1. CHAPTER 7: DIFFERENT TYPES OF MARKET STRUCTURES
SWS 2007

2. WHAT IS A MARKET? “An environment in which buyers and sellers interact to exchange goods and services for money”
SWS 2007

3. Remember the Product Market?
Microsoft & Apple
This is YOU!
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4. What Markets Exist?
Markets are classified by 4 structures (environments)
1. Pure (perfect) Competition (PC)
2. Monopolistic Competition (MC)
3. Oligopoly (Oli)
4. Monopoly

5. How do we describe them? 5 Conditions
Market Structure
How do we describe them? 5 Conditions
Market Power: ability for firm to raise price without losing sales. (control of prices)
Number (#) of Firms in the market.
Barriers of Entry- Is it easy to enter or exit the market?
Types of Products/ Goods: Similar or Different?
Level of Competition- How much competition is there?
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6. IT IS ONLY A THEORY! #1 Perfect Competition
This is a theoretical situation.
NO TRUE Perfectly Competitive Market exists.
IT IS ONLY A THEORY!
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SWS 2007

7. #1 Perfect Competition INFINITE number of VERY SMALL firms.
No single seller can influence the price because no ONE firm owns a large % of the market.
Buyers and sellers deal in identical products. No product differences. (EXAMPLES: Salt, Flour, Wheat, 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. They have NO market share.
“CONSUMERS HAVE THE LARGEST SELECTION OF SELLERS TO BUY GOODS FROM BECAUSE NO SINGLE GOOD IS MORE APPEALING THAN ANOTHER.”
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8. MARKET POWER = “the ability to set one’s OWN prices”
#1 Perfect Competition
Consider the market for salt.
Firms in a perfectly competitive market are price takers. (They take the price they are given; they can’t change the price) Prices are fixed.
NO ONE SINGLE producer controls the market. (just 100s of small firms) They have NO MARKET POWER!
If you want salt…you get salt no matter what brand.
In other words, no one will buy an overpriced pound of salt. Why should they?
A $4 pound is the same as the $3.50 one, so there is no reason to spend that extra money.
MARKET POWER = “the ability to set one’s OWN prices”
The AGRICULTURAL MARKET is the best example of a perfectly competitive market.
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9. Monopolistic Competition (M.C.)
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10. #2 Monopolistic Competition
The 5 conditions
LARGE number of large companies (but fewer than perfect competition).
Sellers can influence the price through creating a product identity
Products are NOT exactly identical, BUT VERY SIMILAR, so companies use PRODUCT DIFFERENTIATION
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: easier than Oligopoly and Monopoly to get started because of the less amount of competition.
Monopolistic competition takes its name and its structure from elements of monopoly and perfect competition.
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11. #2 Monopolistic Competition
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, songs, product support, and especially advertising.
If effective, consumers will positively identify a certain brand and purchase it even if hand soap costs more.
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12. #2 Monopolistic Competition
Product Differentiation (Brand Identity):
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!

13. #2 Monopolistic Competition
Non-Price Competition:
Non-Price Competition involves the 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. VS
Notice these commercials never mention price.
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14. Monopolistic Competition Examples
Auto, Gas, Fast Food, Airlines, etc.
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15. WHAT HAPPENS WHEN COMPANIES IN A M.C. MARKET FAIL?
They don’t close their doors, but rather merge with larger companies.

16. MERGERS OF MONOPOLISTIC 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. This “take-over” or acquisition of a company is known as a merger.
THREE types of mergers:
HORIZONTAL, VERTICAL, and CONGLOMERATE.
1.) HORIZONTAL: involve firms in the SAME market, such as between two telecom companies.
Reason: takeover the market
2.) VERTICAL: involve one firm buying a resource provider.
EXAMPLE: automaker buys an steel company
Reason: Cheaper Resources
3.) CONGLOMERATE: a company buys a business in a UNRELATED industry.
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Reason: Diversification

17. MERGERS OF MONOPOLISTIC COMPANIES
Other examples of HORIZONTAL MERGERS…
…a company buys a COMPETITOR in the market.
Reason: ownership of the market

18. MERGERS OF MONOPOLISTIC COMPANIES
Other examples of CONGLOMERATES…
…a company buys a business in a UNRELATED markets.
Reason: Diversification

