1. Market Structures `

2. Perfect Competition Large number of firms all produce the same product
No single firm can influence prices
Efficient
Intense competition forces prices down
Prices just cover costs
Four requirements
Many buyers and sellers
Identical products
Informed buyers and sellers
Sellers enter and exit freely

3. Many buyers and sellers & identical products
Due to large number of buyers and sellers, not one seller can influence price
Must accept market price
No differences between products from different suppliers
*Commodity- product that is considered the same regardless of who makes or sells it
Ex.: oil, gold, wheat
Buyer will not pay extra for one particular company’s good
Choose lowest price

4. Informed buyers and sellers & Freedom of entry and exit
Know enough about market to find best deal
Buyers provide sellers with full information
Trade-off: Time spent gathering information must be worth amount of money saved
Free entry: Enter when money is to be made and exit when it can’t
Markets with more firms (more competition) lower prices

5. Barriers to entry
Any factor that makes it difficult for a new firm to enter a market
Start up costs and technology
When start-up costs are high  hard to enter a market
Not likely perfectly competitive
Barriers of technology and know-how

6. Monopoly Market dominated by a single seller
Illegal in US
Barriers prevent firms from entering market
Can charge high prices

7. Legal Monopolies Natural Monopoly Patent Franchise
Runs most efficiently with one firm
Examples?
Patent
Exclusive rights to sell a good or service for a specific amount of time
Franchise
Gives a single firm the right to sell its goods within a market

8. Monopolistic competition
Many companies sell products that are similar but not identical
Holds monopoly over its own product
Similar enough to be substituted
Four conditions
Many firms
Few barriers to entry
Slight control over price
Differentiated products

9. Non-price competition
Way to attract customers other than by price
Physical characteristics
Location
Service Level
Advertising
Prices
Competition prevents high prices
Switch to substitute

10. Oligopoly A few large firms dominate a market
Four largest control 70%-80% of output
Will work both alone and as a team
Lower production, higher prices
Significant barriers to entry
Advertising

11. Oligopolies Soft drinks/Sodas:
Coca-Cola (44%) – Coke, Sprite, Barq, Fanta, Mello Yello, etc.
Pepsi (32%) – Pepsi, Mountain Dew, Mug, Slice, etc.
Cadbury Schweppes (16%) – Seven-Up, Dr. Pepper, Schweppes, A & W, Canada Dry, Sunkist, Squirt, etc.
Brand
1999
2005
2008
2011
Kellogg's
32%
33%
General Mills
31%
26%
25%
28%
Post
16%
15%
13%

12. Collusion and Cartels
Collusion  agreement among firms to divide market and set prices or limit production
Sell at same or similar prices
Illegal in the US
Cartel  formal organization of producers that agree to coordinate prices and production
Permitted in other countries
Only work if agreements are kept
Strong incentives to cheat

13. Regulation and Deregulation
Predatory Pricing  selling a product below cost to drive out competitors
Antitrust laws  government power to stop cartels and monopolies from forming and break up existing monopolies
Standard Oil  34 companies
AT&T  7 regional companies
Require companies that buy one product to buy other products

14. Business Organizations
Establishment formed to carry on commercial enterprise
A place that sells stuff

15. Sole Proprietorship Business owned or managed by a single individual
Most popular in the US
75% of all businesses
Only 6% of all sales

16. Pros and Cons Pros? Owner earns all the profits Own boss/own decisions
Easy to start up  little paperwork
Least regulated
Cons?
Responsible for all debt
Can ruin personal finances
Limited access to resources
Lack of permanence
Fringe benefits- payments to employees other than wages
Limited

17. Partnerships
Business organization owned by two or more people with divided responsibility
7% of all businesses
5% of all sales
General Partnership
Share equally in responsibility and liability
Doctors, Lawyers, etc.
Limited Partnership
One partner has unlimited responsibility, the other contribute only money
Limited Liability Partnership
All partners are limited from other partner’s mistakes
Doctors, lawyers, dentists

18. Pros and Cons Pros? Inexpensive
Partnership agreement
Shared decision making and specialization
More capital
Taxes on individuals income, no business tax
Cons?
Unlimited liability, unless LLP
Possible conflict

19. Corporations
Legal entity owned by stockholders who face limited liability
Own stock  Part owner
20% of businesses
90% of sales
Horizontal Merger  Join firms competing in the same market
Vertical Merger  Join firms in different stages of production
Conglomerate  business combination of more than three businesses that make unrelated products
Multinational  Produces and sells products throughout the world

20. Pros and Cons Pros? Limited liability for owners
Transferable ownership
Attract capital
Long life
Cons?
Difficult, expensive, and time-consuming to establish
Double taxation
Tax on dividends, tax when stocks are sold
Loss of control
More regulation

21. Other organizations
Business Franchises  semi-independent business that pays fees to a parent company
Nonprofit organization  functions like a business, but operates to benefit society instead of earning a profit