1. MARKET STRUCTURES AND COMPETITION

2. Market Structure
The nature and degree of competition among firms operating in the same industry
Markets are classified according to certain structural characteristics
Pure competition, monopolistic competition, oligopoly, and monopoly

3. PURE COMPETITION
A large number of buyers and sellers exist – no single buyer or seller can affect price
Buyers and sellers deal in identical products (ex. salt)
Each buyer and seller acts independently – competition keeps price low
Buyers and sellers are reasonably well-informed about items for sale
If everyone is informed, no one would be way off on price
Buyers and sellers are free to enter into, conduct or get out of business

4. REALITY
Pure competition does not exist to any great degree - for this reason it is considered a theoretical situation
It is studied in order to evaluate other market structures
Any market situation that lacks any of the conditions above is considered imperfect competition
Most/all firms fall into this category

5. Monopolistic Competition
Characteristics
Has all the characteristics of pure competition except the fact that the products sold are not identical
product differentiation – the products are similar but not identical
Differences can be real or perceived
real differences example – athletic shoes
perceived difference example – aspirin

6. Monopolistic Competition
Non-price Competition
When the product is differentiated, price competition is no longer the issue
Advertisements try to convince consumers that the product is somehow better than the other brand
Heavy advertisement and promotion from these types of companies
If you can convince consumers you have a better product, you may be able to get a higher price for it – but not too much

7. Monopolistic Competition
Profit Maximization
There is still price competition so you cannot raise your price too high
Producers will maximize profits by using the market price for their product as a guide to decide how many will be produced and sold

8. OLIGOPOLY Characteristics
Market structure in which very few large sellers of a product dominate
Product can be differentiated (autos) or identical (steel)
Due to few number of firms, one firm can cause a change in output, sales and price in the industry as a whole
Because there are so few firms, whenever one firm does something, the other firms usually follow

9. COLLUSION When firms work together to decide on price and output
Example is price fixing, usually above
the market price
This is against the law in the US, but
some does still take place

10. OLIGOPOLY Pricing Behavior
Since they typically follow each other one firm can lower the price and expect the others to follow
This can lead to a price war, prices could go lower than the cost of producing the product (losses)
One firm can hope that the other firms raise their prices if they do, but there is no guarantee and you could lose business
These firms will typical use non-price competition to attract customers
Use advertising campaigns, change the product in some way to make it “better”

11. MONOPOLIES Characteristics Exact opposite of pure competition
Market structure in which there is only one seller of a particular product with no close substitutes
Very few in the US economy - Why?
we have traditionally disliked monopolies and have tried to outlaw them
Its usually easy to find a reasonably close substitute for most products
new technologies often introduce products that compete with existing monopolies
No pure monopolies exist, but some firms come close

12. TYPES OF MONOPOLIES Natural Monopolies
A situation in which costs are minimized by having a single firm produce the product
The nature of the industry dictates that society would be better served by only one supplier
Telephones, gas, electric, public transportation
To set up telephone lines for multiple carriers, pipes for multiple gas companies, electricity for multiple suppliers would be chaos and not economically viable
Utility companies granted permission from the government to act as a monopoly in a certain area, but they must also follow regulations

13. TYPES OF MONOPOLIES Geographic Monopolies
A monopoly exists because no other business in the immediate area offers any competition
Gas Station in middle of nowhere
This may not last as others decide to start in the area to compete

14. TYPES OF MONOPOLIES Technological Monopolies
A firm or individual has discovered a new manufacturing technique or has invented or created something entirely new
I-phone
Hybrid car
If you get a patent on the product, no one else can legally produce it

15. TYPES OF MONOPOLIES Government Monopoly
A business the government owns and operates
Found at all levels and are generally products the private sector may not adequately provide
Local water authorities, state liquor control, federal –uranium