Market Structures How does competition affect your choices? Mrs. Bradley Economics

Perfect Competition Four characteristics Many buyers and sellers in the market. Sellers offer standardized products (products that are nearly the same). Buyers and sellers must be well-informed. Sellers must easily be able to get into and out of the market.

Terms to know Perfect competition: a market structure in which a large number of firms all produce the same product, and no single seller controls supply or prices. Commodity: a product, such as petroleum or milk, that is considered the same no matter who produces or sells it

Terms Barrier to entry: any factor that makes it difficult for a new firm to enter a market. What businesses have a lot of barriers?

Imperfect Competition Barriers to entry can lead to imperfect competition. Imperfect competition: any market structure besides perfect competition What factors prevent firms from entering a market?

Start-up Costs The costs that a new business must pay before it can open are called start-up costs. High start-up costs make it difficult to enter a market.

Technology How does technology prevent firms from entering the market? Training costs Machinery Computers

Perfect competition… … keeps prices and production costs low. BUT does perfect competition exist???

Monopoly …not the game. A monopoly is a market in which a single seller has control. A drug that only one company produces. A toy that only one company produces.

Three characteristics of a monopoly 1. There is only one seller. 2. There are no close substitutions. 3. Getting into and out of the market is difficult. Can you think of some examples of monopolies?

Economies of scale The factors that cause a producer’s average cost per unit to fall as more units are produced. Monopolies have economies of scale. lower production costs lower cost loans cheaper raw materials

Government Monopoly .. A monopoly created by the government. How? By limiting competition through Granting patents Granting copyrights Protecting ingenuity inspires people to create. Other people can’t steal their work.

Monopolies use …. Price discrimination: charging different consumers different prices. This type of pricing creates more sales – those who are willing to pay the high price and those who can only afford the lower price. Other companies besides monopolies use price discrimination.

Market Power The ability of a company to control prices and total market output. Monopolies definitely have it….. BUT so do other companies.

Limits to price discrimination Price discrimination requires 3 conditions: Some market power Distinct customer groups Difficult resale: so people can buy low and resell at a higher price.

Monopolistic Competition Many companies compete to sell products that are almost the same. Jeans, cereals, shoes, restaurants Can you think of any examples?

Conditions necessary for monopolistic competition 1. Many firms 2. Few barriers to entry 3. Little control over price 4. Differentiated products Differentiation: making a product different from other, similar products

Nonprice Competition A way to attract customers through style, service or location, but not a lower price. There are four forms of nonprice competitions.

Nonprice Competition Physical features: Location: New color, size, shape, taste Location: Gas stations, movie theaters and grocery stores succeed or fail based on their locations.

More factors Service Level: Advertising: Better service attracts and keeps customers. Advertising: Firms advertise because it works.

Oligopoly A market structure in which a few large firms dominate a market. 1. Few sellers in the market. (cereals, soft drinks, major appliances) 2. A nearly standardized product If one company comes out with a new flavor, others soon copy. What’s an example of this? 3. Difficulty entering the market Usually because start-up costs are very high.

How do oligopolies control the market? Prices depend on what the other sellers do. Sometimes oligopolies break the law by trying to control prices. Collusion: a secret agreement among competing firms to cooperate with one another. Price fixing: an agreement among firms to sell at the same or very similar prices. Cartels: a formal organization of producers that agree to coordinate prices and production

ILLEGAL! Price fixing and cartels are against the law in the United States! But not in other countries. What is the most well-known cartel?

Regulation and Deregulation Sometimes the government regulates competition. Besides price fixing, some firms have used predatory pricing to drive other firms out of the market. Predatory pricing: selling a product below cost for a short period of time to drive competitors out of the market.

Government protects competition People demanded protection from big companies. Sherman Antitrust Act 1890 Trust: an illegal grouping of companies that discourages competition. Antitrust laws: laws that encourage competition in the marketplace.

Antitrust laws exist… .. To break up monopolies. AT & T -- was the only phone company at one time Merger: when two or more companies join to form a single firm. The government can BLOCK mergers if a monopoly will result.

Deregulation … the removal of some government controls over a market. Occurred in the late 1970’s and 1980’s. Mixed success. Airlines: lower prices, poorer service Cable television: higher prices