1. Market Structures Mini Unit

2. Market What is a Market? Market = The exchange of goods/services between producers and consumers Markets are based off the self-interest of both producers and consumers Producers – want profit Consumers – want best price Leads to COMPETITION Competition = the struggle among producers for the dollars from the consumers

3. Price Competition v. Non-Price Competition Price Competition = when firms use price to get consumers’ money. Increase or decrease their the price of the good they are selling. Non-Price Competition = when firms use alternate strategies to get consumers’ dollars. They have to distinguish themselves from other firms, because the products are they offer are similar. Ex: Commercials, internet ads, Billboards, endorsements, advertising

4. Market Structures Market Structure = the characteristics of the market. How is the firm organized will tell us which market structure they fall into Here are some things we look out to determine which structure they fit in 1. # of firms 2. Variety of Goods 3. Barriers to entry (easy or hard to start) 4. Price or non-price competition 5. Who controls prices

5. Market Structures Economists have organized firms into FOUR market structures – each having their own characteristics 1. Perfect Competition 2. Monopoly 3. Oligopoly 4. Monopolistic Competition

6. Perfect Competition Perfect Competition is a structure in which- Every firm/producer produces the same product for relatively the same price Each firm is only able to produce a small portion of the total supply of the good Since there are soooooooo many options, the firms must be “Price Takers” instead of “Price Makers” Price Taker – the producer must accept the going rate in the market Price Maker – the producer establishes the market price

7. Perfect Competition Characteristics of Perfect Competition # of firms = MANY – there are several producers as well as consumers Variety of Goods = Firms sell identical products Barriers to entry = very low barriers (not difficult to start). It is easy to start, low start-up cost, not a whole lot of technology, no special degree, etc. Non- Price or Price Competition = Price (zero non- price) – there is no need to push advertising b/c consumers are offered the same product regardless of who it comes from. Firms must use PRICE alone to get their product sold. Control over prices = firms have none, remember they are “Price Takers”

8. Examples of Perfect Competition Fruits Vegetables Gold/Silver Stocks

9. Monopoly A monopoly is a market structure in which – A single seller dominates One supplier of that product VERY HIGH barriers to entry are what lead to monopolies Most forms of monopolies are illegal in the U.S. because it is unfair to the consumers. However, there are some instances where monopolies are necessary

10. Monopoly Characteristics of a Monopoly # of firms = ONE Variety of Goods = ONE major product Barriers to entry = Extremely high – this is what causes monopolies to occur in the first place Non- Price or Price Competition = Price (zero non-price) – there is no need to compete with other companies. The monopoly can set any price they choose really, because they have no one to have price competition with. Except, the law of demand tells us that if prices are too high, then the consumers will not buy. Therefore, the firm must be able to set a price that consumers are willing to pay. Control over price = Complete Control (if they plan to stay in the market). Firms that are monopolies are “Price Makers”

11. Examples of Monopolies Types of Monopolies that are legal Natural Monopoly = a market that runs more efficiently when one large firm provides all of the output. Like water service. It would be impractical to build dozens of reservoirs and pipes throughout an area. Instead, the gov’t grants certain companies the right to provide water services in a particular geographic region. Phone service lines were an example at one point, but with the change in technology it became more efficient to provide service (via radio waves or satellite). Government Monopoly = monopolies created (allowed) by the government. Like PATENTS. Patents allow a firm to have exclusive rights to their product or invention for a certain time period, usually 20years. Patents encourage entrepreneurs to accept the extremely high costs of research and start up costs, by only allowing them the right to sell the product. This helps the U.S. to seek advancement Or the government may give franchise contracts. Or issue a license for exclusive rights to operate in a particular market (MLB).

12. Oligopoly An Oligopoly is a market structure in which A few firms dominate that particular market These few firms usually control 70%-80% of the market for a particular good. Typically it is the fairly high barriers to entry that only allow for a few firms

13. Oligopoly Characteristics of an Oligopoly # of firms = only a few that dominate 70%-80% of that product Variety of Goods = there can be a variety of goods that qualify – variations on coke Barriers to Entry = high barriers to cross in order to enter the market – cost, regulations, etc Non- Price Competition = is WIDELY used in Oligopolies – Constant advertisements (price also plays a role) Price Control = they have some control, but consumers and competitors will dictate price. Brand loyalty might allow some companies to increase prices. Price Fixing is illegal

14. Examples of Oligopolies Soda and Sports Drinks – only a few brans dominate the market. Coke, Pepsi, Gatorade, PowerAde Movie Production Studios – only a few production companies dominate the industry Paramount, Disney, 20 th Century Air Travel – there are only a few choices for airlines you travel with Delta, United Airways, Cellphone Carriers – there are only a few who dominate Sprint, T-Mobile, Verizon

15. Monopolistic Competition Monopolistic Competition is a market structure in which There are SEVERAL companies selling similar products, but not identical products. Referred to as monopolistic, because the firms are selling a variation of the same type of product. It’s not perfect competition, because the products are not identical, they are similar

16. Monopolistic Competition Characteristics of Monopolistic Competition # of firms = there are many producers Variety of Goods = there are some varieties of the goods – different variations of jeans Barriers to Entry = Low, it is usually easier to join into the market. Due to the low barriers, it leads to more competitors Non-Price Competition = is going to be KEY! How can you get people to buy your product if prices are similar? Advertise, get your name out there. Some consumers will show Brand Loyalty and neglect non-price competition. Control over Price = Very little control by the firms. With all of the different options for consumers out there, a firm that sets prices too high will not be successful. They need to get people loyal to their brand if they hope to go above the market standard price.

17. Examples of Monopolistic Competition Countless #’s Denim Jeans – the firms are all selling jeans, but there is variations - size, color, fit, style Shoes – sizes, color, style, comfort, shape Winter Jackets – thickness, material, Hats – logos, style, color