1. Market Structures & Competition
There are several possibilities for free market competition:
Perfect Competition
Monopolistic Competition
Monopoly
Oligopoly
Inadequate Competition

2. Perfect Competition
A large # of buyers and sellers exchange identical products under 5 conditions:
1. Large # of buyers and sellers
2. Products are identical between suppliers
3. Buyers and sellers act independently
4. Buyers and sellers are well-informed
5. Buyers and seller are free to enter, conduct, or get out of business. NO Barriers to entry other than start-up costs or technology

3. Price and Output One of the primary characteristics of perfectly competitive markets is that they are efficient. In a perfectly competitive market, price and output reach their equilibrium levels. .
Market Equilibrium in Perfect Competition
Quantity
Price
Demand
Equilibrium Price
Equilibrium Quantity
Supply

4. Monopolistic Competition
In monopolistic competition, many companies compete in an open market to sell products which are similar, but not identical. Best example: OTC pain relievers
1. Many Firms--As a rule, monopolistically competitive markets are not marked by economies of scale or high start-up costs, allowing more firms.
2. Few Artificial Barriers to Entry--Firms in a monopolistically competitive market do not face high barriers to entry.
3. Slight Control over Price--Firms in a monopolistically competitive market have some freedom to raise prices because each firm's goods are a little different from everyone else's. EX: Tylenol, Aleve, and Bayer
4. Differentiated Products--Firms have some control over their selling price because they can differentiate, or distinguish, their goods from other products in the market. EX: Excedrin better for headache than Tylenol

5. Non-Price Competition
Nonprice competition is a way to attract customers through style, service, or location, but not a lower price
1. Characteristics of Goods--The simplest way for a firm to distinguish its products is to offer a new size, color, shape, texture, or taste.
2. Location of Sale--A convenience store in the middle of the desert differentiates its product simply by selling it hundreds of miles away from the nearest competitor.
3. Service Level--Some sellers can charge higher prices because they offer customers a higher level of service. EX: Insurance companies
4. Advertising Image--Firms also use advertising to create apparent differences between their own offerings and other products in the marketplace.

6. Oligopoly
Oligopoly describes a market dominated by a few large, profitable firms through collusion or cartel. It is further away from perfect competition than monopolistic competition is. Final prices are higher for consumers.
Collusion--an agreement among members of an oligopoly to set prices and production levels. 2 forms of collusion: Price- fixing is an agreement among firms to sell at the same or similar prices. Dividing up the market is another. Collusion is illegal in the U.S.
Cartel--an association by producers established to coordinate prices and production.
Oligopolists act independently by lowering prices soon after the first seller announces the cut, but they typically prefer nonprice competition.

7. Activity: Deciding How Much to Produce

8. Monopoly Only 1 seller of a particular product.
It’s VERY DIFFICULT to define a true monopoly
Americans prefer competitive trade; few monopolies in U.S.
The monopolist is larger than a perfect competitor, allowing it to be a price MAKER.
Herfendahl Index used to measure monopolies; nowadays the trend is to analyze Barriers to Entry

9. Types of Monopolies
Economies of Scale--If a firm's start-up costs are high, and its average costs fall for each additional unit it produces, then it enjoys what economists call economies of scale. An industry that enjoys economies of scale can easily become a natural monopoly. Good example: Broadband and Cable TV industries
Natural Monopolies--a market that runs most efficiently when one large firm provides all of the output. Sometimes the development of a new technology can destroy a natural monopoly.
Geographic Monopoly—occurs when a location cannot support two or more businesses EX: Small-town drugstore or barbershop
Government Monopoly—see next slide

10. Types of Gov’t Monopolies
Technological Monopolies
The government grants patents, licenses that give the inventor of a new product the exclusive right to sell it for a certain period of time, and copyrights, the exclusive right to protect written or performed work. EX: Artists get lifetime + 50 yrs.
Franchises and Licenses
A franchise is a contract that gives a single firm the right to sell its goods within an exclusive market. A license is a government-issued right to operate a business. Local cable companies are frequently franchised.
Industrial Organizations
In rare cases, such as sports leagues, the government allows companies in an industry to restrict the number of firms in the market.

11. Interesting Thoughts About Monopolies…
Anti-trust lawyers try to expand the definition of monopoly; corporate attorneys try to narrow it.
Even if there is no competition, you must act as if there are other competitors, or you will provide an incentive to compete
Efficiency is NOT a barrier to entry.
EX: Microsoft wins because its software is compatible with everything. Apple screwed up. Don’t like Microsoft? Try Linux, or try to beat Microsoft.
Large companies can spring up to take on large monopolies who practice predatory pricing.

