Market Structures
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Transcript Market Structures
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 fly or 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
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
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.
Nonprice Competition
Win customers!
Location
Service
Style
Size, color, etc.
Brand
Advertising
Prices, Output and Profits
in Monopolistic Competition
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
1. Goal
6. Recently
Deregulated
Industries
5. Guidelines for
Mergers
2. Antitrust Powers
GOVERNMENT
MARKET
INTERVENTION
4. Complaints
Against AT&T
3. Complaints Against
Microsoft
6. Recently
Deregulated
Industries
airlines, trucking,
banking, railroads,
natural gas, television
broadcasting
5. Guidelines for
Mergers
Must prove that
merger will lower
costs and consumer
prices or lead to a
better product
1. Goal
Keep firms from
controlling the price
and supply of
important goods
PRESERVE
COMPETITION
GOVERNMENT
MARKET
INTERVENTION
4. Complaints Against
AT&T
Using legal monopoly in local
service to take control over
markets for long-distance
phone calls and
communications equipment
2. Antitrust Powers
Watch and regulate
industry; stop formation
of cartels or
monopolies; break up
existing monopolies
3. Complaints Against
Microsoft
Requiring
manufacturers to
include Microsoft
browsers with Microsoft
operating system and
predatory pricing
Chapter 7 Market Sturctures
Outline, Essential Questions and Vocabulary list
http://plant.mysdhc.org/teacher/3411kroegel/TBpages/C7outline.pdf