MARKET STRUCTURES AND COMPETITION

Market Structure The nature and degree of competition among firms operating in the same industry Markets are classified according to certain structural characteristics Pure competition, monopolistic competition, oligopoly, and monopoly

PURE COMPETITION A large number of buyers and sellers exist – no single buyer or seller can affect price Buyers and sellers deal in identical products (ex. salt) Each buyer and seller acts independently – competition keeps price low Buyers and sellers are reasonably well-informed about items for sale If everyone is informed, no one would be way off on price Buyers and sellers are free to enter into, conduct or get out of business

REALITY Pure competition does not exist to any great degree - for this reason it is considered a theoretical situation It is studied in order to evaluate other market structures Any market situation that lacks any of the conditions above is considered imperfect competition Most/all firms fall into this category

Monopolistic Competition Characteristics Has all the characteristics of pure competition except the fact that the products sold are not identical product differentiation – the products are similar but not identical Differences can be real or perceived real differences example – athletic shoes perceived difference example – aspirin

Monopolistic Competition Non-price Competition When the product is differentiated, price competition is no longer the issue Advertisements try to convince consumers that the product is somehow better than the other brand Heavy advertisement and promotion from these types of companies If you can convince consumers you have a better product, you may be able to get a higher price for it – but not too much

Monopolistic Competition Profit Maximization There is still price competition so you cannot raise your price too high Producers will maximize profits by using the market price for their product as a guide to decide how many will be produced and sold

OLIGOPOLY Characteristics Market structure in which very few large sellers of a product dominate Product can be differentiated (autos) or identical (steel) Due to few number of firms, one firm can cause a change in output, sales and price in the industry as a whole Because there are so few firms, whenever one firm does something, the other firms usually follow

COLLUSION When firms work together to decide on price and output Example is price fixing, usually above the market price This is against the law in the US, but some does still take place

OLIGOPOLY Pricing Behavior Since they typically follow each other one firm can lower the price and expect the others to follow This can lead to a price war, prices could go lower than the cost of producing the product (losses) One firm can hope that the other firms raise their prices if they do, but there is no guarantee and you could lose business These firms will typical use non-price competition to attract customers Use advertising campaigns, change the product in some way to make it “better”

MONOPOLIES Characteristics Exact opposite of pure competition Market structure in which there is only one seller of a particular product with no close substitutes Very few in the US economy - Why? we have traditionally disliked monopolies and have tried to outlaw them Its usually easy to find a reasonably close substitute for most products new technologies often introduce products that compete with existing monopolies No pure monopolies exist, but some firms come close

TYPES OF MONOPOLIES Natural Monopolies A situation in which costs are minimized by having a single firm produce the product The nature of the industry dictates that society would be better served by only one supplier Telephones, gas, electric, public transportation To set up telephone lines for multiple carriers, pipes for multiple gas companies, electricity for multiple suppliers would be chaos and not economically viable Utility companies granted permission from the government to act as a monopoly in a certain area, but they must also follow regulations

TYPES OF MONOPOLIES Geographic Monopolies A monopoly exists because no other business in the immediate area offers any competition Gas Station in middle of nowhere This may not last as others decide to start in the area to compete

TYPES OF MONOPOLIES Technological Monopolies A firm or individual has discovered a new manufacturing technique or has invented or created something entirely new I-phone Hybrid car If you get a patent on the product, no one else can legally produce it

TYPES OF MONOPOLIES Government Monopoly A business the government owns and operates Found at all levels and are generally products the private sector may not adequately provide Local water authorities, state liquor control, federal –uranium