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CHAPTER 7: DIFFERENT TYPES OF MARKET STRUCTURES WHAT IS A MARKET? An environment in which buyers and sellers interact to exchange goods and services.

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Presentation on theme: "CHAPTER 7: DIFFERENT TYPES OF MARKET STRUCTURES WHAT IS A MARKET? An environment in which buyers and sellers interact to exchange goods and services."— Presentation transcript:

1

2 CHAPTER 7: DIFFERENT TYPES OF MARKET STRUCTURES

3 WHAT IS A MARKET? An environment in which buyers and sellers interact to exchange goods and services for money

4 Remember the Product Market? © SWS 2008 3 This is YOU! Microsoft & Apple

5 1. Pure (perfect) Competition (PC) 2. Monopolistic Competition (MC) 3. Oligopoly (Oli) 4. Monopoly Markets are classified by 4 structures (environments) What Markets Exist?

6 © SWS 2008 5 Market Structure How do we describe them? 5 Conditions 1.Market Power: ability for firm to raise price without losing sales. (control of prices) 2.Number (#) of Firms in the market. 3.Barriers of Entry- Is it easy to enter or exit the market? 4.Types of Products/ Goods: Similar or Different? 5.Level of Competition- How much competition is there?

7 © SWS 2008 6 #1 Perfect Competition This is a theoretical situation. NO TRUE Perfectly Competitive Market exists. IT IS ONLY A THEORY!

8 © SWS 2008 7 #1 Perfect Competition 1)INFINITE number of VERY SMALL firms. No single seller can influence the price because no ONE firm owns a large % of the market. 2)Buyers and sellers deal in identical products. No product differences. (EXAMPLES: Salt, Flour, Wheat, Corn) 3)Unlimited Competition: so many firms, that suppliers lose the ability to set their own price. 4)No Barriers to Entry. Sellers are free to enter the market, conduct business and free to leave the market. (Low cost to enter) 5)Each firm is a PRICE-TAKER. They have NO market share. CONSUMERS HAVE THE LARGEST SELECTION OF SELLERS TO BUY GOODS FROM BECAUSE NO SINGLE GOOD IS MORE APPEALING THAN ANOTHER.

9 © SWS 2010 #1 Perfect Competition Consider the market for salt. Firms in a perfectly competitive market are price takers. (They take the price they are given; they cant change the price) Prices are fixed. Firms in a perfectly competitive market are price takers. (They take the price they are given; they cant change the price) Prices are fixed. NO ONE SINGLE producer controls the market. (just 100s of small firms) They have NO MARKET POWER! NO ONE SINGLE producer controls the market. (just 100s of small firms) They have NO MARKET POWER! If you want salt…you get salt no matter what brand. If you want salt…you get salt no matter what brand. In other words, no one will buy an overpriced pound of salt. Why should they? In other words, no one will buy an overpriced pound of salt. Why should they? A $4 pound is the same as the $3.50 one, so there is no reason to spend that extra money. A $4 pound is the same as the $3.50 one, so there is no reason to spend that extra money. MARKET POWER = MARKET POWER = the ability to set ones OWN prices The AGRICULTURAL MARKET is the best example of a perfectly competitive market.

10 © SWS 2010 Monopolistic Competition (M.C.)

11 © SWS 2008 10 #2 Monopolistic Competition 1)LARGE number of large companies (but fewer than perfect competition). Sellers can influence the price through creating a product identity 2)Products are NOT exactly identical, BUT VERY SIMILAR, so companies use PRODUCT DIFFERENTIATION 3)Heavy Competition: Firms must remain aware of their competitors actions, but they each have some ability to control their own prices. 4)Low Barriers to Entry: easier than Oligopoly and Monopoly to get started because of the less amount of competition. 5)Monopolistic competition takes its name and its structure from elements of monopoly and perfect competition. The 5 conditions

12 © SWS 2010 #2 Monopolistic Competition Essentially, all hand soaps are the same. Yet firms can create a brand identity that separates their hand soap from their competitors. Essentially, all hand soaps are the same. Yet firms can create a brand identity that separates their hand soap from their competitors. This brand identity can be formed through packaging, songs, product support, and especially advertising. This brand identity can be formed through packaging, songs, product support, and especially advertising. The key idea to understanding monopolistic competition is that firms sell products that are similar, but not exactly alike. EXAMPLE: Hand Soap If effective, consumers will positively identify a certain brand and purchase it even if hand soap costs more. If effective, consumers will positively identify a certain brand and purchase it even if hand soap costs more.

13 #2 Monopolistic Competition Product Differentiation (Brand Identity): The real or imagined differences between competing products in the same industry. The real or imagined differences between competing products in the same industry. Differentiation may be color, packaging, store location, store design, store decorations, delivery, service….. anything to make it stand out! Differentiation may be color, packaging, store location, store design, store decorations, delivery, service….. anything to make it stand out!

