2 Market StructureThe nature and degree of competition among firms in the same industry
3 Perfect CompetitionMarket structure characterized by a large number of well-informed independent buyers and sellers who exchange identical products.A Theoretical ideaQ: So why does perfect competition serve as a theoretical market structure?A: Its advantages serve as a yardstick or example for other structures to be measured by.
4 Perfect Competition Conditions Must be a large number of buyers and sellersBuyers and sellers deal in identical productEach buyer and seller acts independentlyBuyers and sellers are reasonably well-informed about product and pricesBuyers and sellers are free to enter into, conduct, or get out of business
5 Monopolistic Competition Market structure that has all the conditions of perfect competition except for identical products.Seller has the ability to raise or lower the priceIf sellers raise or lower the price enough, customers will change brands
6 Monopolistic Competition Characterized by product differentiation: real or perceived differences between competing products in the same industry.To make their products stand out, they use nonprice competition: the use of advertising, giveaways, or other promotions designed to convince buyers that the product is somehow unique or fundamentally better than a competitor’s.
7 OligopolyMarket Structure in which a few large sellers dominate the industryProducts may be distinct like the car industry or standardized like the steel industryWhen one firm changes prices, enhances product, etc the other firms usually follow or they run the risk of losing customers
8 Monopoly Market structure with a single seller of a particular product Few Pure Monopolies today…very rare
9 Characteristics of Market Structure Number of Firms in IndustryInfluence over PriceProduct DifferentiationAdvertisingEntry into MarketExamplesPerfect CompetitionManyNoneEasyPerfect: NoneNear: Truck FarmingMonopolistic CompetitionLimitedFair AmountGas StationsWomen’s clothingOligopolyFewSomeDifficultAutomobilesAluminumPure MonopolyOneExtensiveAlmost ImpossibleNear: Water
10 Types of MonopoliesNatural Monopoly: market situation where the costs of production are minimized by having a single firm produce the productIE: Public utilitiesGeographic Monopoly: market structure based on the absence of other sellers in a particular geographic areaIE: Only 1 gas station in a small town
11 Types of MonopoliesTechnological Monopoly: based on a firm’s ownership or control of a production method, process, or other scientific advanceIE: item with a patentGovernment Monopoly: monopoly owned and operated by the governmentIE: oversee water use, weapon-grade uranium for military
12 Market FailureCondition that causes a competitive market to fail
13 5 Reasons for Failure: Inadequate Competition Inadequate Information – if the knowledge is important to buyers and sellers but is difficult to obtainResource Immobility – factors of production do not move to markets where returns are the highestPublic Goods – products that are collectively consumed by everyoneExternalities – unintended side effect that either benefits or harms a third party not involved.
14 ExternalitiesNegative: harm, cost, or inconvenience suffered by a third party because of actions by othersIE: Noise from an airport, pollutionPositive: a benefit someone receives who was not involved in the activity that generated the benefit.IE: Airport expansion provides more business for local restaurantsDoesn’t matter if they are positive or negative: they are considered market failures, because their costs and benefits are not reflected in the market prices that buyers and sellers pay.
15 The Role of GovernmentThe government exercises its power to maintain competition within marketsTwo ways that government can maintain competitive markets:Prohibiting market structures that are not competitiveRegulating markets where full competition is not possible
16 Antitrust Legislation Trust: illegal combination of corporations or companies organized to hinder competitionPrice Discrimination: the practice of selling the same product to different consumers at different pricesCease and Desist Order: ruling requiring a company to stop an unfair business practice that reduces or limits competition
17 Anti-Monopoly Legislation Sherman Antitrust Act 1890 – Outlawed all contracts to stop the growth of trusts and monopoliesClayton Antitrust Act 1914 – Strengthened the Sherman Act by outlawing price discriminationFederal Trade Commission Act 1914 – Established the Federal Trade Commission to regulate unfair methods of competition in interstate commerce.Robinson-Patman Act 1936 – Made it where everyone got the same rebates and discounts
18 Q:What two market failures does the government have the ability to correct?A:Inadequate Informationand Public Goods
19 Improve Economic Efficiency Promote Transparency – information and actions are not hidden and are easily available for reviewPublic Disclosure: requirement that businesses reveal certain information to the publicProvide Public Goods