Chapter 7 Market Structures

4 Types of Market Structures Perfect Competition Monopolistic Competition Monopoly Oligopoly

Perfect Competition A market structure in which a large number of firms all produce the same product Production is small Does not influence prices

4 Conditions for Perfect Competition Many buyers and sellers Identical Products Commodity-Same product regardless of who makes or sells Milk, Notebook Paper, Water, Gasoline

Informed Buyers and Sellers Buyers are looking for the best deal Free Market Entry and Exit Markets w/more firms have lower prices

Barriers to Entry & Costs Price Barriers Efficient Market Lowest prices possible Will just cover costs Start-Up Costs Technology

Imagine that you and your friends plan to open a new convenience store Imagine that you and your friends plan to open a new convenience store. Brainstorm a list of ten expenses that would be your start-up costs.

Monopolistic Competition Market structure in which many companies sell products that are similar but not identical.

4 Conditions of Monopolistic Comp. Many Firms Few Artificial Barriers to entry Slight control over price Differentiated Products

Pricing Higher Make enough to cover cost Pricing Non-Price Comparison Higher Make enough to cover cost Physical Characteristics Location Service Level Advertising, image or status

Oligopoly A market structure in which a few large firms dominate a market Car industry, breakfast cereals, home appliances

Barriers to Entry Problems Competing with Larger Firms Typically work together with other large firms ILLEGAL!!! Price War-lowers the market price Collusion-agreement to set prices and production levels low Price Fixing-one price for the same good Cartels-Organizations that agree to coordinate prices and production

WHAT IS THE GOAL OF THE GAME OF MONOPOLY?

Monopoly A market structure dominated by a single seller. What happens if: You have a rare disease and to cure the disease you must take a new antibiotic to help cure it, and without the antibiotic your future is terminal?

Problem w/monopolies… —take advantage of their market power and charge high prices

One company owns all of the diamond mines in South Africa?

How a Monopoly Forms: If a firm’s start-up costs are high, and its average costs fall for each additional unit it produces, then this is called an economies of scale. (Characteristics that cause a producer’s average cost to drop as production rises)

Natural Monopolies A market that runs most efficiently when one large firm supplies all of the output. Example: Water -Technology can change natural monopolies. Ex: Phone companies

Government Monopolies A monopoly created by the government One way that the government can give a company monopoly power is by issuing a patent. A patent gives a company exclusive rights to sell a new good or service for a specific period of time.

Patents guarantee that companies can profit from their own research without competition. Franchise-the right to sell a good or service within an exclusive market. Ex: School Cafeteria

Industrial Organizations Government allows companies in an industry to restrict the number of firms in the market Ex: MLB

How Monopolies Make Money Price Discrimination- division of customer into groups based on how much they will pay for a good. Discounted Airfare Manufacture’s rebates Senior Citizen or Student Discounts

However for price discrimination to work a market must meet three conditions Some market power Distinct customer group Difficult resale

Predatory Pricing Selling a product below cost to drive competitors out of the market Trust-illegal grouping of companies that discourages competition

Anti-Trust Laws Makes sure firms don’t get too powerful. Laws that encourage competition in the marketplace (Strengthens Gov. control)

History of Anti-Trust 1901-Sherman Anti-Trust Laws which outlaws mergers and monopolies that restrain trade between states

1911-John D. Rockefellers Standard Oil Trust 1974-Department of Justice sued to end AT&T’s monopoly 1982-AT&T breaks ups 1999-Microsoft is a monopoly 2011-AT&T is sued by Justice department

Deregulation The removal of some government controls over a market (Weakens Gov. control.)