Market Structures Chapter Six

Highly Competitive Markets Consumers benefit greatly from highly competitive markets Two types: Perfect Competition Perfect Competition Monopolistic Competition Monopolistic Competition

Perfect Competition Definition: Buyers (consumers) and sellers (producers) compete directly and fully under the laws of supply and demand. No one seller controls supply, demand, or prices Also called pure competition

Four Conditions of Perfect Competition 1.Many buyers and sellers 2.Identical Products 3.Informed Buyers 4.Easy Market Entry and Exit No market is perfectly competitive

Example: Agriculture Market in the United States Meeting the four conditions… 1. Independent buyers and sellers—farmers 2. Similar products—corn grown by a farmer in GA is similar to corn grown in TN 3. Informed buyers—labels on produce 4. Easy Exit/Entry—suppliers can easily change specialization in the market

Monopolistic Competition Definition: market in which many producers offer a similar, but not identical, good or service Similar to perfect competition in that it is under supply and demand Much more common than perfect competition

Product Differentiation in Monopolistic Competition Sellers try to point out differences between their products and those of their competitors Product differentiation used to set products apart

Non-price Competition in Monopolistic Competition Competition through advertising, not price Example: Blue jean market “No-name” vs. designer “No-name” vs. designer

Profits By setting a product apart from its competitor, the seller can raise the price above the competitive price Done by: advertising, brand-name loyalty Ex. Godiva Chocolate

Imperfectly Competitive Markets Dominated by 1-4 sellers Two types – Oligopoly Oligopoly Monopoly Monopoly

Oligopolies (Oligopoly) Most common noncompetitive market in the US Definition: market in which a few large sellers control most of the production of a good or service

3 Conditions of an Oligopoly 1.Few Large Sellers Largest 3 or 4 sellers control 70% or more of the market 2.Identical or Similar Products 3.Difficult Market Entry

Oligopolies at Work Non-price competition: sellers attempt to differentiate their products through advertising and name-brand loyalty Interdependent Pricing: Responding to the prices of competitors Pricing War: Sellers aggressively undercut each other’s prices in an attempt to gain the market share

Oligopolies at Work, Continued Cartels: Companies openly organizing a system of price setting and market sharing International carters: diamonds, oil International carters: diamonds, oil Often unstable and short-lived Often unstable and short-lived Collusion: Sellers secretly agree to set production levels or prices Illegal!! Illegal!!

Monopolies Conditions opposite from perfect competition Conditions: 1. Single Seller 2. No close substitutes 3. Difficult Market Entry

4 Types of Monopolies 1.Natural Monopolies Definition: Single seller that produces a good/service most efficiently Example: public and private utilities 2.Geographic Monopolies Limited by geographic location Example: general store in a rural area 3.Technological Monopolies Develop when a producer develops a new technology Example: trident submarines Patents and copyrights 4.Government Monopolies Any market in which the government is the sole seller Example: water, sewage, roads, bridges, canals

Monopolies at Work 3 forces limit seller’s control of prices 1. Consumer demand 2. Potential Competition 3. Government Regulation