1. 7-1: What is Perfect Competition?

2. Competition
Economists classify markets based on how competitive they are
Market structure: Describes the level of competition found in an industry.
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly

3. Perfect Competition Perfect Competition Definition:
ideal model of a market economy
Note: Ideal is a model, not a reality in most cases.

4. 5 Characteristics of Perfect Competition
1. Numerous buyers and sellers
No single buyer or seller has the power to control the prices.
Buyers have lots of options
Sellers are able to sell their products at market price

5. 5 Characteristics of Perfect Competition (continued)
2. Standardized product
A product that consumers see as identical regardless of the producer
Example: milk, eggs, etc.

6. 5 Characteristics of Perfect Competition (continued)
3. Freedom to enter and exit markets
Producers enter the market when it is profitable and exit when it is unprofitable

7. 5 Characteristics of Perfect Competition (continued)
4. Independent buyers and sellers
This allows supply and demand to set the equilibrium price

8. 5 Characteristics of Perfect Competition (continued)
5. Well-informed buyers and sellers
Buyers compare prices
Sellers know what consumers are willing to pay for goods

9. Perfect Competition
Examples of markets that are close to perfect competition:
Corn
Beef

10. Imperfect Competition
Market structures that lack one of the conditions needed for perfect competition are examples of imperfect competition
This means there are only a few sellers and/or products are not standardized

11. 7-2: Monopoly – More than a Game

12. Definition of a Monopoly
A market structure in which only one producer sells a product for which there are no close substitutes
Pure monopolies are rare

13. Definition of a Monopoly
A cartel is close to a monopoly
Cartel:
a group of sellers that act together to set prices and limit output
Example: OPEC—11 nations hold more than 2/3 of the world’s oil reserves

14. Definition of Monopoly
Why do monopolies have no competition?
Other firms struggle to enter the market due to a barrier to entry— something that stops the business from entering a market

15. 3 Characteristics of Monopolies
1. Only One Seller
Supply of product has no close substitutes

16. 3 Characteristics of Monopolies
2. A Restricted or Regulated Market
In some cases, government regulations allow a single firm to control a market (think utilities)

17. 3 Characteristics of Monopolies
3. Control of Prices
Prices are controlled since there are no close substitutes

18. Types of Monopolies First, not all monopolies are harmful
When monoplies are harmful to consumers the government has power to regulate them or break them up
Sherman Anti-Trust Act of 1890

19. Questions
1. Suppose that you went to a farmers’ market and found several different farmers selling cucumbers. Would you be likely to find a wide range of prices for cucumbers? Why or why not?

20. 2. What would happen to a wheat farmer who tried to sell his wheat for $2.50 per bushel if the market price were $2.00 per bushel? Why?

21. 3. In 2003, 95% of the households on the U. S
3. In 2003, 95% of the households on the U.S. had access to only 1 cable TV company in their area. What type of monopoly did cable TV companies have? Explain your answer.

22. 4. In 2002 the patent on the antihistamine Claritin expired
4. In 2002 the patent on the antihistamine Claritin expired. Using the 3 characteristics of a monopoly, explain what happened to the market for Claritin when the patent expired.

23. 7-3: Other Market Structures

24. Definition of Monopolistic Competition
when many sellers offer similar, but not standardized products

25. Definition of Monopolistic Competition
Monopolistic competition is based on product differentiation and non-price competition
Product differentiation: attempt to distinguish a product from similar products

26. Characteristics of Monopolistic Competition (continued)
Non-price competition: using factors other than low price to convince consumers to buy their products.
Our car is better quality
Our burger tastes better
Our jeans are hipper
Our purse is a status symbol

27. 4 Characteristics of Monopolistic Competition
1. Many sellers and many buyers
Meaningful competition exists
Example: there are many restaurants where you can buy a hamburger

28. 4 Characteristics of Monopolistic Competition (continued)
2. Similar but differentiated products
Sellers try to convince consumers that their product is different from that of the competition

29. 4 Characteristics of Monopolistic Competition (continued)
3. Limited control of prices
Product differentiation gives producers limited control over price
Consumers will buy substitute goods if the price goes too high

30. 4 Characteristics of Monopolistic Competition (continued)
4. Freedom to enter or exit the market
No huge barriers to enter a monopolistically competitive market
When firms make a profit, other firms enter the market and increase competition

31. Oligopoly
Definition Oligopoly: market structure in which only a few sellers offer a similar product
Few large firms have a large market share: percent of total sales in a market

32. 4 Characteristics of Oligopolies
1. Few sellers and many buyers
Generally where the 4 largest firms control 40% of the market
Example: breakfast cereal industry

33. 4 Characteristics of Oligopolies (continued)
2. Standardized or differentiated products
Products can be standard such as steel
They try to differentiate themselves based on brand name, service, or location
Or, products can be differentiated such as cereal and soft drinks
They use marketing strategies to separate them from competitors

34. 4 Characteristics of Oligopolies (continued)
3. More control of prices
Each firm had a large enough share of the market that its decisions about price and supply affect one another

35. 4 Characteristics of Oligopolies (continued)
4. Little freedom to enter or exit market
Set-up costs are high
Firms have established brands, making it hard for new firms to enter the market successfully

36. 7-4: Regulation and Deregulation Today

37. Definition of Regulation
set of rules or laws designed to control business behavior to promote competition and protect consumers

38. Antitrust Legislation
Definition Antitrust Legislation:
laws that define monopolies and give government the power to control them and break them up
Example – Sherman Antitrust Act

39. Example: Standard Oil Company
Trust
Trust: when a group of firms are combined to reduce competition in an industry
Example: Standard Oil Company

40. Definition of Merger: Merger when 2 firms join together to become 1
If a merger will eliminate competition it will be denied by the government
Example – Google and Motorolla

41. Enforcing Antitrust Legislation
The FTC and the Department of Justice are responsible for enforcing antitrust laws

42. Definition deregulation:
Reducing or removing government control of a business
Results in lower prices for consumers and more competition
Example: airline industry was deregulated in 1978

43. Questions
1. In 2005, a major U.S. automaker announced a new discount plan for its cars for the month of June. It offered consumers the same price that its employees paid for new cars. When the automaker announced in early July that it was extending the plan for another month, the other 2 major U.S. automakers announced similar plans. What market structure is exhibited in this story and what specific characteristics of that market structure does it demonstrate?

44. 2. Why do manufacturers of athletic shoes spend money to sign up professional athletes to wear and promote their shoes rather than differentiating their products strictly on the basis of physical characteristics such as design and comfort?

45. 3. The Telecommunications Act of 1996 included provisions to deregulate the cable industry. In 2003, consumers complained that cable rates had increased by 45% since the law was passed. Only 5% of American homes had a choice of more than 1 cable provider in Those homes paid about 17% less than those with no choice of cable provider. How effective had deregulation been in the cable industry by 2003? Explain your reasoning.