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1 [How many sellers in each industry]
Market Structures [How many sellers in each industry]

2 Most Competitive Market Structures Basic Cable Rate TXU
Greyhound Natural Monopoly Competition would be chaotic. It is natural to give it to one co. Ex: Utilities Basic Cable Rate Blue Jeans Beauty Shops Monopolistic Competition [Element of monopoly with “product differentiation”] TXU Waste Management Barber Shops Forney High “Price Makers” Government Monopoly Owned & operated by G Ex: U.S. Mail State Highways DART Geographic Monopoly Only seller in a specific area Example: Remote Store Monopoly Oligopoly Many [25-75] sellers Control over price: Some Ex: Blue Jeans U.S. Mail Monopoly [mono(1) poly (seller)] Control over price: Total Product: unique Ex: Comcast Cable TV Rubik’s Cube Monopolistic Competition Perfect Competition Technological Monopoly “Patent” Ex: Rubik’s Cube Market [buyer & seller] Structures [How many sellers] Most Competitive Oligopoly Oliogo (few) poly (seller) [A few control 70% of market Cable TV Duopoly Perfect Competition Very many [100s] of sellers Perfect Competition Monopolistic Oligopoly Pure Monopoly Control over price: Fair Amount Differentiated or Identical Differentiated Oligopoly Differentiated Products Autos & Sneakers Control over price: None Products: Identical (Agricultural & fishery) Reebok Pure Oligopoly Identical Products (steel) [undifferentiated] Price Taker Control over Price

3 The “invisible hand” is omnipotent.

4 Many

5 Market Structure Objectives
1. Characteristics of the four market structures [monopoly, oligopoly, monopolistic competition, & perfect competition] 2. Know the four types of monopolies [Government, Natural, Technology, and Geographic] 3. Know the difference between collusion and price leadership. 4. Know the difference between negative and positive externalities. 5. Summarize anti-trust legislation and review the circumstances surrounding the Justice Dept. case against Microsoft.

6 Market Structure Vocabulary

7 U.S. States Sue Big Music over Price-Fixing
This price-fixing lawsuit against the 5 major recording labels charged that they increased the price of CDs in violation of antitrust laws. “Because of these conspiracies, tens of millions of consumers paid inflated prices to buy CDs of artists including Santana, Whitney Houston, Madonna and Eric Clapton.” The FTC estimated that the recording companies policies[$40 billion industry] forced U.S. consumers to pay as much as $480 million more than they should have for CDs and other music over the last three years. Auto body shops sued paint companies, including Sherwin-Williams, for fixing prices on paint, primer and fillers. Four major toy manufacturers (Hasbro, Little Tykes, Mattel, & Toys R’Us) were sued for conspiring to fix prices of toys. Toys R’Us was accused of brokering an illegal agreement with toy manufacturers to not sell their most popular products to the warehouse clubs.

8 The average child sees 245 ads per day. They
4.0 1.4 1.6 The average child sees 245 ads per day. They see around 30,000 commercials in 1 year. By age 65, on average, we see 3 mil. commercials, which is like watching 3 years of non-stop commercials.

9 among firms operating in the same market (autos).
3 Perfect Competition – has a very large number of sellers (hundreds or thousands) of the same product (any agriculture or fishery product). They are all selling the same undifferentiated products (oranges). 4 Competition – economic rivalry among businesses. 5 Market Structure – degree of competition among firms operating in the same market (autos).

10 Perfect Competition and Price
Four Market Conditions Necessary For Perfect Competition 6A 1. Very large number of sellers (hundreds or thousands). Each seller will have only a small share of the market. B Similar or identical products (sweet corn/brocolli/eggs) which means there is no reason for non-price competition. C Easy entry and exit into the market. D Absence of price controls (too many sellers & consumers). Perfect Competition and Price No one firm controls price. Lowering price would lower profits as consumers would buy similar substitutes. Prices are set by the market rather than by the firms. These firms are “price takers.”

