1. Market Structures & Failures
Econ. Ch. 7

2. Market Characteristics
Number of producers
The more producers, the more competitive
Similarity of products
The more similar the products, the more competitive
If the product is very unique, there’s not much competition for it
Ease of entry
The easier it is to enter the industry, the more competitive it will be
Control over prices
If the market is competitive, producers will not have much control
Things like supply & demand will control prices

3. Types of Market Structures
Perfect competition
Many producers
Similar (or identical) products
Commodity – product that is the same no matter who produces it. Examples?
Grain, cotton, sugar, crude oil, milk
Easy entry
Little or no control over prices
Supply & demand will determine prices
Customers determine the market price

4. Types of Market Structures
Monopoly – a single producers controls all or most of an industry
Their products have no close substitute
Characteristics:
Producers = 1
Similarity of products = little similarity, often unique
Ease of entry = high barriers to entry
Control over prices = HIGH

5. Types of Monopolies Illegal monopolies Rare today. Why?
Government regulation
Eventually will face competition
Historical examples?
Standard Oil
Carnegie steel/ U.S. Steel
Bell telephone
DeBeers Diamond Company
Microsoft

6. Types of Monopolies What monopolies are legal? Resource monopolies
If the producer owns a key natural resource
Example: if one company owned the only zinc mine for thousands of miles
Very rare – usually natural resources are spread out

7. Types of Monopolies What monopolies are legal?
Government-created monopolies
3 types: patents/copyrights, public franchises, licenses
Patents & copyrights – gov’t gives the producer legal privilege if they invented something new
Designed to encourage innovation
Examples: new medicines & pharmaceutical products
In the U.S., patents give the creator sole rights for 20 years

8. Types of Monopolies What monopolies are legal?
Government-created monopolies
3 types: patents/copyrights, public franchises, licenses
Public franchises: gov’t issues a contract that gives a company the sole right to provide a good/service in a certain area
Example = schools may allow a certain company to stocks it’s vending machines, thus giving a monopoly in that school

9. Types of Monopolies What monopolies are legal?
Government-created monopolies
3 types: patents/copyrights, public franchises, licenses
Licenses: legal permit to operate a business in an area
Example: city gov’t might only license one company to operate a towing service in the city

10. What monopolies are legal?
Types of Monopolies
What monopolies are legal?
Natural monopolies
When a single firm can supply a good/service more efficiently and/or cheaper than other firms
Examples?
Most utilities: gas, water, cable TV, electricity
Economy of scale – good/service becomes cheaper by the company increasing its output over a larger area

11. Types of Market Structures
Oligopoly
Industry dominated by a few firms with similar products
Generally considered an oligopoly if the top companies control 60% or more of the industry
Characteristics?
Few producers
Similar (or identical) products
High barriers to entry
Some control over prices
Examples?
Cereal industry (Kellogg’s, General Mills, Post, Quaker) – almost 90%
U.S. auto industry (until 1980s) – GM, Ford, Chrysler (basically 100%)
Hollywood – Sony, Disney, 20th Century Fox, Warner Bros., Paramount (70% - 90%)
Beer – Anheuser-Busch, Miller, Coors – 80%
Processed Foods – Kraft, Nestle, PepsiCo – about 60% of global share
Credit ratings – S&P, Moody’s, Fitch – 100%

12. Oligopoly practices Price leadership Collusion
The biggest firm sets the market price, and others follow suit
If the price is set low to steal business or drive others out of business, a price war ensues
Collusion
When producers get together & make agreements on production and pricing (to avoid price wars and keep prices high)
Historical examples?
RR in late 1800s
Music industry in 1990s and 2000s
Cartels – groups created to control production and prices
Examples?
OPEC

13. Types of Market Structures
Monopolistic competition
Many producers
Different products
Few barriers to entry
Some control over prices
How is it different from perfect competition?
Some producers don’t get capture much of the market, even though the opportunity is there
Why not?
Brand loyalty!!!

14. Monopolistic Competition
Sometimes firms compete in ways OTHER THAN pricing!!!
Physical characteristics
Look, feel, or properties of tennis shoes, rain jackets, purses, etc.
Service
Similar products, but better customer service
Location
Near neighborhood, highway exit, mall, etc.
Status and image
How cool the product is
Styling and branding
Nike, North Face, Uggs, Under Armour, etc.

15. Externalities
Externality – side effects of production or consumption for people OTHER THAN the producer or consumer
Positive – neighbors plant new flowers that you get to see every morning when you wake up
A new store opens down the street from your restaurant, and you get more customers
Also could be technology spillover
Negative – neighbors play loud music that keeps you awake
Chemical factory opens near your town, lowering property values

16. Public Goods
Things not provided by the markets because they are difficult to deliver or profit from
Examples include lighthouses, sewers, fire depts., etc.
Often they are provided by gov’t instead of businesses
Problems?
They are nonexcludable – you can’t filter out who can consume and who can’t (think of a lighthouse – you can’t charge to use a lighthouse – anybody can see it for free)
Free-rider problem
Sometimes they are difficult to provide
Example – the military – private armies would pose a major conflict of interest in society, and are too expensive to maintain