Competition and Market Structures Chapter 7 Section 1

Market Structure : the nature and degree of competition among firms operating in the same industry. : the nature and degree of competition among firms operating in the same industry. There are 4 types: There are 4 types:

1. Perfect Competition 5 conditions: 5 conditions: 1. Large # of buyers and sellers 2. b & s deal in identical products --since there is no difference in quality, there is no need to advertise or have brand names there is no need to advertise or have brand names

3. each b & s acts independently 3. each b & s acts independently 4. b & s are well informed 4. b & s are well informed 5. b & s are free to enter into, conduct or get out of business 5. b & s are free to enter into, conduct or get out of business Each individual firm is too small to influence price Each individual firm is too small to influence price Supply & Demand set the equilibrium price Supply & Demand set the equilibrium price There is no real “perfect competition”—it is used to evaluate other market structures There is no real “perfect competition”—it is used to evaluate other market structures The closest to P.C. is farming (farmers market) The closest to P.C. is farming (farmers market)

2. Monopolistic Competition Has the characteristics of perfect competition except: Has the characteristics of perfect competition except: 1. Product differentiation: real or imagined differences between competing products in the same industry 2. Uses non-price competition 1. Advertising 2. Giveaways 3. Free interest for a year

Examples: Examples: Gas stations, banks, cell phone providers—firms that provide basically the same good or service Gas stations, banks, cell phone providers—firms that provide basically the same good or service

3. Oligopoly 1. very few large sellers dominate the industry 1. very few large sellers dominate the industry 2. products may be differentiated (cars) or standardized (steel industry) 2. products may be differentiated (cars) or standardized (steel industry) 3. single firm can change output, sales & price 3. single firm can change output, sales & price Examples: Pepsi, Coke and Dr. Pepper Examples: Pepsi, Coke and Dr. Pepper McDonald’s, Burger King and Wendy’s McDonald’s, Burger King and Wendy’s

Oligopoly continued 4. Act interdependently 4. Act interdependently *Collusion: a formal agreement to act in a cooperative manner *Collusion: a formal agreement to act in a cooperative manner *Price-fixing: agreement to charge the same price for a product *Price-fixing: agreement to charge the same price for a product * both are illegal because it restrains competition * both are illegal because it restrains competition Price wars: when one company lowers their price, others will lower theirs and the next firm will lower theirs, etc. Price wars: when one company lowers their price, others will lower theirs and the next firm will lower theirs, etc.

Oligopoly continued Work together to change price so they depend on advertising for competition Work together to change price so they depend on advertising for competition

4. Monopoly One seller of a product One seller of a product Not many in the US Not many in the US -- Cable & local phone companies are the closest 4 Types of Monopolies:

a. Natural Monopoly Costs of production are minimized by having one firm Costs of production are minimized by having one firm Home phone companies—each company would need their own wires and poles Home phone companies—each company would need their own wires and poles Water or gas companies—each would need their own pipes Water or gas companies—each would need their own pipes Gov’t gives these companies a franchise but will regulate price if necessary Gov’t gives these companies a franchise but will regulate price if necessary

b. Geographic Monopoly Based on the absence of other sellers in a certain geographic area Based on the absence of other sellers in a certain geographic area One drug store in a town One drug store in a town One gas station for the next 200 miles One gas station for the next 200 miles

c. Technological Monopoly Gov’t can grant a patent—an exclusive right to produce, use or sell any new invention for 20 years Gov’t can grant a patent—an exclusive right to produce, use or sell any new invention for 20 years Copyright—art and literary works for a lifetime plus 75 years Copyright—art and literary works for a lifetime plus 75 years

d. Government Monopoly Owned and operated by the gov’t Owned and operated by the gov’t Examples: Examples: Water company Water company Alcoholic beverages (in some states) Alcoholic beverages (in some states) Weapons of mass destruction Weapons of mass destruction

Work with a partner or by yourself to complete the following chart on a separate sheet of paper. You will use it on a quiz later. Work with a partner or by yourself to complete the following chart on a separate sheet of paper. You will use it on a quiz later.

# of Firms One firm Have Influence Over Price? Product Differen -tiation? Adverti- sing? Entry into market Exam- ple PerfectComp. Monop- olistic Comp. Oligop- oly Mono- poly