1. Chapter 7
Market Structures

2. 4 Types of Market Structures
Perfect Competition
Monopolistic Competition
Monopoly
Oligopoly

3. Perfect Competition
A market structure in which a large number of firms all produce the same product
Production is small
Does not influence prices

5. 4 Conditions for Perfect Competition
Many buyers and sellers
Identical Products
Commodity-Same product regardless of who makes or sells
Milk, Notebook Paper, Water, Gasoline

6. Informed Buyers and Sellers
Buyers are looking for the best deal
Free Market Entry and Exit
Markets w/more firms have lower prices

7. Barriers to Entry & Costs
Price
Barriers
Efficient Market
Lowest prices possible
Will just cover costs
Start-Up Costs
Technology

8. Imagine that you and your friends plan to open a new convenience store
Imagine that you and your friends plan to open a new convenience store. Brainstorm a list of ten expenses that would be your start-up costs.

9. Monopolistic Competition
Market structure in which many companies sell products that are similar but not identical.

10. 4 Conditions of Monopolistic Comp.
Many Firms
Few Artificial Barriers to entry
Slight control over price
Differentiated Products

11. Pricing Higher Make enough to cover cost Pricing
Non-Price Comparison
Higher
Make enough to cover cost
Physical Characteristics
Location
Service Level
Advertising, image or status

12. Oligopoly
A market structure in which a few large firms dominate a market
Car industry, breakfast cereals, home appliances

13. Barriers to Entry Problems Competing with Larger Firms
Typically work together with other large firms
ILLEGAL!!!
Price War-lowers the market price
Collusion-agreement to set prices and production levels low
Price Fixing-one price for the same good
Cartels-Organizations that agree to coordinate prices and production

14. WHAT IS THE GOAL OF THE GAME OF MONOPOLY?

15. Monopoly A market structure dominated by a single seller.
What happens if: You have a rare disease and to cure the disease you must take a new antibiotic to help cure it, and without the antibiotic your future is terminal?

16. Problem w/monopolies…
—take advantage of their market power and charge high prices

17. One company owns all of the diamond mines in South Africa?

18. How a Monopoly Forms:
If a firm’s start-up costs are high, and its average costs fall for each additional unit it produces, then this is called an economies of scale. (Characteristics that cause a producer’s average cost to drop as production rises)

20. Natural Monopolies
A market that runs most efficiently when one large firm supplies all of the output. Example: Water
-Technology can change natural monopolies. Ex: Phone companies

21. Government Monopolies
A monopoly created by the government
One way that the government can give a company monopoly power is by issuing a patent.
A patent gives a company exclusive rights to sell a new good or service for a specific period of time.

22. Patents guarantee that companies can profit from their own research without competition.
Franchise-the right to sell a good or service within an exclusive market. Ex: School Cafeteria

24. Industrial Organizations
Government allows companies in an industry to restrict the number of firms in the market Ex: MLB

25. How Monopolies Make Money
Price Discrimination- division of customer into groups based on how much they will pay for a good.
Discounted Airfare
Manufacture’s rebates
Senior Citizen or Student Discounts

26. However for price discrimination to work a market must meet three conditions
Some market power
Distinct customer group
Difficult resale

27. Predatory Pricing
Selling a product below cost to drive competitors out of the market
Trust-illegal grouping of companies that discourages competition

28. Anti-Trust Laws Makes sure firms don’t get too powerful.
Laws that encourage competition in the marketplace
(Strengthens Gov. control)

29. History of Anti-Trust
1901-Sherman Anti-Trust Laws which outlaws mergers and monopolies that restrain trade between states

31. 1911-John D. Rockefellers Standard Oil Trust
1974-Department of Justice sued to end AT&T’s monopoly
1982-AT&T breaks ups
1999-Microsoft is a monopoly
2011-AT&T is sued by Justice department

32. Deregulation The removal of some government controls over a market
(Weakens Gov. control.)