2Perfect CompetitionPerfect Competition – a market where a large number of firms are all producing essentially the same product
3Perfect Competition Four Conditions for Perfect Market: Many buyers and sellers participateSellers offer identical productsProducts that are the same no matter who makes or sells them are commodities
4Perfect Competition Four Conditions for Perfect Market: Buyers and sellers are well informed about productsSellers are able to enter and exit the market freely
5Barriers to EntryBarriers – factors that make it difficult for new firms to enter a marketBarriers lead to imperfect competition
6Examples of BarriersStart-Up Costs – The expenses a new business must pay before it can enter the marketHigh Start-Up Costs prevent new firms from entering
7Examples of BarriersTechnology – how much training does it take to enter the market?
8Examples of BarriersGovernment – may require licensing, certification, approval, etc.
9Price and OutputA perfectly competitive market produces the lowest sustainable prices possibleWith many firms competing, each firm lowers its prices to the point of just covering their costs
10MonopolyMonopoly – Barriers prevent firms from entering a market that has a single supplier
11Factors that Create a Monopoly 1. Economies of Scale – average cost of production always drops, never increases2. Natural Monopoly – market runs most effectively when one large firm provides all output
12Factors that Create a Monopoly Natural Monopolies are usually given special status by the government, but the government is allowed to control their pricesNew technologies can destroy a natural monopoly
13Government Monopolies Government Monopoly – a monopoly created by the government
14Typical High School Boy Questions? Wait… what’s a government monopoly?
15Government Monopolies Government Monopoly – a monopoly created by the governmentThere are 3 types of government monopolies, each with a different reason for being formed
16Three Kinds of Government Monopoly Technological Monopoly – government issues a patentPatent – exclusive rights to sell a good or service for a specific period of time
17Three Kinds of Government Monopoly Franchises and LicensesFranchises – government allows company to create an exclusive market for their brand name and products
18Three Kinds of Government Monopoly Franchises and LicensesLicenses – government grants a firm the right to operate a business
19Three Kinds of Government Monopoly Industrial Organizations – government allows companies in an industry to restrict the number of firms in the market
20Output Decisions Do you emphasize price or output? Price-Takers – in a competitive market, businesses have no control over their own pricesPrice-Setters – in a non-competitive market, business can choose what price to charge
21Falling Marginal Revenue MR = price in perfect competition, and does not changeIn a monopoly, however, MR begins falling at a pointTherefore, monopolies set production where MR = MC, but charge a higher price
25Price DiscriminationPrice Discrimination – dividing consumers into different groups and charging different prices to each group
26Price DiscriminationMonopolies are not the only companies that do thisAny company with market power, the ability to control prices and output, can use discrimination
27Price DiscriminationThe easiest way to maximize profit for a monopoly is to identify consumers who will not pay full price, and offer them a “discount”These are called targeted discounts – think of airline fares, manufacturers rebates, student discounts
28Limits to Price Discrimination I am the limit to price discriminicization.
29Limits to Price Discrimination 1. Firm must have some market power2. There must be distinct consumer groups3. It must be difficult for consumers to resell the product
30Monopolistic Competition and Oligopoly Presidenting is my anti-drug.
31Monopolistic Competition Monopolistic Competition – many companies compete in an open market, but sell products that are slightly different from one another
39Characteristics of Oligopoly 1. Many Barriers to Entry2. Cooperation and CollusionPrice Leadership – market leader raises prices, other firms follow suit (can also cause price war, though)
40Characteristics of Oligopoly 1. Many Barriers to Entry2. Cooperation and CollusionCollusion – an agreement among members of an oligopoly to set prices and production levels
41Characteristics of Oligopoly 1. Many Barriers to Entry2. Cooperation and CollusionCollusion causes price fixing, where firms agree to sell at the same or similar pricesIt’s illegal, by the way
42Characteristics of Oligopoly 1. Many Barriers to Entry2. Cooperation and CollusionCartels – an agreement by producers to coordinate prices and productionLegal in some countries, not here
43Regulation and Deregulation What might a firm do to increase its market power?Form a cartelMerge with competitorsPredatory Pricing - Temporarily lower prices to put others out of business
44Regulation and Deregulation Government has Antitrust Laws in place to prevent such practicesTrust – a business combination similar to a cartelBegan with Sherman Antitrust Act in 1890
45Fair or Unfair?Nike is one of the world’s largest and most popular shoe manufacturersOnce Nike introduced clothing, it forced companies that wanted to buy its shoes to buy its clothes as well
46Fair or Unfair? Disney, ABC, AOL, and Time-Warner have merged together They now control the Disney Channel, Cartoon Network, and the WB, which is a basic monopoly on children's programming
47Regulation and Deregulation Government can step in and break up monopolies based on the Sherman Antitrust ActFamous examples: John D. Rockefeller’s Standard Oil (1911), AT&T (1982)
48Regulation and Deregulation Government can also block mergers from happeningMerger – when one company joins with anotherGovernment uses research to see whether the merger will help or hurt consumers
49Regulation and Deregulation The Republican Party has typically supported deregulation – when the government stops making decisions about what businesses can and cannot doGovernment uses regulation and deregulation for the same purpose – to promote competition