2. Ch. 7 Market Structures POPE- 2015

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?

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

6. How do we describe them? (5) 1. Market Power: ability for firm to raise price without losing sales. (control of price) 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. 1. Perfect Competition (PC) 1. Infinite number of very small firms. No single seller owns a large % of the market. 2. Buyers and sellers deal in identical products. No product differences. (Ex: salt, flour, wheat, corn) 3. Unlimited Competition: so many firms, that suppliers lose the ability to set their own prices. 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.

8. Perfect Competition Consider the market for salt Firms in a perfectly competitive market are price takers. (They take the price they are given; they can’t change the price) Fixed Prices No one single producer controls the market Just many small firms. They have no market power. If you want salt… you get salt no matter the brand. 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 one’s OWN prices” The AGRICULTURAL MARKET is the best example of a perfectly competitive market.

9. Monopolistic Competition (MC) 1. Large number of large companies (fewer than perfect competition) Sellers can influence the price through creating a product identity 2. Products are NOT exactly identical, but very similar. 3. Heavy competition: firms must remain aware of their competitor's actions, but they each have some ability to control their own price. 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.

10. Monopolistic Competition The key idea to understand monopolistic competition is that firms sell products that are similar, but not exactly alike. Essentially, all hand soaps are the same. Yet firms can create a brand identity that separates their hand soap from their competitor's This brand identity can be formed through packaging, songs, product support, and especially advertising. EXAMPLE: Hand Soap

11. Monopolistic Competition Product Differentiation (Brand Identity) 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?

12. Monopolistic Competition Non-price Competition: 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. VS Notice these commercials never mention price.

13. Monopolistic Competition Examples Auto, Gas, Fast Food, Airlines, etc.

14. Monopolistic Competition What happens when companies in a M.C. Market Fail? They don’t close their doors, but rather merge with larger companies. This is called a Merger!

15. Mergers of Monopolistic Companies 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. Three Types of Mergers: 1. Horizontal 2. Vertical 3. Conglomerate

16. Three Types of Mergers 1. Horizontal: involve firms in the same market, such as between two telecom companies. 2. Vertical: involve one firm buying a resource provider Example: automaker buys a steel company 3. Conglomerate: a company buys a business in a unrelated industry. Reason: takeover the market Reason: Cheaper Resources Reason: Diversification

17. Three Types of Mergers Other examples of Horizontal Mergers… A company buys a competitor in the market Reason: ownership of the market

18. Three Types of Mergers Other examples of Conglomerates… A company buys a business in a unrelated market. Reason: Diversification

19. 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. 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

20. Oligopoly What will happen when Oligopoly goes bad, a Price War will result. 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. When price wars start, oligopolists would rather like to be independent price setters.

21. 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

22. Monopoly Monopoly is the exact opposite of Pure Competition 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 5. Highly wasteful and inefficient

23. Types of Monopolies 1. Natural Monopoly 2. Geographic Monopoly 3. Technological Monopoly 4. Government Monopoly

24. Natural Monopoly Natural Monopoly: where costs are minimized by having a single producer of the product. Sometimes govt. 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.  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.

25. © SWS 2010 Types of Monopolies Natural Monopolies

26. 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.  DeBeers is an African company that has (over the century) bought numerous diamond mines across the global. They provide 90% of the world’s 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.

27. Natural Monopoly Why would government do this or what are the benefits of a natural monopoly? Economics 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. Example: It is cheaper for the TVA to provide power in the SE than two or three companies.

28. Geographic Monopolies Geographic Monopoly: the only business in a geographic region. 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

29. Technological Monopolies 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. Copyright: Life plus 70 years

30. Government Monopolies Government Monopoly: operated completely or partially by the government. Liquor sales in some GA counties, uranium production, water, etc. Similar to natural monopolies. Adam Smith would be extremely mad! Healthcare in Canada Uranium in USA Alcohol Suppliers in Sweden

31. Government vs. Monopolies Antitrust Legislation Trust: a legally formed combination of companies 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.

32. Government vs. Monopolies Antitrust Legislation 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 1914- Federal Trade Commission Act: passed to enforce the Clayton Antitrust Act. It gave the authority to issue Cease and Desist Order. Cease and Desist Order: FTC ruling requiring a company to stop unfair business practice that reduces or limits competition

33. 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