Market Structures `

Perfect Competition Large number of firms all produce the same product No single firm can influence prices Efficient Intense competition forces prices down Prices just cover costs Four requirements Many buyers and sellers Identical products Informed buyers and sellers Sellers enter and exit freely

Many buyers and sellers & identical products Due to large number of buyers and sellers, not one seller can influence price Must accept market price No differences between products from different suppliers *Commodity- product that is considered the same regardless of who makes or sells it Ex.: oil, gold, wheat Buyer will not pay extra for one particular company’s good Choose lowest price

Informed buyers and sellers & Freedom of entry and exit Know enough about market to find best deal Buyers provide sellers with full information Trade-off: Time spent gathering information must be worth amount of money saved Free entry: Enter when money is to be made and exit when it can’t Markets with more firms (more competition) lower prices

Barriers to entry Any factor that makes it difficult for a new firm to enter a market Start up costs and technology When start-up costs are high  hard to enter a market Not likely perfectly competitive Barriers of technology and know-how

Monopoly Market dominated by a single seller Illegal in US Barriers prevent firms from entering market Can charge high prices

Legal Monopolies Natural Monopoly Patent Franchise Runs most efficiently with one firm Examples? Patent Exclusive rights to sell a good or service for a specific amount of time Franchise Gives a single firm the right to sell its goods within a market

Monopolistic competition Many companies sell products that are similar but not identical Holds monopoly over its own product Similar enough to be substituted Four conditions Many firms Few barriers to entry Slight control over price Differentiated products

Non-price competition Way to attract customers other than by price Physical characteristics Location Service Level Advertising Prices Competition prevents high prices Switch to substitute

Oligopoly A few large firms dominate a market Four largest control 70%-80% of output Will work both alone and as a team Lower production, higher prices Significant barriers to entry Advertising

Oligopolies Soft drinks/Sodas: Coca-Cola (44%) – Coke, Sprite, Barq, Fanta, Mello Yello, etc. Pepsi (32%) – Pepsi, Mountain Dew, Mug, Slice, etc. Cadbury Schweppes (16%) – Seven-Up, Dr. Pepper, Schweppes, A & W, Canada Dry, Sunkist, Squirt, etc. Brand 1999 2005 2008 2011 Kellogg's 32% 33% General Mills 31% 26% 25% 28% Post 16% 15% 13%

Collusion and Cartels Collusion  agreement among firms to divide market and set prices or limit production Sell at same or similar prices Illegal in the US Cartel  formal organization of producers that agree to coordinate prices and production Permitted in other countries Only work if agreements are kept Strong incentives to cheat

Regulation and Deregulation Predatory Pricing  selling a product below cost to drive out competitors Antitrust laws  government power to stop cartels and monopolies from forming and break up existing monopolies Standard Oil  34 companies AT&T  7 regional companies Require companies that buy one product to buy other products

Business Organizations Establishment formed to carry on commercial enterprise A place that sells stuff

Sole Proprietorship Business owned or managed by a single individual Most popular in the US 75% of all businesses Only 6% of all sales

Pros and Cons Pros? Owner earns all the profits Own boss/own decisions Easy to start up  little paperwork Least regulated Cons? Responsible for all debt Can ruin personal finances Limited access to resources Lack of permanence Fringe benefits- payments to employees other than wages Limited

Partnerships Business organization owned by two or more people with divided responsibility 7% of all businesses 5% of all sales General Partnership Share equally in responsibility and liability Doctors, Lawyers, etc. Limited Partnership One partner has unlimited responsibility, the other contribute only money Limited Liability Partnership All partners are limited from other partner’s mistakes Doctors, lawyers, dentists

Pros and Cons Pros? Inexpensive Partnership agreement Shared decision making and specialization More capital Taxes on individuals income, no business tax Cons? Unlimited liability, unless LLP Possible conflict

Corporations Legal entity owned by stockholders who face limited liability Own stock  Part owner 20% of businesses 90% of sales Horizontal Merger  Join firms competing in the same market Vertical Merger  Join firms in different stages of production Conglomerate  business combination of more than three businesses that make unrelated products Multinational  Produces and sells products throughout the world

Pros and Cons Pros? Limited liability for owners Transferable ownership Attract capital Long life Cons? Difficult, expensive, and time-consuming to establish Double taxation Tax on dividends, tax when stocks are sold Loss of control More regulation

Other organizations Business Franchises  semi-independent business that pays fees to a parent company Nonprofit organization  functions like a business, but operates to benefit society instead of earning a profit