1. Competition and Market Structures
Chapter notes
Competition and Market Structures

2. Market Structure
nature and degree of competition among firms operating in the same industry.
Economists group industries into four different market structures:
1.Perfect Competition
2.Monopolistic Competition
3.Oligopoly
4.Monopoly

3. Perfect Competition 5 necessary conditions:
1. large # of buyers and sellers
2. buyers and sellers deal in identical products
3. each buyer and seller acts independently
4. buyers and sellers are reasonably well-informed about products and prices
5. buyers and sellers are free to enter into, conduct, or get out of business.
Each firm is too small to influence price; supply and demand set price
“price takers”

4. Examples of p.c. Nothing is “perfect”
Closest – corn, ag products, raw beef

5. Imperfect Competition
There are no pure examples of perfect competition, most fall into “imperfect competition”
Lacks one of more of the 5 conditions
Most firms and industries fall into I.C.
There are 3 categories: monopolistic competition, oligopoly, monopoly

6. Monopolistic Competition
has all the conditions of perfect competition except for identical products
product differentiation – real or imagined differences between competing products in the same industry
nonprice competition – the use of advertising, giveaways or other promotional campaigns to convince buyers that the product is somehow better than another brand
can enter the market easily; narrow price range

7. Examples of mon.comp.
How many fast food restaurants can you think of that serve hamburgers?

8. Oligopoly
market structure in which a few very large sellers dominate the industry
industry is oligopoly if four firms control 40 percent of market
product can be differentiated or standardized
interdependent behavior – oligopolies are so large that when one firm acts the other firms usually follow
Very difficult to enter market

9. Cont’d
sometimes collusion can occur – formal agreement to price-fix or cooperate on something. Collusion = illegal
price wars can occur b/c oligopolists usually act together; but tend to compete on a nonprice basis

10. Examples of Oligopoly
Tennis balls
Cereal
Soft drinks

11. Monopoly
market structure with only one seller of a particular product (extreme cases)
Americans generally do not like monopolies because of price increases, sometimes “price fixing”
monopolies are price makers instead of price takers

12. Types of Legal Monopolies
natural monopoly – market situation where the costs of production are minimized by having a single firm produce the product. EX: phone company, utilities
geographic monopoly – based on the absence of other sellers in a certain geographic area
technological monopoly – based on the ownership or control of a manufacturing method, process, or other scientific advance Ex: patents, copyrights
government monopoly – owned and operated by the gov’t, found at all 3 levels

13. Antitrust Laws
Because monopolies can be harmful to consumers and some producers, gov’t created laws against them
Late 1800s, trusts dominated oil, steel, railroad industries
1890 Sherman Antitrust Act enabled government to control monopolies

14. Unfair business practices
NO market allocation
NO predatory pricing
Govt’ can issue and cease and desist order
Gov’t requires public disclosure

15. Federal Agencies FDA – Food and Drug Admin. FTC – Federal Trade Comm.
FCC – Federal Communications Commission
EPA – Environmental Protection Agency
CPSC – Consumer Product Safety Commission

16. Deregulation In 1970’s, gov’t started to deregulate some industries
Example – Airlines
Prices fell because of competition, but quality of service also fell, and some airlines went bankrupt