11 Sellers try to decrease competition by making their products different
20 Monopolistic Competition – fairly large number (25-75) of sellers competing to sell slightly differentiated products. Product differentiation (real or imaginary) is vital. This is the most common market structure. Sellers try to decrease competition by making their products different from the others. Since each firm attempts to make its product unique, unique, there is an “element of monopoly”, thus monopolistic competition. Product differentiation, when it is successful, enables a firm to “establish a kind of monopoly” so that loyal customers will prefer it rather than buy from the competition. [They try to monopolize a small portion of the market.]

12 21 Even virtually identical products may be differentiated
by brand name, packaging, or design but they are still similar. They have all the conditions of perfect competition except for product “differentiation.” 22 They use “nonprice” methods of competition such as advertising and improved service to increase sales. Reputation is important [builds loyalty]. Most manufactured goods are made by only a few producers.

13 4 Market Conditions For Monopolistic Competition
25-75 buyers and sellers must exist. Firms act independently but no single firm is large enough to change the supply or price of a good. 2. The products are similar but they emphasize product differentiation (differences among products). This is the one thing that separates monopolistic competition from perfect competition. The differences may be real or imaginary (a refrigerator with plastic or metal trays). Aspirin, by federal law, has to have certain chemicals but people believe highly advertised aspirin is better. Revlon offers 157 shades of lipstick – 41 are pink. 3. Buyers must be well informed about differences in products. Monopolistic competitors rely on informative and competitive advertising. 4. Easy to enter or exit the industry. Few restrictions exist.

14 Examples of Monopolistic Competition
Monopolistic Competition [element of monopoly [differentiation uniqueness] so called monopolistic competition] This is the most common market structure – over 99% of all firms. Examples of Monopolistic Competition Blue Jeans Grocery Stores Candy Bars Dry Cleaners Rock Concerts Pizza Shoe Stores Cassette players Chicken Toothpaste Book Stores Soaps and detergents Restaurants Vacuum Cleaners Furniture Stores Barbershops Beauty Parlors Econ Textbook Co’s “Econ” “Econ,Econ”

15 Other Monopolistic Competition Examples
Janitorial Services Pest Control Air Conditioning Alcohol Treatment Centers Auto Dealers Carpet Cleaning Karate Fingernail Saloons Body Shops Upholstery Cleaners Pet Shops Tire Companies Electrical Contractors Masonry Contractors Window Cleaners Dry Wall Contractors Dermatologists Party Suppliers Copying Dog Grooming Locksmiths Accountants

16 Monopolistic Competition and Price 23 There is some control over price because differentiation creates buyer loyalty [jeans]. Non-price competition is used to control price. Developing brand name loyalty will enable a firm to marginally increase price without losing customers. If the increase is too much, buyers will switch to a competitor’s product. The “Real World” The “real world” of competition involves monopolistic competition & oligopolies. Over 99% of all firms are monopolistic competitors. However, a few thousand oligopolies produce most of the products in the U.S. So, our big firms are oligopolists and our smaller firms are monopolistic competitors.

17 Two Types of Oligopolies
24 Oligopoly – “the chosen few” (3 or 4) firms control 70% of the market. Monopoly – 1 firm industry (Cable TV) Duopoly – 2 firm industry. (Coke & Pepsi) [P&G (47%) & Kim-Clark (30%) in diapers] “Oligo” – few in an industry. (“Big 3 or 4” or even “Big 5 or 6”) Two Types of Oligopolies 25 Pure (Undifferentiated) Oligopoly – 3 or 4 producers dominate the production of an identical product (steel, zinc, copper, aluminum, lead, cement, industrial alcohol) Differentiated Oligopoly – 3 or 4 producers dominate the production of differentiated (similar) products. [typewriters, tires, soap, cigarettes, refrigerators, cereals, TVs & autos]

18 Duopoly – when 2 firms dominate an industry.
Coke products have 43% of the market and Pepsi products have 32%. 1. Coke Classic 2. Pepsi Cola 3. Diet Coke 4. Mountain Dew 5. Diet Pepsi 6. Sprite 7. Dr. Pepper 8. Caffeine Free Diet Coke 9. Diet Dr Pepper 10. Sierra Mist Pepsi’s first commercial in 1939 became so popular, it became a hit record and was played in jukeboxes. A 12-ounce bottle sold for a nickel. Here it is.

