MARKET STRUCTURE HOW BUSINESSES INTERACT WITH EACH OTHER DETERMINES: - PRICING - PROFITABILITY - LEVEL OF COMPETITION - SERVICE TO BUYERS

FOUR TYPES OF MARKET STRUCTURE PERFECT COMPETITION MONOPOLISTIC COMPETITION OLIGOPOLY MONOPOLY

PERFECT COMPETITION MANY BUSINESSES SELLING EXACT SAME PRODUCT EASY FOR NEW BUSINESSES TO ENTER INDUSTRY AND OTHERS TO LEAVE NO CONTROL OVER PRICE – “PRICE TAKER” - AND CAN SELL ALL THAT PRODUCE LOW PROFITS – IF HIGH, NEW COMPETITORS MOVE IN

PERFECT COMPETITION (CON’T) GOOD EXAMPLE – FARMING TAKE PRICE AS “GIVEN” AND DECIDE HOW MUCH TO PRODUCE PRICES FREQUENTLY CHANGE, SO PROFITS UP AND DOWN PEOPLE CAN MOVE INTO AND OUT OF FARMING

PERFECT COMPETITION (CON’T) TO MAXIMIZE PROFIT, SIMPLY PRODUCE WHERE PROFITS ARE HIGHEST CORN SELLS FOR $4 PER BUSHEL # BUSHELS GROWN FIXED COST VARIABLE COST 1000 $2000 $ $2000 $ $2000 $ $2000 $7000 PROFIT AT: 1000 BUSHELS ( $4 x 1000) - $3000 = $ BUSHELS ( $4 x 2000) - $3700 = $ BUSHELS ( $4 x 3000 ) - $4500 = $7500 < 4000 BUSHELS ( $4 x 4000 ) - $9000 = $7000

OPPOSITE SIDE – MONOPOLY ONE SELLER – NO COMPETITORS COMPLETE CONTROL OVER PRICE – “PRICE SETTER” SOME CREATED BY LAW – U.S. POSTAL SERVICE OTHERS ARE “NATURAL MONOPOLIES” – POWER COMPANIES – WILL BE REGULATED

WILL A MONOPOLY ALWAYS INCREASE PRICE? NO – THEY STILL FACE THE DEMAND CURVE – PEOPLE BUY LESS WHEN PRICE RISES WILL SET PRICE AND QUANTITY (AMOUNT SOLD) THAT MAXIMIZES PROFIT

EXAMPLE – ELECTRIC POWER COMPANY PRICE PER WATT #WATTS SOLD REVENUES TOTAL COST PROFIT $ ,000 $25,000 $20,000 $5000 $ ,000 $40,000 $17,000 $23,000 $ ,000 $60,000 $15,000 $45,000 < $ ,000 $50,000 $12,000 $38,000

MONOPOLIES ARE LIMITED IT IS FEDERAL LAW TO REGULATE OR BREAK-UP MONOPOLIES - MICROSOFT EXAMPLE TECHNOLOGY CAN ELIMINATE MONOPOLIES – CABLE TV NOW COMPETES WITH SATELLITE TV

OLIGOPOLY SMALL NUMBER OF PRODUCERS, EACH MAKING AND SELLING THE SAME PRODUCT CAN COMPETE – THEN LIKE PERFECT COMPETITION OR CAN COLLUDE

COLLUSIVE OLIGOPOLIES COOPERATE INSTEAD OF COMPETE AGREE TO COMMON PRICE AND SPECIFIC SELLING TERRITORIES INCREASE PROFIT PROBLEM – COLLUSIVE OLIGOPOLIES ARE ILLEGAL IN THE U.S. HOWEVER, SOME INTERNATIONAL COLLUSIVE OLIGOPOLIES EXIST - OPEC

TWO COLLUSIVE OLIGOPOLIES ARE LEGAL IN THE U.S. PROFESSIONAL SPORTS (SUPREME COURT RULING) AGRICULTURAL COOPERATIVES

MONOPOLISTIC COMPETITION MANY BUSINESSES, ALL SELLING THE SAME PRODUCT HOWEVER, TO AVOID BEING IN “PERFECT COMPETITION”, THEY “TWEAK” THE CHARACTERISTICS OF THEIR PRODUCT SO PEOPLE THINK THEY ARE UNIQUE GIVES THEM POWER OVER PRICE “TWEAKING” CAN BE REAL OR JUST “HYPE” EXAMPLE: AUTO DEALERS

MARKET SEGMENTATION USED BY ALL BUSINESSES EXCEPT THOSE IN PERFECT COMPETITION GOAL: DIVIDE BUYERS INTO DIFFERENT GROUPS, CHARGE EACH GROUP A DIFFERENT PRICE, AND INCREASE PROFITS CAN ONLY WORK IF: - BUYERS CAN’T RESELL THE PRODUCT - BUYERS CAN’T SWITCH GROUPS

MARKET SEGMENTATION (CON’T) RULE: BUYERS WITH INELASTIC DEMAND CURVES PAY MORE; THOSE WITH ELASTIC DEMAND CURVES PAY LESS EXAMPLES: AIRLINE TRAVEL: LEISURE VS. BUSINESS BULK BUYING SENIOR CITIZEN DISCOUNTS PEAK VS. OFF-PEAK

WHAT’S THE “BEST” MARKET STRUCTURE? FOR SOCIETY AS A WHOLE – ECONOMIST ARGUE IT IS “PERFECT COMPETITION” * LOWEST PRICES FOR BUYERS * MOST ATTENTION TO NEEDS OF BUYERS * ALLOWS SUPPY TO EXPAND AND CONTRACT WITH CONDITIONS

AND, COMPETITION FOSTERS INNOVATION FIRMS IN PERFECT COMPETION ARE CONSTANTLY MOTIVATED TO “BUILD A BETTER MOUSETRAP” SO CAN TAKE CUSTOMERS FROM OTHER FIRMS LEADS TO INVENTIONS, INNOVATIONS, BETTER PRODUCTS AND LESS COSTLY PRODUCTS SOCIETY BENEFITS