19. #3 Oligopoly
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20. Conditions of an Oligopoly
A market in which a few large sellers control most of the production of a good or service and they work together on setting prices.
Conditions of an Oligopoly
3-4 Firms that control the entire market by setting prices.
Products are generally identical (standardized)
High Barriers to Entry: Hard to enter the market because the competitors work together to control all the resources & prices. Plus it is very expensive to make the product.
The actions of one affects all the producers.
Collusion / Collude = (Price Fixing) an agreement to act together or behave in a cooperative manner.
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21. #3 Oligopoly: Price Behavior
What happens when Oligopoly goes bad; a PRICE WAR will result.
Price Wars: Series of price cuts that competitors must follow or lose business.
It is a fierce price competition between sellers, sometimes the price is lower than the cost of production.
Why is that bad???
When price wars start, oligopolists would rather like to be Independent Price Setters
…where a firm sets prices based on demand, cost of input and other factors (not based on other companies prices).
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22. Market Structures (Environments)
Unit 7: Market Structures
MARKETS
DIVIDED BY TYPE OF PRODUCTS
DIFFERENTIATED PRODUCTS
IDENTICAL PRODUCTS
Monopoly
Oligopoly
Monopolistic Competition
Perfect Competition
Tap water
Autos
TVA
Crude oil
Shoes
Wheat
E-Business
Salt
ONE
# OF FIRMS
MANY
NONE
COMPETITION
MORE
IMPOSSIBLE
ENTRY INTO THE MARKET
EASY
TOTAL
MARKET POWER
NONE
NONE
CONSUMER POWER
MORE
NONE
EFFICIENT OPERATIONS
MORE
SWS

23. #4 Monopoly
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24. Exact Opposite of Pure Competition.
#4 Monopoly Conditions
Exact Opposite of Pure Competition.
There is a single seller
No substitute goods are available.
A price-maker: (set their own price)
Barriers to Entry: impossible (other sellers cannot enter the market)
Highly wasteful and inefficient.
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25. #4 Monopolies: Types
4 Distinct Types of Monopolies:
Natural Monopoly: Where costs are minimized by having a single producer of the product.
Sometimes government creates natural monopolies in the natural gas, water & electricity industry by franchising these utilities.
Franchise - the right to produce or do business in a certain area under the supervision of a larger company or government.
TVA is the largest government-owned power producer in the US. Its power facilities include 11 fossil-powered plants, 29 hydroelectric dams, three nuclear plants, and six combustion turbine plants.
The corporation transmits electricity to 8.7 million consumers.
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26. Types of Monopolies
Natural Monopolies
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27. Types of Monopolies
4 Distinct Types of Monopolies:
Natural Monopoly: Where costs are minimized by having a single producer of the product.
Other times Natural Monopolies are created simply because there is no regulations or one other firms can get into the market because the monopoly owns all resources.
DeBeers is an African company that has (over the century) bought numerous diamond mines across the global. They provide 90% of the world’s diamonds.
When another diamond company reaches the point when they must sell stock to raise capital for operations, DeBeers comes in and buys a majority of the stock.
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28. Types of Monopolies Natural Monopoly 4 Distinct Types of Monopolies:
WHY WOULD GOVERNMENT DO THIS
OR WHAT ARE THE BENEFITS OF A NATURAL MONOPOLY?
Economies of Scale: As natural monopolies grow larger, this reduces its production costs.
Because normally companies become more efficient as the firm becomes larger over time.
Example: It is cheaper for the Tennessee Valley Authority (TVA) to provide power in the southeast than two or three companies.
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29. EXAMPLE: Only person selling water in the desert.
Types of Monopolies
Geographic Monopoly: The only business in a geographic region.
Some of these are decreasing in the U.S. because of mobility of consumers.
EXAMPLE: Turner Field
EXAMPLE: Only person selling water in the desert.
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30. Types of Monopolies
Technological Monopoly: Firm has discovered a new process or product.
Constitution has given government the right to grant technological monopolies (protect property rights)
Patent: 20 years exclusive rights to a developed technology.
Copyright: Life plus 70 years. (Artists and writers)
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31. Alcohol Suppliers in Sweden
Types of Monopolies
Government Monopoly: operated completely or partially by the government.
Liquor sales in some GA counties, uranium production, water, etc.
Similar to natural monopolies.
Adam Smith would be pissed.
Healthcare in Canada
Alcohol Suppliers in Sweden
Uranium in USA
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32. Government vs. Monopolies
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33. Government vs. Monopolies
Antitrust Legislation
Trust: a legally formed combination of companies.
Since the late 1800s the US have passed laws to restrict and regulate trusts.
Government has the power to maintain competition, regulate monopolies, or to run government-owned monopolies.
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34. Antitrust Legislation
The Role of Government
Antitrust Legislation
Sherman Antitrust Act: law against those companies that hindered competition or made competition impossible because of the “restraint of trade” that was created.
Basically outlawing monopolies.
1887
PRESENT
1887: Interstate Commerce Act
1890: Sherman Antitrust Act
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35. 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: Federal Trade Commission Act
© SWS 2008

36. Market Structures (Environments)
DIVIDED BY TYPE OF PRODUCTS
DIFFERENTIATED PRODUCTS
IDENTICAL PRODUCTS
Monopoly
Oligopoly
Monopolistic Competition
Perfect Competition
Tap water
Autos
TVA
Crude oil
Shoes
Wheat
E-Business
Salt
ONE
# OF FIRMS
MANY
NONE
COMPETITION
MORE
IMPOSSIBLE
ENTRY INTO THE MARKET
EASY
TOTAL
MARKET POWER
NONE
NONE
CONSUMER POWER
MORE
NONE
EFFICIENT OPERATIONS
MORE

37. STUDY FOR YOUR TEST!!
© SWS 2008