Chapter 7: Market Structures Perfect Competition: a large # of firms produce the same product 4 Conditions Many buyers and sellers Sellers offer identical products Buyers and sellers are well informed Sellers are able to enter and exit the market freely

Commodity A product that is the same, no matter who produces it Gas Milk Notebook Paper

A market dominated by a single seller

http://www.lifeaftertheoilcrash.net/

Natural Monopolies A market that runs most efficiently when one large firm provides all of the output. Ex-public water supplies The environment would be a mess if all kinds of companies drilled for water

Barriers to entry Things that make competition difficult In the old days the phone company was a local monopoly…wire service was costly and took up space..not enough room for competitors Enter cell phones: wireless, lots of competition

Government Monopolies Patents-an exclusive right to sell a new good, allows firms to benefit from their research and development Franchises and licenses-only one companies vending machines, or only one contracted vendor per market

Price Discrimination Charging different prices to different groups of people Discounted airline fairs, weekends Manufacturers rebate offers Senior citizen discounts Student discounts Free meals for little kids

Conditions for Price Discrimination Market Power Distinct Customer Groups Difficult Resale

Monopolistic Competition A market structure in which many companies sell products that are similar but not identical Four Conditions: Many Firms Few barriers to entry Slight control over price Differentiated Price

Nonprice Competition Competition through ways other than lower prices Physical characteristics Location Service Level Advertising

Oligopoly A market dominated by a few, large, profitable firms They “seem” to work together to control output and price Difficult to regulate Collusion: an agreement amongst companies to divide the market, set prices Cartel: a formal organization of producers that agree to fix production and prices

OPEC OPEC

OPEC Oil producing and exporting countries They control OIL

Comparison of Market Structure Number of Firms Variety of Goods Control Over Prices Barriers to Entry Examples

Gov’t Regulation Predatory Pricing: Driving competitors out of business, often selling products below cost Antitrust Laws: prevent monopolies from eliminating competition AT&T was broken up by the Federal Gov’t in 1982, it has slowly been rebuilt through the merger process

Regulation Antitrust Laws Breaking up monopolies Blocking mergers-this doesn’t happen much anymore

Deregulation Late 70’s, Early 80,s, Now Airlines Trucking TV Radio The media in general Prices end up going up in these cases