Market Structures

HOW DOES COMPETITION AFFECT YOUR CHOICES?

Perfect Competition

Characteristics  Many buyers and sellers participate in the market  No individual can be powerful enough to buy or sell enough goods to influence the total market quantity or the market price.

  Sellers are for identical products  commodity Buyers and sellers are well-informed about products  Sellers are able to enter and exit the market freely   Seller motivation: profit Buyer motivation: get the most for your money

Monopoly

    One seller in the market: no competition Selling a unique product with no close substitute Quantity supplied low and product price high Barriers to entry of other firms

Economies of Scale

 Factors that cause a producers average cost per unit to fall as output rises Total cost / quantity produced = average cost

Natural Monopoly

 A market that runs most efficiently when one large firm provides all of the output   Inefficiencies exist with more than one firm Example: Tampa Electric Company (TECO)  Subject to government regulation including price-fixing  Market changes caused by new technology can in the a natural monopoly  Example: Telephone service

Government Monopolies

   Technological monopolies via PATENTS     Temporary monopoly power Extends legal ownership to the use of the patented technology Guarantees company can profit from investment in R&D Encourages firms to research and develop new products that benefit society as a whole Franchises and Licenses   Franchise: a contract that gives a single firm the right to sell its goods within an exclusive market Example: school vending companies License: a government-issued right to operate the business Example: FCC issues licenses for individual radio and television’s days Industrial Organizations  MLB and NFL are exempt from antitrust laws (no competitor cooperation)

Example: BreatheDeep

Price Discrimination

 The division of consumers into groups based on how much they will pay for a good  Examples: discounted airfares, rebate offers, senior citizen or student discounts, and children Flyer stay free promotion  Price Discrimination Conditions  Firms that use price discrimination must have some market power   Consumers must be divided into distinct groups Buyers must not be in a position in which they can easily resell the good or service

Monopolistic Competition

   Modified version of perfect competition Products are similar enough to be substitutes for each other but not identical Examples: gas stations, ice cream, bagel stores, and other retail stores

The market for jeans is monopolistically competitive because jeans can vary by size, color, style, and designer.

Monopolistic Competition

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Many Firms

  No economies of scale—lower start-up costs Ease of start-up encourages more competitors

Few artificial barriers to entry

  Patents have limited affect—products similar not identical With much competition less opportunity for any one or group of firms to imbalance industry

Little control over price

 Variations in price are possible but limited—substitutes readily available

Differentiated products

 Creating an actual [or perceived] difference in a product to justify price and win customers

Nonprice Competition

    

Win customers!

Location Service Style  Size, color, etc.

Brand Advertising

Prices, Output and Profits in Monopolistic Competition

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Prices

 Under monopolistic competition prices are higher than perfect competition but their demand curves are more elastic (price sensitive).

Output

 As a result of the relative elasticity in monopolistically competitive firms, the total output falls somewhere between that of a monopoly and that of perfect competition.

Profits

  Monopolistically competitive firms earn just enough to cover all of their costs.

They can earn profits in the short run, but too many competitors make this hard to maintain in the long run.

Oligopoly

  Markets dominated by a few large, profitable firms  Four largest firms produce 70-80% of industry output Examples: air travel, automobiles, breakfast cereals, soft drinks and household appliances.

Oligopoly: Barriers to Entry

     Technology Government licenses and patents Established brands and distribution networks difficult to break through High start-up costs Economies of scale – market becomes saturated with supply – no profit motive

Oligopoly: Cooperation and Collusion

    Collusion: an illegal agreement among firms to divide the market, set prices, or limit production Firms must work for profit independent of each other oligopolistic firms can attempt to influence price by starting a price war—undercutting prices(good for consumer but bad for supplier) Price-fixing has firms setting monopolistically high prices—illegal

Oligopoly: Cartels

    Cartel: an agreement by a formal organization of producers to coordinate prices and production Illegal in the USA International Example: OPEC Incentive to cheat other members by over producing can result in a surplus of supply and cause prices to fall