1. MARKET STRUCTURES AND FAILURES Economics

2. Important Terminology  Market Structure  Perfect Competition  Monopoly  Oligopoly  Monopolistic Competition  Market Failure  Externality  Public Goods

3. Cell Phone Service Market  Think about the market for phone service---how would you describe it?  Is it open?  Is it fair?  Are there any penalties for anything?  Do you think there is such a thing as a “cell phone jail?”

4. Cell Phone Industry  There are penalties for cancelling contracts to move to a different provider---may increase overall cost  Service companies may raise rates just because…how many of us change service providers?  Do you always go out and get the cheapest plan? Can you? Do you reward the most efficient company?  Imagine not being able to change grocery stores without penalties? Is that fair?

5. Cell phone industry  So how can cell phone providers get away with this?  2007—only a few major companies  All behaved the same  What about free market economics?  Not all industries and markets are equally competitive

6. Characteristics of Market Structure  Market Structure  Organization of a market, based on degree of competition among producers  Four Main Characteristics  Number of Producers  Similarity of Products  Ease of Entry  Control over Prices Market Power---ability to influence prices

7. Perfect Competition (i.e., Milk Industry)  Many Producers, Identical Products  All goods sold at equilibrium price  Most efficient---it allocates resources to those who value them the most  Characteristics  Many producers and consumers  Identical Products---commodity (i.e., grains, cotton, sugar)  Easy entry into market  No control over prices---producers are Price Takers

8. What can limit competition?  Barriers to entry  High start up costs  Control of Resources  Technology  Education levels required  Benefits of competition  Forces producers to be efficient  Consumers never overpay

9. Monopoly (Microsoft)  Imperfect Competition  Producers have control over prices of products  One Producer, a Unique Product  Characteristics  One Producer  Unique Product  High Barriers to Entry  Substantial Control over Prices----Price Setters  Pure monopoly rare---Trusts, Anti-Trust laws

10. Three types of Legal Monopolies  Resource Monopolies  Government Created Monopolies  In the public interest  Patents and copyrights  Public franchise---sole right to a firm to provide a good or service, i.e. National Park Service to companies to provide food or lodging in national parks  Licenses---legal permit to operate business in a market  Natural monopolies---economies of scale, i.e. Utilities

11. Oligopoly  Few Producers, Similar Products  Market dominated by few firms  Arise out of economies of scale  Examples: Airlines, cars, soft drinks, light bulbs, tennis balls, and large passenger jets  Characteristics  Few Producers  Similar Products  High Barriers to Entry  Some control over Prices

12. Behavior of Oligopolies  Price Leadership  Dominant firm sets a price, others follow  Collusion  Firms get together and make agreements on production and pricing  Cartel formation  OPEC

13. Monopolistic Competition  The one we most encounter  Restaurants, gas stations, clothing stores  Characteristics  Many Producers  Differentiated Products  Few Barriers to Entry  Some control over Prices  Brands, Brand Loyalty  Non Price Competition---Advertising, Differentiation  Physical characteristics, Service, Location, and Status/Image

14. Market Failures  What is a market failure?  Not allocating goods/services in the most efficient way  Externalities and Public Goods are evidence of failures  Externality  Side effect of production/consumption that has consequences for others  Positive and Negative---Cost or Benefit on someone else  Failure because they do not take into account all costs of production and benefits to consumers into model of supply and demand

15. Public Goods  Goods and services that are not provided by the market system because of the difficulty of getting people who use them to pay for their use  Examples:  Fire and police services  National Defense  Public Parks  Free Rider Problem