1. Market Structures

2. Perfect Competition Monopolistic Competition Oligopoly Monopoly

3. Perfect Competition Many buyers and sellers Each participant sells a homogenous (identical) product Buyer will not pay extra for one particular company’s goods because they are the same Buyer always chooses the supplier with the lowest price

4. Perfect Competition Most consistently meets the criteria of the pure supply and demand model

5. Perfect Competition Competitors known as “price takers” No control over the price of their product Price is set by the laws of supply and demand at market equilibrium Can sell as much product as they can produce at market price and receive a small profit

6. Perfect Competition Entry and exit in the market is easy Buyers and sellers are well-informed by the market about products and prices (presumes perfect information.)

7. Perfect Competition Example: Share in the stock market – When buying a share of a company’s stock, you are buying a share of ownership in the company that issued the stock – The value of all shares increases and decreases equally – No difference between shares of stock (within the same class of share)

8. Perfect Competition Example: Share of stock There are many shares available from any particular corporation Any adult may buy a share Entering the market (buying a share) and exiting the market (selling a share) is simple because stock is very liquid Liquid assets are those that can be easily and quickly sold at their market value for cash

9. Perfect Competition Example: Share of stock Buyers have relevant information about a stock Price Performance over time Information about the stock is regularly published and available from: The stock market itself Financial media Print: Wall Street Journal; Financial Times Television: CNBC, Fox Business News

10. Commodities Category of products that exists in perfect competition – Often (but not always) substances that come from the earth – The same or virtually the same no matter where produced – Maintain roughly universal price – Fungible = equivalent no matter who produces it

11. Commodities – Examples of Commodities Notebook paper Milk Petroleum Metals – Primarily traded in the U.S. on the: – Chicago Board of Trade – New York Mercantile Exchange (“The Merc”)

12. Monopolistic Competition Similar to perfect competition Biggest exception is the nature of the product itself Includes most retail markets where there are a number of competing sellers

13. Monopolistic Competition Many buyers and sellers Characterized by low economies of scale and low start up costs Economies of scale – the more a company makes, the less expensive each unit becomes Start up costs – non-recurring costs associated with setting up a business

14. Monopolistic Competition Distinguished from perfect competition by product differentiation Products similar enough to be substitutes but are not identical Each firm holds a monopoly over its own product Firms have freedom to make products different enough in some way to attract buyers

15. Monopolistic Competition Few barriers to entry No patents, franchises, or legal limitations to enter market Competitors enter market with ease

16. Monopolistic Competition Too many producers to coordinate to keep out new competitors Like perfect competition

17. Monopolistic Competition Non-price competition allows producers some control over prices Compete on variables other than price: style, quality, color, etc. Advertise to try to differentiate goods to attract consumers

18. Non-Price Competition

19. Monopolistic Competition Example: Shirt industry Plenty of shirts available on the market All serve same basic function However, there is variety demanded by consumers: Style, Color, Types, Quality, Design

20. Oligopoly Few sellers in the market Economists define as when 4 of the largest firms produce 70-80% of the output Working alone or together, dominant firms set prices for goods

21. Oligopoly Attempt to avoid price competition, price deflation Could trigger a downward spiral of competitively lower prices Companies could lose profits without gaining market share

22. Oligopoly Market leader is usually also the pricing leader Market leader – the company with the largest market share Market share = size of the company/size of the industry

23. Oligopoly Pricing leader – the company that usually makes pricing changes first, causing other industry participants to adjust their relative prices in response

24. Oligopoly Significant barriers to entry Accounts for the fact that few survive the competition High start-up costs Strong customer loyalty Long established brands Government regulations

25. Oligopoly Sometimes due to huge economies of scale Average cost of production decreases as output increases A few firms reach these economies of scale and levels of efficiency before the market becomes too crowded

26. Oligopoly Competitors often able to coordinate to not lower prices in ways that avoid breaking government anti-trust laws (press releases)

27. Collusion An agreement between 2 or more parties made in secret to illegally limit competition

28. Cartel A formal agreement among “competing” firms to fix prices, marketing, and production

29. Antitrust Laws A collection of laws which regulates businesses to promote fair competition for the benefit of consumers Sherman Act of 1890

30. Differentiated Oligopoly Products are not exactly alike according to style and design Work to make their brands and models stand apart Makes non-price competition the most distinguishing characteristic

31. Differentiated Oligopoly Each firm must find its own way to win customers without lowering prices Example: Auto industry Automobile industry financing incentives Free service plans Heavily advertized features of models to make them stand out from others

32. Differentiated Oligopoly Example: Breakfast cereal industry Only 4 cereal makers 100s of brands appealing to wide range of tastes

33. Pure Oligopoly Products are homogenous (identical) Cannot be differentiated Like perfect competition in this respect Only a few producers Unlike perfect competition

34. Pure Oligopoly Non-price competition exists, but difficult Must build image, but usually without large advertising budgets Service Speedy delivery Quality service

35. Pure Oligopoly Example industries: Salt Sand Gravel Glass windows

36. Monopoly Single seller of goods produces 70-80% of output Disliked because they are “price makers” Discouraged by anti-trust laws AT&T was last true example (1981) Before cellular communication and Internet NFL, NBA, MLB all operate under government-sanctioned monopolies

37. Monopoly Forms when barriers to entry are very high High start-up costs Low per-unit operating costs No substitutes Little to no non-price competition Due to unique nature of the good or service being monopolized

38. Monopoly Government sometimes encourage monopolies Patents issued by the Congressional Patent Office Give inventor or developer of a new product or service exclusive operating rights for a set period of time Guarantee companies can profit from costly research without competition Encourages firms to develop new products that benefit all, and contribute to higher standard of living Patents usually expire after a number of years

39. Monopoly Government licensing Utilities often have exclusive rights to operate in a certain locality Water Electric Pay a licensing fee to a city, county, or commission

40. Monopoly Government franchising and licensing (cont’d) In a competitive market competing utilities would: Run separate lines Clutter landscape Possibly make service unprofitable for both utilities

41. Monopoly Companies are also franchised to do exclusive business in a government facility Food concessions at government-built stadiums Corporate pizza business in school cafeteria

42. Duopoly A market structure in which two companies control at least 70-80% of the market.