1. Market Structures Analyzing the levels of competition in various markets

2. Market Structure Market structure – identifies how a market is made up in terms of: The number of firms in the industry The nature of the product produced The degree of monopoly power each firm has The degree to which the firm can influence price Profit levels Firms’ behaviour – pricing strategies, non-price competition, output levels The extent of barriers to entry

3. Market Structure More competitive (fewer imperfections) Perfect Competition Pure Monopoly

4. Market Structure Less competitive (greater degree of imperfection) Perfect Competition Pure Monopoly

5. Market Characteristics Number of Firms: How many firms produce this type of product? Type of Product: Do all competing firms make products that are essentially the same or specialized? Barriers to Entry: How easy it is for a firm to enter the market (competition, start up costs, etc.)? Price Setting Power: How much control does a firm have over the selling price of the product?

6. Perfect Competition The four basic market structures are defined by how competitive they are. Perfect competition is the most competitive, with many producers offering identical products.

7. Perfect Competition Characteristics: Large number of firms Products are homogenous (identical) – consumer has no reason to express a preference for any firm Freedom of entry and exit into and out of the industry Firms are price takers – have no control over the price they charge for their product Each producer supplies a very small proportion of total industry output Consumers and producers have perfect knowledge about the market

8. Perfect Competition Farmers Market Stock Market Agriculture

9. Commodities Products that are considered the same regardless of who makes or sells them. Examples – low-grade gas, notebook paper, milk, oranges. Buyers always choose Supplier with lowest price

10. Barrier to Entry Barriers can made it difficult for new firms to start leading to imperfect competition. Start-up Costs (start-up costs for opening sandwich shop smaller than grocery store so entrepreneur more likely to open it). Internet could help reduce start-up costs – up one’s based solely on net have trouble staying up – too much competition and cost of shipping, etc. Technological Know-How

11. Monopoly

12. Monopoly - Definition Monopoly lies at the other end of the spectrum from perfect competition. A monopoly is a market with one producer offering a product for which there are no good substitutes. Examples include the water, power, and cable TV industries. Problem – can take advantage of market and charge high prices

13. Monopoly WaterCable TVPrescription Drugs

14. Monopoly Pure monopoly – where only one producer exists in the industry In reality, rarely exists – always some form of substitute available! Monopoly exists, therefore, where one firm dominates the market Firms may be investigated for examples of monopoly power when market share exceeds 25% Use term ‘monopoly power’ with care!

15. Monopoly Monopoly power – refers to cases where firms influence the market in some way through their behaviour – determined by the degree of concentration in the industry Influencing prices Influencing output Erecting barriers to entry Pricing strategies to prevent or stifle competition Sometimes seen as a case of market failure

16. Monopoly Origins of monopoly: Through growth of the firm Through merger or takeover Through acquiring patent or license Through legal means – national contracts (defence, etc)

17. Monopoly Preventing or limiting competition can be achieved by the use of trademarks and patents.

18. Economies of Scale When a firm’s start-up costs are high but its costs fall as each additional unit is produced. Think of a Hydro-Electric Plant – large dam is expensive to build – however after built very little cost to run. Average cost of first unit of electricity very high, but over time average cost drops. Because of the huge start-up costs – these economies of scale naturally become monopolies.

19. With Economies of Scale – average cost should fall

20. Types of Monopoly Natural Monopoly - This situation occurs when the costs of production are minimized by having a single firm produce the product. Example: Electricity Geographical Monopoly - Is based on the absent of other sellers. If you are the only grocery store in a town you own a geographical monopoly. Technological Monopoly - This monopoly controls a certain process, a patented product, or a scientific advance. Governmental Monopoly - Provides services not available from private industry. Example would be city water or alcohol sales.

21. Monopoly Terms Patent – gives a company exclusive rights to sell a new good or service for a specific period of time. (makes sure that companies can profit from development to insure future research and development) Franchise – contract issued by a local authority that gives a firm the right to sell its goods within an exclusive market (ex. National Park Services have only one company providing food to all the parks) Licenses – government issued right to operate a business

22. Setting the Price in a Monopoly Price Discrimination – dividing consumers into two or more groups and charging each a different price. Business must have control over Market Price – ability to control prices and total market output Targeted Discounts (ex. Cheaper tickets for buying airline seats early, manufacturer rebates, senior citizen or student discounts, free children promotions)

26. Bill Gates – A Case Study Read page 165 Competition – good or bad?

27. Monopolistic competition lies at the more competitive end of the spectrum. It is a market with many producers offering similar but slightly different products. Examples include the shoe, clothing, and restaurant industries. Monopolistic Competition

28. Monopolistic Competition

29. Differentiation Firms can have some control over selling price because they can differentiate their goods from others

30. Non-Price Competition Firms try not to compete on price alone. Physical characteristics – new color, shape, taste Location – convenience store located away from competitors, etc. Service Level – waiters, better atmosphere, “full service” gas Advertising – logo’s on shirts, etc.