19 Oligopoly Examples Autos – “Big 3” – GM, Ford, Daimler-Chrysler-Benz
Big 3 Subscribers[mil.] 51.6 M 47.4 M 40.4 M Market Share of Phone Sales Nokia % Siemens % Motorola 16% L.G.Telecom 7% Samsung 11% Sony % Autos – “Big 3” – GM, Ford, Daimler-Chrysler-Benz Athletic Shoes–“Big 4”–Nike, Reebok, New Balance, Adidas, [Nike made $10 billion in 2004] Beer – “Big 3” – Anheuser-Busch, Miller, & Coors Cereals – “Big 3” – Quaker Oats, General Mills, & Kelloggs TV Networks – “Big 4” – NBC, CBS, ABC & Fox There are also oligopolies in chewing gum, light bulbs, typewriters, photocopiers, and sewing machines. Verizon Wireless AT&T Wireless Sprint Nextel Shox is Nike’s latest hot seller. It is modeled on a 10,000 year old sandal discovered in an Oregon cave.

20 And Who Is Winning The Sneaker Wars?
Nike % Reebok % New Balance 10.9% Adidas %

21 Four Market Conditions For Oligopolies 1
Four Market Conditions For Oligopolies 1. A few sellers control over 70% of market. 2. Firms offer identical or differentiated products (real or imaginary). Advertising important. 3. Product information must be easily available. They use informative advertisement (price, quality, and special features) to introduce new products. 4. There are huge barriers to entry into the industry. The three major barriers are technological knowledge, money, & brand name loyalty In 1980, it cost Ford $3 billion to equip a factory that would produce two new subcompacts Entry is difficult because many have patents or own essential raw materials. This makes it difficult for new firms to try to compete. Oligopoly and Price Oligopolies control price to some degree by creating brand name loyalty and using non-price competition.

22 26 Price Leadership – when one firm, usually the largest
and most powerful in the industry, offers a new product at a certain price. The others then follow because they fear a price war or because they would be better off financially by doing so. In other words, oligopolists play the game, “follow the leader”. Price leadership is legal (unlike collusion) because it does not involve any agreement among competitors. If the competition does not follow the leader’s price, the leading firm may be forced to change its price and fall in line with the prices of the competition. 27 Collusion – a formal price agreement among competitors. This is illegal because it presents a danger to free competition. Even one from one manager to another is illegal.

23 Price-fixing In 1996, Archer Daniels Midland Company, one
of the country’s most influential corporations, pleaded guilty to criminal price-fixing charges and was fined $100 million. That fine was by far the largest ever obtained by the Justice Department in a price-fixing case. The charge was that Archer Daniels conspired to fix the prices of lysine, a feed additive, and citric acid, used in a number of food products.

24 Price-Fixing Fines Vitamin Makers
Hoffman La Roche 40% $500 million fine BASF AG 20% $225 million fine Rhone-Paulene 15% Spilled the beans on co-conspirators Both had to pay a total fine of $725 million because of massive price-fixing that inflated the cost of everything from breakfast cereal to hamburgers over the past decade. The suits were brought by livestock farmers and other purchasers of bulk vitamins who allege they were forced to pay illegally inflated prices. It hurt every American consumer who took a vitamin, drank a glass of milk, or had a bowl of cereal.

25 What was the result of the MIT 1993 Price-Fixing Case?
Eight Ivy League schools agreed to stop colluding to fix prices, and MIT was found guilty of price fixing.

