TOPIC 5 MARKET STRUCTURE

PURE COMPETITION Pure competition is a theoretical market structure that has a very large numbers of sellers, identical products, and freedom to enter into, conduct, and get out of a business. Perfect competition is pure competition in which all buyers and sellers have perfect knowledge of all market conditions. Under pure competition, market supply and demand set the equilibrium price for a product. The profit-maximizing quantity of output is the point at which the marginal cost of production equals the marginal revenue from sales (MC = MR). Pure competition is important because economists use it as a yardstick to measure other market structures such as monopolistic competition, oligopoly, and monopoly.

MONOPOLISTIC COMPETITION Monopolistic competition has all of the features of pure competition except for the products are similar but not identical. Monopolistic competitors rely on nonprice competition and product differentiation to make their products stand out. Monopolistic competitors expand production until marginal cost equals marginal revenue (MC = MR).

OLIGOPOLY In an oligopoly, very few sellers dominate the industry. Oligopolists tend to act together—if one company reduces prices or offers a promotion, others in the industry match the price or promotion almost immediately to avoid losing customers. Oligopolists compete on a nonprice basis by introducing new or different features. Collusion is an illegal agreement among oligopolists to fix prices or otherwise behave in a cooperative manner for their own benefit. Like all other market structures, oligopolists maximize their profits when marginal cost equals marginal revenue (MC = MR).

MONOPOLIES Monopoly is the opposite of pure competition; it is a market structure that has only one seller of a particular product. A natural monopoly is one in which a single firm can produce the product more cheaply than several competing firms could. A geographic monopoly is a monopoly based on the absence of other sellers in a certain geographic area. A technological monopoly is one based on ownership or control of a manufacturing method, process, or other scientific method. A government monopoly is a monopoly owned and operated by the government. Monopolies equate marginal cost with marginal revenue to find the profit-maximizing quantity of output.

ENSURING COMPETITION The government can help maintain competitive markets by breaking up monopolies, expanding laws against them, or regulating their activities. The Sherman Act of 1890 was the first American law against monopolies. In 1914, the Clayton Antitrust Act outlawed price discrimination, and the Federal Trade Commission Act set up the Federal Trade Commission to help stop unfair business practices. Some monopolies, such as public utilities, are beneficial and should not be broken up.

COMPETITION, CONSUMER PROTECTION, AND REGULATION Transparency and public disclosure help ensure that consumers have adequate information to make decisions. The Consumer Financial Protection Bureau (CFPB) was established in 2011 to oversee and guide the financial lending industry. Federal regulatory agencies include the National Weather Service, the National Highway Traffic Safety Administration, the Food and Drug Administration, and many others. Zoning ordinances are examples of government regulations at the local level.

MODIFIED FREE ENTERPRISE The U.S. economy is now a modified free enterprise economy because of increased government intervention in economic matters. Almost everything people do and buy is affected by one or more federal agencies. Over the years, government’s role in the economy has evolved from consumer protection issues to promotion of economic competition and efficiency.