31. Oligopoly Oligopoly lies at the less competitive end of the spectrum. It is a market with only a few producers that offer similar or identical products. Examples include the soft drink, aircraft, and auto industries.

32. Oligopoly

33. Cooperation and Collusion Oligopoly presents challenge to government because firms SEEM to be working together even when they aren’t. Price War – competitors cut prices very low to win business – harmful to other producers Collusion – agreement to set prices and production levels (price fixing – agree to sell at same/similar price) – technically illegal in US Cartels – formal agreement in an organization to coordinate prices and production - OPEC

34. OPEC

35. This is a graphic equation that illustrates the market characteristics of the wheat industry in the 1990’s. Let’s examine each piece of the equation.

36. What does this circle graph and written summary tell you about the “number of producers” in the wheat industry?

37. What does this flowchart and written summary tell you about the “similarity of products” in the wheat industry?

38. What does this illustration and written summary tell you about the “ease of entry” into the wheat industry?

39. What does this graph and written summary tell you about the “control over prices” in the wheat industry?

40. Which market structure best describes the wheat industry in the 1990’s?

41. Regulation and Deregulation The federal government sometimes steps into markets to promote competition and the lower prices it brings. In recent years, the government has also deregulated several markets to promote competition.

42. Examples of Government Regulation/Involvement in Your Life: Taking a shower: The water that flows from your showerhead has been analyzed by your local water department to be sure it is safe. Taking a shower: The water that flows from your showerhead has been analyzed by your local water department to be sure it is safe. Brushing your teeth: A government agency assured that the ingredients in your toothpaste are safe and that it was packaged safely. Brushing your teeth: A government agency assured that the ingredients in your toothpaste are safe and that it was packaged safely. Driving: The traffic laws that allow you to get to school safely have been created and enforced by local government and police departments. Potholes in the road have been filled by a company hired by the government. Driving: The traffic laws that allow you to get to school safely have been created and enforced by local government and police departments. Potholes in the road have been filled by a company hired by the government.

43. Listening to the radio: You can hear music clearly because a government agency assigns a separate frequency to each competing station.Listening to the radio: You can hear music clearly because a government agency assigns a separate frequency to each competing station. Going to School: National, state, and local government regulate and fund schools so we have an educated workforce.Going to School: National, state, and local government regulate and fund schools so we have an educated workforce. Going to Work: Government agencies assure that your workplace is safe and protect you from discrimination.Going to Work: Government agencies assure that your workplace is safe and protect you from discrimination. Examples of Government Regulation/Involvement in Your Life:

44. Government Intervention in Markets Regulation - government control of an industry Regulation - government control of an industry Control prices, output, standards Control prices, output, standards Deregulation - removal of government control Deregulation - removal of government control No rules, free market No rules, free market

45. Examples of Regulation Economic Regulation Economic Regulation Federal Communications Commission (FCC) Federal Communications Commission (FCC) Civil Aeronautics Board (CAB) Civil Aeronautics Board (CAB) Social Regulation Social Regulation Environmental Protection Agency (EPA) Environmental Protection Agency (EPA) Occupational Safety and Health Administration (OSHA ) Occupational Safety and Health Administration (OSHA )

46. Reasons for Regulation Protects Firms: Protects Firms: Costs of production (economies of scale) Costs of production (economies of scale) “Fair” profits “Fair” profits Protects Consumers: Protects Consumers: Necessary products/services will be available Necessary products/services will be available Safety Safety Quality Quality

47. Cost of Regulation In most cases regulation tends to RAISE prices and LOWER output!

48. Trusts Trusts – business combinations similar to cartels These are monitored by Federal Trade Commission and the Department of Justice’s Antitrust Division Anti-Trust Laws – 1890s outlaws mergers (combining of companies) that limit trade

49. Trust Busting Most Recent Case – Micro Soft required computer manufacturers who wanted to use its operating system also include its browser (for free) which eliminated other companies from selling their browsers. ATT and Apple – forced to use one carrier – now more options

50. Challenges - Phone Networks – cell towers expensive to put up. Cable Providers Electricity Providers

51. Deregulation Purpose Purpose Remove government regulations to increase competition, lower prices Remove government regulations to increase competition, lower prices Dilemma Dilemma Increase competition without social costs (ex: health and safety requirements) Increase competition without social costs (ex: health and safety requirements)

52. General Effects of Deregulation Lower prices Lower prices More competition= increase in output= more options More competition= increase in output= more options Market is free to compete Market is free to compete