26 “Price Makers” Monopoly – the “power of one”
Basic Cable Rate PalmTran SRCHS Greyhound Waste Management DART Natural Monopoly Competition would be chaotic. It is natural to give it to one co. Ex: Utilities Cable TV Government Monopoly Owned & operated by G Ex: U.S. Mail State Highways U.S.Mail “Price Makers” TXU Monopoly [mono(1) poly (seller)] Control over price: Total Product: unique Ex: Comcast Cable TV Cable TV Rubik’s Cube Technological Monopoly “Patent” Ex: Rubik’s Cube Geographic Monopoly Only seller in a specific area Example: Remote Store Cable TV Monopoly – the “power of one”

27 7 Pure Monopoly – one firm industry [“monopolist”]
Pure Monopoly’s Market Condition 1. One firm is the only seller. Advertising promotes image. 2. No close substitute goods are available. 8 3. Prohibitive barriers to entry in the industry. High invest- ment costs and technological expertise prevent others from entering the market. Legal restrictions make entry in government-supported monopolies nearly impossible. 4. Almost complete control of market price. 9 Monopolist have much control over price because they are the only seller. A higher price would hurt demand. The state may control the price on some legal monopolies. These single suppliers are “price makers.”

28 Four Types of Legal Monopolies
11 1. Natural Monopoly – where competition would be chaotic, it is natural to give the business to one firm. Imagine the confusion if 5 different busses raced each other to the corner to pick up a passenger. Competition would be impractical, inconvenient, & unworkable. 12 Examples: Public Utilities (electric & gas) – privately owned companies (buses-Continental Trailways) but regulated by the government. Comcast Cable TV in Plano. The government monitors the natural monopolies to ensure that they provide quality service at reasonable rates. AT&T had a long-distance telephone natural monopoly for 75 years. Greyhound TXU Electric Waste Management

29 Natural Monopoly Where competition would be chaotic, therefore, it is natural to give the business to one firm Ex’s are utility companies and cable TV Market where average costs are lowest when all output is produced by a single firm They are privately owned, but regulated by the government

30 & government monopolies [government owned] is
13 Government Monopoly – monopoly owned and operated by the government. The difference between natural [privately owned] & government monopolies [government owned] is that these monopolies are owned operated by any level of government. Examples would be interstate highway system, public libraries, public schools, Postal Service, & DART. In most cases, government monopolies deal with economic products needed for the public welfare but which people would not be provided adequately by private industry. Most tend to provide goods that enhance the general welfare rather than seek profits. Pilot Point High [Local G] State G Federal G Dart Dart

31 Examples of Government Monopoly
The Government has control over: U.S. Mail, State highways, and Public schools Bryan Adams Another mugging at Bryan Adams

32 Geographic Monopoly – when a firm is the only seller of a good in a specific location.

33 The “Last Chance Gas Station” is the last one within
50 miles of Mexico. A general Store in a remote community has a monopoly because the area can’t support two stores. Geographic monopolies are not guaranteed.

34 Examples of Geographic Monopoly
“Last Chance Gas Station” Last Chance Gas A general store in the middle of nowhere

35 14 4. Technological Monopoly – results from the
invention of a new product (patent) or when technology changes the way a good is produced. General Dynamics is the only defense contractor with the technology to build Trident Submarines. 16 A patent gives an individual or firm exclusive right to pro- duce, use or dispose of an invention or discovery for 20 years from the date of filing. To obtain a patent, you must go to the Patent Office after doing research to make sure the patent has not already been patented. Then You hire a patent lawyer to file your patent. All of this takes about 18 months. The total cost for a patent runs about $5,000. 17 It is very expensive to wage a patent infringement suit, around $300,000. Polaroid’s camera patent prevailed & won $929 million. Polaroid had accused Kodak of infringing on instant photo patents & it took 10 years to make it to the Supreme Court.

