1. CHAPTER 7 Market Structures

2. Market  An arrangement that allows people to make voluntary exchanges with one another, whenever and wherever.

3. Five Categories of Market Structures  Number of Firms in the industry  Type of Product sold  Ease of entry and exiting the industry  Amount of information about the market available  Degree of Price control

4. Types of Market Structures  Perfect or pure competition  Monopolistic Competition  Oligopoly  Monopoly

5. Fill in the Blanks  You will fill in the blanks on the table for each market structure  However, you will also be filling in other information on your Worksheet as we go through each structure  PAY ATTENTION!!!

6. Perfect Competition

7.  Market structure in which a large number of firms all produce the same product  Standardized or homogeneous product – identical, undistinguishable  Commodity: product that is the same no matter who produced it Oil, corn for cattle, wheat, stocks, apples

8. Perfect Competition: Start here 4A  Very easy to enter or leave the market  No government entity prevents entry or exit  Barriers to entry – any factor that makes it difficult for a new firm to enter a market (technology/start-up costs) Technology - Some markets require a high degree of technological know-how (computers, software) Start-up costs – expenses a firm must pay before it can begin to produce and sell (building, equipment, employees, etc.) Start-up costs for a supermarket would be considerably more than for a sandwich shop

9. Perfect Competition  Information about the products are complete – informed buyers & sellers  Trust me – every farmer knows the latest fertilizer or hybrid seed available  They meet every morning at the coffee shop in the winter and discuss this  No price controls  Price is set at marginal cost – very efficient  Price Takers – could take less but they are not stupid!!!!

10. Imperfect Competition  Market structure that does not meet the condition of perfect competition  i.e. monopoly, monopolistic competition, oligopoly

11. Monopolistic Competition  Market structure in which many companies sell products that are similar but not identical  Price Searchers – can change the price of their products and still expect to sell some, not all, of their units  Differentiated products – distinguishable – different from other similar products (Gore-Tex vs. eVent)

12. Non-price Competition: Allows for different pricing to attract customers through:  Physical  Color, shape, size, texture, function  Location –  New York penthouse, Paris gown, last gas for 100 miles  Service Level  Warranties, customer service  Advertising, image, status  Packaging  Best value – “New and Improved”  Prestige to drive a BMW

13. Monopolistic Competition  Low barriers to entry  Easy to enter or exit  Make handbags – sell them at Saturday market  Reasonably complete information  Some price control – nonprice  Older firms can steal new firms sales so they can’t charge too much  Examples: breakfast cereals, hair salon

14. Toothpaste- Real or Perceived Product Differentiation Regular Flavor Crest ToothpasteGeneric Regular Flavor Fluoride Toothpaste Ingredients: “Active: Sodium Fluoride (0.15% w/v fluoride ion) Inactives: Sorbitol, Water, Hydrated Silica, Trisodium Phosphate, Sodium Lauryl Sulfate, Flavor, Sodium Phosphate, Xanthan Gum, Carbomer 956, Sodium Saccharin, Titanium Dioxide, FD&C Blue No. 1” Ingredients: “Sodium Fluoride in a Dentifrice Base of Sobitol, Water, Hydrated Silica, Trisodium Phosphate, Sodium Lauryl Sulfate, Flavor, Sodium Phosphate, Xanthan Gum, Carbomer 940, Sodium Saccharin, Titanium Dioxide, FD&C Blue No. 1” Ingredients are essentially the same, the price of Crest is not the same as the price of the generic. PLEASE STOP HERE! Show Videos

15. Oligopoly  A market structure in which a few large firms dominate a market  Very profitable  Four largest firms produce at least 70-80 percent of the output

16. Oligopoly  Can be identical products – steel beams  Can be differentiated – autos  Difficult to enter or leave  expensive to operate  High start-up costs  Government licenses  Patents  EXAMPLE: Airline industry – gate prices

17. Oligopoly  Incomplete Information  Closely guarded secrets what are on new cars each year  Life each new episode of Lost  Varying degrees of price control  Cartel – a formal organization of producers that agree to coordinate prices and production  EXAMPLE: OPEC

