Market Structures In Chapter 7, We will examine four market structures through the lens of competition

The 4 Structures Perfect competition Monopolistic competition Oligopoly Monopoly

Conditions of perfect competition Many buyers and sellers Identical products Well informed buyers and sellers Easy entry/exit to market

About Perfect Competition It doesn’t really exist, but the commodity market comes close. Commodity- a g/s that is the same no matter who produces it. Examples of commodities: Corn, grain, oil, paper, milk, gasoline “Barriers to Entry” refers to all that makes it difficult to enter a market, like start up costs and “know how.”

Weakness of markets that are almost perfectly competitive Prices are so close to marginal cost of output, that profits are small. This is why the U.S. finds it necessary to subsidize farmers, and why it is so hard to get ahead in the unskilled labor market.

Strength of Perfect Competition Buyers are aware of and can easily get the best price for a g/s

Conditions of Monopoly Only one seller High barriers to market entry Only one type of product is produced Exist in markets where there are economies of scale, which means that the average cost per unit drops as more of a g/s is produced.

Types of Monopolies Natural monopoly- markets where it is most efficient to have one seller. Examples: Public water, electric companies have geographic monopolies Government Monopoly- the government creates a monopoly, like the postal service use to be Or by issuing a patent (gives a company exclusive rights to be the soul provider of a g/s) Or by issuing a franchise that allows a single company to be the only provider in a market

Strength of Monopoly Enables a company to make large profits If properly regulated, monopolies can offer a less expensive g/s, or have less of an environmental impact Companies hopes’ for a patent encourage research and development.

Weakness of Monopoly If unregulated, monopolies will charge higher prices for a g/s and cause a shortage. Once a monopoly is obtained, there is less incentive for innovation. Monopoly can lead to unfair price discrimination, where different groups of consumers are charged different prices.

More detail about weakness of monopoly Profit is maximized when marginal cost = marginal revenue (which is the price of a g/s. Because a monopoly is the only seller of a g/s in a market, it has total control of marginal revenue (pricing), and it will likely be most profitable to inflate prices. This ability is called Market Power. Example: De Beers (youtube)

Conditions of Monopolistic Competition Many buyers and sellers Few or low barriers to entry Slightly different products Sellers have slight control over price Firms use nonprice competition- when firms use advertising, location, level of service, and slight difference of product to sell a g/s.

Examples of Monopolistic Competition Toothpaste companies- sell us on the idea that their product is better at whitening teeth, fighting tooth decay, or freshening your breath. Gas stations spring up in locations where there is little competition. Beverage companies associate their products with status, sexuality, health benefits, energy boosting, etc. etc. etc.

Weakness/Strength of Monopolistic Competition Strength Many choices for buyers Sellers have only slight market control, so prices move close to equilibrium Sellers can easily move in and out of the market Weakness Consumers’ minds are manipulated into believing that there is a substantial difference between products. This manipulation causes consumers to look for easy solutions to our desires instead of the harder, yet better solutions. We all must endure massive amounts of advertising, even when a market does not pertain to us.

Conditions of Oligopoly A few large firms dominate a market High barriers to market entry These big firms cooperate to inflate prices for higher profits, or decrease prices to crush upstart competition. This is called price fixing. Collusion- firms in this market may also agree to divide the market, or limit production, along with fixing prices.

Examples of Oligopoly Cartels- a formal organization of producers that agree to coordinate prices and production, like OPEC. Airplane manufacturers- Boeing and Airbus Cellular phone market- AT&T, Verizon, Sprint, and T-Mobile control 89% of market.

Oligopoly Strengths Firms can make large profits from economies of scale and price manipulation. Consumers can benefit if firms get involved in a price war. Weakness Most often, consumers must pay higher prices because of price manipulation. New suppliers have a very difficult time entering such markets because of barriers to entry and the ability of well established companies to drive them out.

Gov’t Regulation and Deregulation When lack of competition in a market leads to firms, (or a firm) taking advantage of consumers, the gov’t creates regulations to create competition, guarantee an adequate product is being supplied. The gov’t sometimes chooses to deregulate a market if the market has changed, such as when a natural monopoly is no longer the best model, or deregulation encourages market entry by new suppliers. Deregulated industries; airlines and banks

A little Gov’t History on Regulation of Industry The Commerce Clause of the Constitution-To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes; Sherman Anti-Trust Act (1890)- outlawed mergers and monopolies that limit interstate commerce. The Sherman Act was used to break up railroad monopolies and Rockefeller’s Standard Oil b/c they engaged in predatory pricing.

A little Gov’t History on Regulation of Industry The Clayton Anti-Trust Act (1914)- strengthened the Sherman Act by: 1.Defining activities that limit competition or created monopolies 2.Specified procedures to bring law suits against offending companies 3.Made union practices like boycotts and non- violent picketing legal