14 © SWS 2008 13 #2 Monopolistic Competition Non-Price Competition: Non-Price Competition involves the advertising of a product's appearance, quality, or design, rather than its price. Non-Price Competition involves the advertising of a product's appearance, quality, or design, rather than its price. Advertising to help the consumer believe that this product is different and worth more money. Advertising to help the consumer believe that this product is different and worth more money. VS Notice these commercials never mention price.

15 © SWS 2008 14 Monopolistic Competition Examples Auto, Gas, Fast Food, Airlines, etc.

16 WHAT HAPPENS WHEN COMPANIES IN A M.C. MARKET FAIL? They dont close their doors, but rather merge with larger companies.

17 Reason: Cheaper Resources © SWS 2008 16 MERGERS OF MONOPOLISTIC COMPANIES Sometimes companies fall victim to market failure. However, not all businesses close their doors and empty their factories and stores. Sometimes companies fall victim to market failure. However, not all businesses close their doors and empty their factories and stores. Many get swallowed up by another company. This take-over or acquisition of a company is known as a merger. Many get swallowed up by another company. This take-over or acquisition of a company is known as a merger. THREE types of mergers: HORIZONTAL, VERTICAL, and CONGLOMERATE. 1.) HORIZONTAL: involve firms in the SAME market, such as between two telecom companies. EXAMPLE: automaker buys an steel company Reason: Diversification 2.) VERTICAL: involve one firm buying a resource provider. 3.) CONGLOMERATE: a company buys a business in a UNRELATED industry. Reason: takeover the market

18 MERGERS OF MONOPOLISTIC COMPANIES Other examples of HORIZONTAL MERGERS… Reason: ownership of the market …a company buys a COMPETITOR in the market.

19 MERGERS OF MONOPOLISTIC COMPANIES Other examples of CONGLOMERATES… Reason: Diversification …a company buys a business in a UNRELATED markets.

20 © SWS 2008 19 #3 Oligopoly

21 © SWS 2010 #3 Oligopoly A market in which a few large sellers control most of the production of a good or service and they work together on setting prices. Conditions of an Oligopoly 1)3-4 Firms that control the entire market by setting prices. 2)Products are generally identical (standardized) 3)High Barriers to Entry: Hard to enter the market because the competitors work together to control all the resources & prices. Plus it is very expensive to make the product. 4)The actions of one affects all the producers. 5)Collusion / Collude = (Price Fixing) an agreement to act together or behave in a cooperative manner.

22 © SWS 2008 21 #3 Oligopoly: Price Behavior When price wars start, oligopolists would rather like to be Independent Price Setters When price wars start, oligopolists would rather like to be Independent Price Setters …where a firm sets prices based on demand, cost of input and other factors (not based on other companies prices). …where a firm sets prices based on demand, cost of input and other factors (not based on other companies prices). Price Wars: Series of price cuts that competitors must follow or lose business. It is a fierce price competition between sellers, sometimes the price is lower than the cost of production. It is a fierce price competition between sellers, sometimes the price is lower than the cost of production. Why is that bad??? Why is that bad??? PRICE WAR What happens when Oligopoly goes bad; a PRICE WAR will result.

23 MARKETS Market Structures (Environments) COMPETITIONNONEMORE ENTRY INTO THE MARKET IMPOSSIBLEEASY # OF FIRMS ONEMANY DIFFERENTIATED PRODUCTS IDENTICAL PRODUCTS Monopoly Tap water TVA Oligopoly Autos Crude oil Monopolistic Competition Shoes E-Business DIVIDED BY TYPE OF PRODUCTS Perfect Competition Wheat Salt MARKET POWER TOTALNONE CONSUMER POWER NONEMORE EFFICIENT OPERATIONS NONEMORE

24 © SWS 2008 23 #4 Monopoly

25 © SWS 2008 24 #4 Monopoly Conditions 1) There is a single seller 2) No substitute goods are available. 3) A price-maker: (set their own price) 4) Barriers to Entry: impossible (other sellers cannot enter the market) 5) Highly wasteful and inefficient. Exact Opposite of Pure Competition.

26 © SWS 2010 #4 Monopolies: Types 1) Natural Monopoly: Where costs are minimized by having a single producer of the product. Sometimes government creates natural monopolies in the natural gas, water & electricity industry by franchising these utilities. Sometimes government creates natural monopolies in the natural gas, water & electricity industry by franchising these utilities. Franchise - the right to produce or do business in a certain area under the supervision of a larger company or government. Franchise - the right to produce or do business in a certain area under the supervision of a larger company or government. 4 Distinct Types of Monopolies: TVA is the largest government-owned power producer in the US. Its power facilities include 11 fossil-powered plants, 29 hydroelectric dams, three nuclear plants, and six combustion turbine plants. TVA is the largest government-owned power producer in the US. Its power facilities include 11 fossil-powered plants, 29 hydroelectric dams, three nuclear plants, and six combustion turbine plants. The corporation transmits electricity to 8.7 million consumers. The corporation transmits electricity to 8.7 million consumers.

