2CompetitionEconomists classify markets based on how competitive they areMarket structure: Describes the level of competition found in an industry.Perfect CompetitionMonopolistic CompetitionOligopolyMonopoly
3Perfect Competition Perfect Competition Definition: ideal model of a market economyNote: Ideal is a model, not a reality in most cases.
45 Characteristics of Perfect Competition 1. Numerous buyers and sellersNo single buyer or seller has the power to control the prices.Buyers have lots of optionsSellers are able to sell their products at market price
55 Characteristics of Perfect Competition (continued) 2. Standardized productA product that consumers see as identical regardless of the producerExample: milk, eggs, etc.
65 Characteristics of Perfect Competition (continued) 3. Freedom to enter and exit marketsProducers enter the market when it is profitable and exit when it is unprofitable
75 Characteristics of Perfect Competition (continued) 4. Independent buyers and sellersThis allows supply and demand to set the equilibrium price
85 Characteristics of Perfect Competition (continued) 5. Well-informed buyers and sellersBuyers compare pricesSellers know what consumers are willing to pay for goods
9Perfect CompetitionExamples of markets that are close to perfect competition:CornBeef
10Imperfect Competition Market structures that lack one of the conditions needed for perfect competition are examples of imperfect competitionThis means there are only a few sellers and/or products are not standardized
12Definition of a Monopoly A market structure in which only one producer sells a product for which there are no close substitutesPure monopolies are rare
13Definition of a Monopoly A cartel is close to a monopolyCartel:a group of sellers that act together to set prices and limit outputExample: OPEC—11 nations hold more than 2/3 of the world’s oil reserves
14Definition of Monopoly Why do monopolies have no competition?Other firms struggle to enter the market due to a barrier to entry— something that stops the business from entering a market
153 Characteristics of Monopolies 1. Only One SellerSupply of product has no close substitutes
163 Characteristics of Monopolies 2. A Restricted or Regulated MarketIn some cases, government regulations allow a single firm to control a market (think utilities)
173 Characteristics of Monopolies 3. Control of PricesPrices are controlled since there are no close substitutes
18Types of Monopolies First, not all monopolies are harmful When monoplies are harmful to consumers the government has power to regulate them or break them upSherman Anti-Trust Act of 1890
19Questions1. Suppose that you went to a farmers’ market and found several different farmers selling cucumbers. Would you be likely to find a wide range of prices for cucumbers? Why or why not?
202. What would happen to a wheat farmer who tried to sell his wheat for $2.50 per bushel if the market price were $2.00 per bushel? Why?
213. In 2003, 95% of the households on the U. S 3. In 2003, 95% of the households on the U.S. had access to only 1 cable TV company in their area. What type of monopoly did cable TV companies have? Explain your answer.
224. In 2002 the patent on the antihistamine Claritin expired 4. In 2002 the patent on the antihistamine Claritin expired. Using the 3 characteristics of a monopoly, explain what happened to the market for Claritin when the patent expired.
24Definition of Monopolistic Competition when many sellers offer similar, but not standardized products
25Definition of Monopolistic Competition Monopolistic competition is based on product differentiation and non-price competitionProduct differentiation: attempt to distinguish a product from similar products
26Characteristics of Monopolistic Competition (continued) Non-price competition: using factors other than low price to convince consumers to buy their products.Our car is better qualityOur burger tastes betterOur jeans are hipperOur purse is a status symbol
274 Characteristics of Monopolistic Competition 1. Many sellers and many buyersMeaningful competition existsExample: there are many restaurants where you can buy a hamburger
284 Characteristics of Monopolistic Competition (continued) 2. Similar but differentiated productsSellers try to convince consumers that their product is different from that of the competition
294 Characteristics of Monopolistic Competition (continued) 3. Limited control of pricesProduct differentiation gives producers limited control over priceConsumers will buy substitute goods if the price goes too high
304 Characteristics of Monopolistic Competition (continued) 4. Freedom to enter or exit the marketNo huge barriers to enter a monopolistically competitive marketWhen firms make a profit, other firms enter the market and increase competition
31OligopolyDefinition Oligopoly: market structure in which only a few sellers offer a similar productFew large firms have a large market share: percent of total sales in a market
324 Characteristics of Oligopolies 1. Few sellers and many buyersGenerally where the 4 largest firms control 40% of the marketExample: breakfast cereal industry
334 Characteristics of Oligopolies (continued) 2. Standardized or differentiated productsProducts can be standard such as steelThey try to differentiate themselves based on brand name, service, or locationOr, products can be differentiated such as cereal and soft drinksThey use marketing strategies to separate them from competitors
344 Characteristics of Oligopolies (continued) 3. More control of pricesEach firm had a large enough share of the market that its decisions about price and supply affect one another
354 Characteristics of Oligopolies (continued) 4. Little freedom to enter or exit marketSet-up costs are highFirms have established brands, making it hard for new firms to enter the market successfully
37Definition of Regulation set of rules or laws designed to control business behavior to promote competition and protect consumers
38Antitrust Legislation Definition Antitrust Legislation:laws that define monopolies and give government the power to control them and break them upExample – Sherman Antitrust Act
39Example: Standard Oil Company TrustTrust: when a group of firms are combined to reduce competition in an industryExample: Standard Oil Company
40Definition of Merger: Merger when 2 firms join together to become 1 If a merger will eliminate competition it will be denied by the governmentExample – Google and Motorolla
41Enforcing Antitrust Legislation The FTC and the Department of Justice are responsible for enforcing antitrust laws
42Definition deregulation: Reducing or removing government control of a businessResults in lower prices for consumers and more competitionExample: airline industry was deregulated in 1978
43Questions1. In 2005, a major U.S. automaker announced a new discount plan for its cars for the month of June. It offered consumers the same price that its employees paid for new cars. When the automaker announced in early July that it was extending the plan for another month, the other 2 major U.S. automakers announced similar plans. What market structure is exhibited in this story and what specific characteristics of that market structure does it demonstrate?
442. Why do manufacturers of athletic shoes spend money to sign up professional athletes to wear and promote their shoes rather than differentiating their products strictly on the basis of physical characteristics such as design and comfort?
453. The Telecommunications Act of 1996 included provisions to deregulate the cable industry. In 2003, consumers complained that cable rates had increased by 45% since the law was passed. Only 5% of American homes had a choice of more than 1 cable provider in Those homes paid about 17% less than those with no choice of cable provider. How effective had deregulation been in the cable industry by 2003? Explain your reasoning.