12. Predatory Pricing
The concept: Drive your competitors out of business by charging less than cost for a good or service. Once your opponents are gone, raise prices and screw consumers.
How do you define it? Grocery stores often sell some items under cost to entice consumers. Is that wrong?
Predatory pricing cannot work in the long-term.
German Bromine Cartel existed around Sold bromine for 45¢. Dow in the U.S. sold for 36¢. Germans got mad, sold bromine for 15¢. Dow bought up all the bromine and sold it in Europe at 27¢! Germans eventually gave up.

13. More on Efficiency John D. Rockefeller led Standard Oil
At one point, he owned 90% of the refineries in the U.S.
Company was broken up when he only owned 64%.
Yet, under Rockefeller, the price of kerosene had DROPPED!!!
1869– 30 cents/gal.
1880—9 cents/gal.
1897—5.9 cents/gal. (cheaper than electricity)

14. Inadequacies in the Market
Inadequate competition—decreases in competition due to mergers/acquisitions can create market failure
Resource problems: Inefficient resource allocation occurs when there’s no incentives to use resources wisely. Resources must also avoid immobility (in case a market tanks)
Companies may not market products properly, even if they are cheaper and better (Sony Betamax loses to JVC VHS)
Monopolies can reduce supply, raise prices
A large business can exert political power (USX)
Market failures on the demand side are harder to correct than failures on the supply side.
Consumers, businesspeople, and government officials must be able to obtain market conditions quickly and easily.

15. Price Discrimination
Price discrimination is the division of customers into groups based on how much they will pay for a good.
Although price discrimination is a feature of monopoly, it can be practiced by any company with market power. Market power is the ability to control prices and total market output.
Targeted discounts, like student discounts and manufacturers’ rebate offers, are one form of price discrimination.
Price discrimination requires some market power, distinct customer groups, and difficult resale.

16. Monopolistic Competition
Comparison of Market Structures Markets can be grouped into four basic structures: perfect competition, monopolistic competition, oligopoly, and monopoly.
Comparison of Market Structures
Number of firms
Variety of goods
Control over prices
Barriers to entry and exit
Examples
Perfect Competition
Many
None
Wheat,
shares of stock
Monopolistic Competition
Many
Some
Little
Low
Jeans,
books
Oligopoly
Two to four dominate
Some
High
Cars,
movie studios
Monopoly
One
None
Complete
Public water

17. Section 3 Review
The differences between perfect competition and monopolistic competition arise because
(a) in perfect competition the prices are set by the government.
(b) in perfect competition the buyer is free to buy from any seller he or she chooses.
(c) in monopolistic competition there are fewer sellers and more buyers.
(d) in monopolistic competition competitive firms sell goods that are similar enough to be substituted for one another.
An oligopoly is
(a) an agreement among firms to charge one price for the same good.
(b) a formal organization of producers that agree to coordinate price and output.
(c) a way to attract customers without lowering price.
(d) a market structure in which a few large firms dominate a market.

18. Deregulation
Deregulation is the removal of some government controls over a market
Deregulation is used to promote competition.
Many new competitors enter a market that has been deregulated. This is followed by an economically healthy weeding out of some firms from that market, which can be hard on workers in the short term.
EX: Telecommunications sector in U.S. Effects have been mixed.

19. Government and Competition
Government policies keep firms from controlling the prices and supply of important goods. Antitrust laws are laws that encourage competition.
Sherman Antitrust Act (1890) was the 1st U.S. law against monopolies
Clayton Antitrust Act (1914) outlawed price discrimination
Federal Trade Commission (1914) was empowered to issue cease and desist orders to companies practicing unfair business practices
Robinson-Patman Act (1936) outlawed special discounts to some consumers
Government also taxes to regulate businesses with negative externalities (Chemical manufacturers)
Government also requires public disclosure

20. Section Review—Role of Gov’t
Antitrust laws allow the U.S. government to do all of the following EXCEPT
(a) regulate business practices.
(b) stop firms from forming monopolies.
(c) prevent firms from selling new experimental products.
(d) break up existing monopolies.
The purpose of both deregulation and antitrust laws is to
(a) promote competition.
(b) promote government control.
(c) promote inefficient commerce.
(d) prevent monopolies.