36 Patents Filed Each Year
Fiscal Year Applications Filed 116,427 121,611 126,407 137,069 151,331 163,571 167,715 172,539 174,553 186,123 221,304 191,116 220,773 240,090 261,041 293,244 326,081 333,688 333,452 355,527 384,228 Patents Filed Each Year Why didn’t I think of that?

37 Top 20 Patent Recipients in 2006
Patents Company Patents Company 3,621 IBM Korninklijke 2,451 Samsung Infineon Tech 2,366 Canon TI 2,229 Matsushita Siemens 2,110 Hewlett-Packard Honda 1,959 Intel 1,771 Sony 1,732 Hitachi 1,672 Toshiba 1,610 Micron Tech 1,487 Fujitsu 1,463 Microsoft 1, Seiko 1,051 GE 906 Fuji Photo

38 Some Sad News Today About The Pillsbury Doughboy
A great icon of the entertainment community has died today at age 71, the Pillsbury Doughboy. He died yesterday of a yeast infection and complications from repeated pokes in the belly. Doughboy was buried in a lightly greased coffin. Dozens of celebrities turned out to pay their respects, including Mrs. Butterworth, Hungry Jack, the California Raisins, Betty Crocker, the Hostess Twinkies, and Captain Crunch. The gravesite was piled high with flours. Aunt Jemima delivered the eulogy and lovingly described Doughboy as a man who never knew how much he was kneaded. Doughboy rose quickly in show business, but his later life was filled with turnovers. He was not considered a very smart cookie, wasting much of his dough on half-baked schemes. Despite being a little flaky at times he still, as a crusty old man, was considered a roll model for millions. Doughboy is survived by his wife, Play Dough; two children, John Dough and Jane Dough; plus they had one in the oven. He is also survived by his elderly dad, Pop Tart.

39 Top-Earning Dead Celebrities
18 Copyright – gives the author or artist the exclusive right to publish, sell or produce his work for his life + 50 years. So, copyrights protect written works of art. Top-Earning Dead Celebrities 1. Kurt Cobain $ Ray Charles $10 2. Elvis Presley $ Marilyn Monroe $8 3. Charles Schulz $ Johnny Cash $8 4. John Lennon $ J.R.R. Tolkien $7 5. Albert Einstein $ George Harrison $7 6. Andy Warhol $ Bob Marley $7 7. Theodor Geisel (Dr. Seuss) $ Jerry Garcia $5

40 Practice Quiz [What kind of monopoly do the following have. ] A
Practice Quiz [What kind of monopoly do the following have?] A. Natural B. Government C. Geographic D. Technological ___ 1. Rubik’s Cube ___ 2. Comcast Cable TV in West Boca ___ 3. Florida Gas ___ 4. The “Last Chance Gas Station” ___ 5. SR High School ___ 6. Constructing a state highway between Naples and Tampa ___ 7. Nike’s combo athletic shoe & one-wheel skate ___ 8. Only one man living in an isolated Trailer Park with 50 women

41 Monopoly Quiz A. Natural B. Technological C. Government D. Geographic
1. Palmtran – bus service (supported by taxes) 2. Postal Service (U.S. mail) 3. Boca High School 4. Construction on a state highway (supported by gasoline taxes) 5. Comcast Cable TV in Plano 6. FPL Electric (privately owned) 7. Waste Management (privately owned) 8. Bell Helicopter producing patented V-22 Osprey 9. Polaroid Instamatic (patent) 10. Remote Drugstore in Podunk, FL “Privately owned” “Remote store”

42 Competition and the Market Structure

43 Price Control and the Market Structure
Least control over price Most control over price

44 Characteristics of Market Structures
Very Many Agric. products Fishery Some Extensive Fair Amount Fair amount with differentiated oligopolies Extensive Cable TV Water