27 © SWS 2010 Types of Monopolies Natural Monopolies

28 © SWS 2008 27 Types of Monopolies 1) Natural Monopoly: Where costs are minimized by having a single producer of the product. Other times Natural Monopolies are created simply because there is no regulations or one other firms can get into the market because the monopoly owns all resources. Other times Natural Monopolies are created simply because there is no regulations or one other firms can get into the market because the monopoly owns all resources. 4 Distinct Types of Monopolies: DeBeers is an African company that has (over the century) bought numerous diamond mines across the global. They provide 90% of the worlds diamonds. DeBeers is an African company that has (over the century) bought numerous diamond mines across the global. They provide 90% of the worlds diamonds. When another diamond company reaches the point when they must sell stock to raise capital for operations, DeBeers comes in and buys a majority of the stock. When another diamond company reaches the point when they must sell stock to raise capital for operations, DeBeers comes in and buys a majority of the stock.

29 © SWS 2008 28 Types of Monopolies 1) Natural Monopoly WHY WOULD GOVERNMENT DO THIS OR WHAT ARE THE BENEFITS OF A NATURAL MONOPOLY? Economies of Scale: As natural monopolies grow larger, this reduces its production costs.Economies of Scale: As natural monopolies grow larger, this reduces its production costs. Because normally companies become more efficient as the firm becomes larger over time.Because normally companies become more efficient as the firm becomes larger over time. Example: It is cheaper for the Tennessee Valley Authority (TVA) to provide power in the southeast than two or three companies.Example: It is cheaper for the Tennessee Valley Authority (TVA) to provide power in the southeast than two or three companies. 4 Distinct Types of Monopolies:

30 © SWS 2008 29 Types of Monopolies 2) Geographic Monopoly: The only business in a geographic region. Some of these are decreasing in the U.S. because of mobility of consumers. Some of these are decreasing in the U.S. because of mobility of consumers. EXAMPLE: Only person selling water in the desert. EXAMPLE: Turner Field

31 © SWS 2008 30 3) Technological Monopoly: Firm has discovered a new process or product. Constitution has given government the right to grant technological monopolies (protect property rights) Patent: 20 years exclusive rights to a developed technology. Patent: 20 years exclusive rights to a developed technology. Copyright: Life plus 70 years. (Artists and writers) Copyright: Life plus 70 years. (Artists and writers) Types of Monopolies

32 © SWS 2008 31 4) Government Monopoly: operated completely or partially by the government. Liquor sales in some GA counties, uranium production, water, etc. Liquor sales in some GA counties, uranium production, water, etc. Similar to natural monopolies. Similar to natural monopolies. Adam Smith would be pissed. Adam Smith would be pissed. Types of Monopolies Healthcare in Canada Uranium in USA Alcohol Suppliers in Sweden

33 © SWS 2010 Government vs. Monopolies

34 © SWS 2008 33 Government vs. Monopolies Trust: a legally formed combination of companies. Since the late 1800s the US have passed laws to restrict and regulate trusts. Since the late 1800s the US have passed laws to restrict and regulate trusts. Government has the power to maintain competition, regulate monopolies, or to run government-owned monopolies. Government has the power to maintain competition, regulate monopolies, or to run government-owned monopolies. Antitrust Legislation

35 © SWS 2008 34 The Role of Government 1890 - Sherman Antitrust Act: law against those companies that hindered competition or made competition impossible because of the restraint of trade that was created. Basically outlawing monopolies. Basically outlawing monopolies. 1887: Interstate Commerce Act 1887PRESENT 1890: Sherman Antitrust Act Antitrust Legislation

36 © SWS 2008 35 The Role of Government 1914 - Federal Trade Commission Act: passed to enforce the Clayton Antitrust Act. It gave the authority to issue Cease and Desist Order. 1887: Interstate Commerce Act 1887PRESENT 1890: Sherman Antitrust Act Cease and Desist Order: FTC ruling requiring a company to stop an unfair business practice that reduces or limits competition. 1914: Federal Trade Commission Act

37 MARKETS Market Structures (Environments) COMPETITIONNONEMORE ENTRY INTO THE MARKET IMPOSSIBLEEASY # OF FIRMS ONEMANY DIFFERENTIATED PRODUCTS IDENTICAL PRODUCTS Monopoly Tap water TVA Oligopoly Autos Crude oil Monopolistic Competition Shoes E-Business DIVIDED BY TYPE OF PRODUCTS Perfect Competition Wheat Salt MARKET POWER TOTALNONE CONSUMER POWER NONEMORE EFFICIENT OPERATIONS NONEMORE

38 © SWS 2008 37 STUDY FOR YOUR TEST!!


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