18. Oligopoly Activity – SUB SKIP  Three to a group - grab your partners  Goal – make as much money as you can for your firm  Decisions – price your product high ($4.00) or low ($3.00)  Review costs/revenue sheet  Round 1 - oldest goes first – using your hand signal pricing high or low (thumb up or down)  #2 and #3 privately record your price  Figure profit  Round 2 – person to left of oldest signals high or low  #1 and #3 privately record your price  Figure profit  Round 3 – person left signals high or low  #1 and #2 privately record your price  Figure profit  REPEAT

19. Oligopoly  Activity is an example of cartel  Doesn’t work if someone breaks agreements  Iraq is a member of OPEC  Before Iraq War they were sneaking oil out and keeping prices lower Illegal in the U.S.

20. Oligopoly  Price War – series of competitive price cuts that lowers the market price below the cost of production  Done to win market share Price Fixing – agreement among firms to charge one price for the same good Collusion – agreement among firms to divide the market, set prices, or limit production Illegal in U.S.

21. Oligopoly  Price Leadership – when one company increases their price and other companies follow  Brand Loyalty – inelastic to certain customers – doesn’t matter if the price changes they are not changing brands  Example: Coke vs. Pepsi  Examples: Auto, Movie Studios, TV

22. Government Regulation  Trust is a business combination like a cartel  Government Regulates by passing Antitrust laws, which encourages competition in the marketplace  Sherman Antitrust Act: outlawed mergers and monopolies that limit trade between states  Gave government right to regulate industry for the first time  Broke up monopolies – At&T, Standard Oil

23. Mergers: Combination of two or more companies into a single firm  Justice Department has to approve major mergers in the United States  Mergers reduce competition which leads to higher prices, and is why the government regulates them by not allowing certain mergers to occur.

24. Deregulation: The removal of some government controls over a market  Examples: airlines, natural gas, banking, trucking, railroads, T.V. broadcasting, cable  Many people criticize the government involvement as creating inefficiencies in industries and causing higher prices  Deregulation led to Banks getting into more than just loaning out and storing money. Caused events like our last recession

25. Monopoly  A market structure dominated by a single seller  Single or unique product with no close substitutes  Barriers to entry are very high  Start-up costs, location, product, convenience  Complete information about product  Control price – can take advantage of monopoly power and charge more

26. Economies of Scale  Factors that cause a producer’s average cost per unit to fall as output rises  Ex: Johnny Jackson bought out Circle K  Each company was advertising in the same market – Jackson’s advertising budget cut in half when he bought Circle K  Cuts costs of products in stores  Economies of Scale can cut advertising and increases customer base which can eventually create a monopoly

27. Natural Monopoly  Market that runs most efficiently when one large firm supplies all of the output  Government allows it and then regulates it  Examples: water, power, telephone, bus lines, sewer, dames  Very expensive to operate and start  Don’t want another set of power lines running next to the ones we already have - cell towers

28. Government Monopoly  Created by the government to create barriers to markets  Technological monopolies  Patents – exclusive right to sell a product for 20 years Benefits: Rewards inventors and companies who put a lot of money into research and development of a product (RX), and allows companies to maximize their profits Costs: Can cause high prices

29. More Rights  Copyright – life of author or 50 years  Copyright infringements are the rage  Piracy – Napster – making CD’s  Trademarks – special design, name, or unique symbol that identifies a product, service or company, usually registered and protected by law

30. Trademarks

31. Franchises and Licenses  A franchise is a contract that gives a single firm the right to sell its goods within an exclusive market.  Contract by a local authority (MVHS concessions and vending machines)  A license is a government-issued right to operate a business.  Examples: radio & TV broadcasting frequencies

32. Price Discrimination  Division of customers groups based on how much they will pay for a good  Firms have to have market power (ability to control prices and total output) to make it work  Need distinct customer groups Discounted airline fares Rebate offers Senior citizens or student discounts Children eat free on Monday nights