1. Market Structure

2. Market Structure
The nature and degree of competition among firms in the same industry

3. Perfect Competition
Market structure characterized by a large number of well-informed independent buyers and sellers who exchange identical products.
A Theoretical idea
Q: So why does perfect competition serve as a theoretical market structure?
A: Its advantages serve as a yardstick or example for other structures to be measured by.

4. Perfect Competition Conditions
Must be a large number of buyers and sellers
Buyers and sellers deal in identical product
Each buyer and seller acts independently
Buyers and sellers are reasonably well-informed about product and prices
Buyers and sellers are free to enter into, conduct, or get out of business

5. Monopolistic Competition
Market structure that has all the conditions of perfect competition except for identical products.
Seller has the ability to raise or lower the price
If sellers raise or lower the price enough, customers will change brands

6. Monopolistic Competition
Characterized by product differentiation: real or perceived differences between competing products in the same industry.
To make their products stand out, they use nonprice competition: the use of advertising, giveaways, or other promotions designed to convince buyers that the product is somehow unique or fundamentally better than a competitor’s.

7. Oligopoly
Market Structure in which a few large sellers dominate the industry
Products may be distinct like the car industry or standardized like the steel industry
When one firm changes prices, enhances product, etc the other firms usually follow or they run the risk of losing customers

8. Monopoly Market structure with a single seller of a particular product
Few Pure Monopolies today…very rare

9. Characteristics of Market Structure
Number of Firms in Industry
Influence over Price
Product Differentiation
Advertising
Entry into Market
Examples
Perfect Competition
Many
None
Easy
Perfect: None
Near: Truck Farming
Monopolistic Competition
Limited
Fair Amount
Gas Stations
Women’s clothing
Oligopoly
Few
Some
Difficult
Automobiles
Aluminum
Pure Monopoly
One
Extensive
Almost Impossible
Near: Water

10. Types of Monopolies
Natural Monopoly: market situation where the costs of production are minimized by having a single firm produce the product
IE: Public utilities
Geographic Monopoly: market structure based on the absence of other sellers in a particular geographic area
IE: Only 1 gas station in a small town

11. Types of Monopolies
Technological Monopoly: based on a firm’s ownership or control of a production method, process, or other scientific advance
IE: item with a patent
Government Monopoly: monopoly owned and operated by the government
IE: oversee water use, weapon-grade uranium for military

12. Market Failure
Condition that causes a competitive market to fail

13. 5 Reasons for Failure: Inadequate Competition
Inadequate Information – if the knowledge is important to buyers and sellers but is difficult to obtain
Resource Immobility – factors of production do not move to markets where returns are the highest
Public Goods – products that are collectively consumed by everyone
Externalities – unintended side effect that either benefits or harms a third party not involved.

14. Externalities
Negative: harm, cost, or inconvenience suffered by a third party because of actions by others
IE: Noise from an airport, pollution
Positive: a benefit someone receives who was not involved in the activity that generated the benefit.
IE: Airport expansion provides more business for local restaurants
Doesn’t matter if they are positive or negative: they are considered market failures, because their costs and benefits are not reflected in the market prices that buyers and sellers pay.

15. The Role of Government
The government exercises its power to maintain competition within markets
Two ways that government can maintain competitive markets:
Prohibiting market structures that are not competitive
Regulating markets where full competition is not possible

16. Antitrust Legislation
Trust: illegal combination of corporations or companies organized to hinder competition
Price Discrimination: the practice of selling the same product to different consumers at different prices
Cease and Desist Order: ruling requiring a company to stop an unfair business practice that reduces or limits competition

17. Anti-Monopoly Legislation
Sherman Antitrust Act 1890 – Outlawed all contracts to stop the growth of trusts and monopolies
Clayton Antitrust Act 1914 – Strengthened the Sherman Act by outlawing price discrimination
Federal Trade Commission Act 1914 – Established the Federal Trade Commission to regulate unfair methods of competition in interstate commerce.
Robinson-Patman Act 1936 – Made it where everyone got the same rebates and discounts

18. Q:
What two market failures does the government have the ability to correct? A:
Inadequate Information
and Public Goods

19. Improve Economic Efficiency
Promote Transparency – information and actions are not hidden and are easily available for review
Public Disclosure: requirement that businesses reveal certain information to the public
Provide Public Goods