mill is built in town. It’s stinky. People sell their house and move, but, house prices are low because it’s stinky.
Positive externality—same as above, but it’s a benefit
Examples: A birthday party with fireworks is enjoyed by whole neighborhood. Cars that produce less exhaust benefit everyone with cleaner air.
Technology externality—one industry’s gains can spillover to others
Externalities are frowned upon as inefficient
Negative—get over-produced b/c they don’t bear the cost (home cost of stank)
Positive—get under-produced b/c people would like more (honey bees pollinate)