45 Antitrust Legislation
Since the 1880s, the federal government had aided competition. To promote efficiency, certain legal monopolies have been allowed to exist. Trusts – legally formed combinations of corporations or companies. In the latter half of the 1800s, cutthroat competition and mergers created trusts in steel, meatpacking, oil, sugar, coal, and tobacco. They were actually large cartels. By the 1880s, the government passed laws to protect competition. 28 Anti-trust legislation – designed to monitor and regulate big business, prevent monopolies and break up existing monopolies. 1. Interstate Commerce Act-1887 – created the ICC to oversee railroad rates. Today it regulates railroads, motor vehicles, & other freight carriers. 2. Sherman Anti-trust Act-1890 – the “cornerstone of anti-trust legislation.” It prohibited any agreements, contracts or conspiracies that would restrain interstate trade or cause monopolies to form. This act protected trade against unlawful restraint & monopoly. It was the 1st significant act against monopolies. Later legislation defines the principles in this act. The Sherman Anti-trust’s failure to define key terms such as “trusts” and “restraint of trade” made it somewhat ineffective. It was not clear what was legal or illegal. This act also ran contrary to the economic theory of laissez-faire (hands-off by the government) attitude of the past 100 years. 29 30

46 Senator John Sherman

47 And What About Microsoft
And What About Microsoft? Should They Be Broken Up Into The “Baby Bills”? Microsoft was accused of forcing computer makers to install its browser [Internet Explorer] as a condition of licensing Windows.

48 31. Economies of Scale [“economies of mass production”] Exist when firms are large enough to take advantage of mass production techniques. Or, “Why it may cost only a little more to produce twice as much.” Variable costs may not change much if workers were under- worked and the oven was not being used to capacity. Fixed cost don’t change

49 The End

50 Market Structure Word Scramble
[From the word scramble below, pick out the 5 correct answers for each market structure] Name 1. ________________ Name 2.________________ *Write the bold face type. Very many (100’s) sellers Price takers Many [25-75] sellers Oligopoly 1._______________________ 2._______________________ 3._______________________ 4._______________________ 5._______________________ Perfect Competition Pure Monopoly Monopolistic Competition A few control 70% of the market Natural, Geographic, Technological, & Gov. One seller Easiest to enter Nike, Reebok, New Balance, and Adidas Comcast Cable TV Homogeneous product [Identical] Economics (college) Textbook Companies (over 50 of these and they are differentiated Identical (pure) or differentiated products Black eyed peas Price Leadership is used Polaroid Instamatic Blue Jean Companies (dozens and differentiated) McDonald’s, Wendy’s, and Burger King Price Maker Beauty Shop Product differentiation gives an element of monopoly

51 Market Structure Word Scramble
[From the word scramble below, pick out the 5 correct answers for each market structure] Name 1. ________________ Name 2.________________ Answers *Write the bold face type. Very many (100’s) sellers Price takers Many [25-75] sellers Oligopoly 1. Few control 70% 2. Nike, Reebok, N.Bal., & Adidas 3. Identical or differentiated 4. Price Leadership 5. McD’s, Wendy’s, & Burger King. Perfect Competition 1. Easiest to enter 2. Homogeneous product 3. Very many sellers 4. Price Takers 5. Black eyed peas Pure Monopoly 1. Nat, Geog, Tech, & Gov. 2. Polaroid Instamatic 3. One seller 4. Comcast Cable TV 5. Price Maker Monopolistic Competition 1. Product differentiation 2. Many sellers 3. Econ Textbook Co’s 4. Blue jean companies 5. Beauty Shop A few control 70% of the market Natural, Geographic, Technological, & Gov. One seller Easiest to enter Nike, Reebok, New Balance, and Adidas Comcast Cable TV Homogeneous product [Identical] Economics (college) Textbook Companies (over 50 of these and they are differentiated Identical (pure) or differentiated products Black eyed peas Price Leadership is used Polaroid Instamatic Blue Jean Companies (dozens and differentiated) McDonald’s, Wendy’s, and Burger King Price Maker Beauty Shop Product differentiation gives an element of monopoly


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