Market Structures and Measuring the Economy Goals: Describe the conditions required for Perfect Competition. 2. Analyze non-price competition between firms in Monopolistic Competition.

Market Structures Classification of the market according to #of firms, types of products, and type of competition There are 4 Different types of Markets: -Perfect Competition -Monopolistic Competition -Oligopoly -Monopoly

Perfect Competition -Market structure where many well informed buyers and sellers exchange identical products Necessary Conditions Many buyers and sellers Identical Products Pure Competition (Buyers & Sellers act independently) Well-Informed Buyers and Sellers No/Low Barriers (Easy for Buyers and Sellers to engage)

Monopolistic Competition Many companies competing in an open market with similar but not identical products. Each company has a mini monopoly over its specific product, but there are other products that could be reasonable substitutes.

Conditions of Mono. Comp. Monopolistic Competition relies on product differentiation – real or imagined differences between competing products. These product differences in addition to non-price competition allow for a wide variety of choices and prices.

Non-Price Competition Competition through ways other than lower prices Physical characteristics-new size, color, shape etc. 2. Location- where a business is located can have a big effect on competition 3. Service Level- how much service/attention is given to customers 4. Advertising, Image or Status – perception and social value

Conditions of an Oligopoly What is an Oligopoly? A market in which a two-three large sellers control most of the production of a good or service and they work together on setting prices. Conditions of an Oligopoly Very few Sellers that control the entire market. Products may be differentiated or identical (but they are usually standardized) Medium barriers to entry: Difficult to Enter the market because the competitors work together to control all the resources & prices. The actions of one affects all the producers. 5) Collusion = an agreement to act together or behave in a cooperative manner.

What does collusion look like? Collusion Agreements: usually illegal, among producers to fix prices, limit output, or divide markets.(hard to prove that a group of companies is doing this) It is also called Price Fixing: setting the same prices across the industry. THIS IS IN VIOLATION OF ANTI-TRUST LAWS. WHY? Basically, the companies are acting a one large monopoly.

Price Behavior in Oligopoly Now, sometimes businesses do not agree with each other about the price, and if that happens, a 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. Why is that bad???

What is each player’s dominate strategy? Video: Split or Steal What is each player’s dominate strategy? Steve Split Steal   Split Half, Half None, All http://www.youtube.com/watch?v=zpahL4fu5R8 Sarah All, None Steal None, None

Conditions of Monopoly Exact Opposite of Pure Competition. A price maker. (set their own price, without regard to supply and demand) There is a single seller No close substitute goods are available High Barriers to Entry: Other sellers cannot enter the Market.

Types of Monopolies 1. Natural Monopoly: Where costs are minimized by having a single producer of the product. Gas, water, electricity: government creates Natural Monopolies by franchising some utilities but they are regulated by the government. Natural Monopolies are businesses that are: Economies of Scale: As natural monopolies grow larger, this reduces its production costs – they become more efficient as they grow.

EXAMPLE: Only person selling water in the desert. Types of Monopolies 2. Geographic Monopoly: The only business in a location due to size of market. Decreasing in the U.S. because of mobility. EXAMPLE: Only person selling water in the desert.

Types of Monopolies 3. Technological Monopoly: Firm has discovered a new process or product and they have sole rights to that technology. Patent: 17 years exclusive rights to a developed tech. Copyright: (Artists and writers) Life plus 50 years.

Types of Monopolies 4. Government Monopoly: Owned and operated by the government. Uranium production, water & Sewage, USPS

Conditions of Efficient & Successful Markets Adequate competition must exist in all markets. Buyers and sellers are reasonably well-informed about conditions and opportunities. Resources must be free to move from one industry to another. Market Failure occurs when any of the 3 conditions alter significantly.