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MARKET STRUCTURE. Market Structure The nature and degree of competition among firms in the same industry.

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Presentation on theme: "MARKET STRUCTURE. Market Structure The nature and degree of competition among firms in the same industry."— Presentation transcript:

1 MARKET STRUCTURE

2 Market Structure The nature and degree of competition among firms in the same industry

3 Market structure characterized by a large number of well-informed independent buyers and sellers who exchange identical products. A Theoretical idea Q: So why does perfect competition serve as a theoretical market structure? A: Its advantages serve as a yardstick or example for other structures to be measured by.

4 1.Must be a large number of buyers and sellers 2.Buyers and sellers deal in identical product 3.Each buyer and seller acts independently 4.Buyers and sellers are reasonably well- informed about product and prices 5.Buyers and sellers are free to enter into, conduct, or get out of business

5 Market structure that has all the conditions of perfect competition except for identical products. Seller has the ability to raise or lower the price If sellers raise or lower the price enough, customers will change brands

6 Characterized by product differentiation: real or perceived differences between competing products in the same industry. To make their products stand out, they use nonprice competition: the use of advertising, giveaways, or other promotions designed to convince buyers that the product is somehow unique or fundamentally better than a competitors.

7 Market Structure in which a few large sellers dominate the industry Products may be distinct like the car industry or standardized like the steel industry When one firm changes prices, enhances product, etc the other firms usually follow or they run the risk of losing customers

8 Market structure with a single seller of a particular product Few Pure Monopolies today…very rare

9 Number of Firms in Industry Influence over Price Product DifferentiationAdvertising Entry into MarketExamples Perfect Competition ManyNone Easy Perfect: None Near: Truck Farming Monopolistic Competition ManyLimited Fair Amount Easy Gas Stations Womens clothing Oligopoly FewSome Fair AmountSomeDifficult Automobiles Aluminum Pure Monopoly OneExtensiveNone Almost Impossible Perfect: None Near: Water

10 Natural Monopoly: market situation where the costs of production are minimized by having a single firm produce the product – IE: Public utilities Geographic Monopoly: market structure based on the absence of other sellers in a particular geographic area – IE: Only 1 gas station in a small town

11 Technological Monopoly: based on a firms ownership or control of a production method, process, or other scientific advance – IE: item with a patent Government Monopoly: monopoly owned and operated by the government – IE: oversee water use, weapon-grade uranium for military

12 Condition that causes a competitive market to fail

13 1.Inadequate Competition 2.Inadequate Information – if the knowledge is important to buyers and sellers but is difficult to obtain 3.Resource Immobility – factors of production do not move to markets where returns are the highest 4.Public Goods – products that are collectively consumed by everyone 5.Externalities – unintended side effect that either benefits or harms a third party not involved.

14 Negative: harm, cost, or inconvenience suffered by a third party because of actions by others – IE: Noise from an airport, pollution Positive: a benefit someone receives who was not involved in the activity that generated the benefit. – IE: Airport expansion provides more business for local restaurants Doesnt matter if they are positive or negative: they are considered market failures, because their costs and benefits are not reflected in the market prices that buyers and sellers pay.

15 The government exercises its power to maintain competition within markets Two ways that government can maintain competitive markets: 1.Prohibiting market structures that are not competitive 2.Regulating markets where full competition is not possible

16 Trust: illegal combination of corporations or companies organized to hinder competition Price Discrimination: the practice of selling the same product to different consumers at different prices Cease and Desist Order: ruling requiring a company to stop an unfair business practice that reduces or limits competition

17 Sherman Antitrust Act 1890 – Outlawed all contracts to stop the growth of trusts and monopolies Clayton Antitrust Act 1914 – Strengthened the Sherman Act by outlawing price discrimination Federal Trade Commission Act 1914 – Established the Federal Trade Commission to regulate unfair methods of competition in interstate commerce. Robinson-Patman Act 1936 – Made it where everyone got the same rebates and discounts

18 What two market failures does the government have the ability to correct? Inadequate Information and Public Goods

19 Promote Transparency – information and actions are not hidden and are easily available for review – Public Disclosure: requirement that businesses reveal certain information to the public Provide Public Goods


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