1. Topic 4: Competition and Market Structure

2. I. Perfect Competition Conditions for Pure Competition
*Def: Pure Competition
Many buyers and sellers participate in market
Sellers offer identical products
Buyers & sellers are well informed about products
Sellers are able to enter and exit the market easily.
*What controls price in a market with pure competition?

3. I. Perfect Competition Barriers to Entry & Competition
* Barriers to entry can lead to imperfect competition
High Start-Up Costs
Complex Technology
*Ex of business with high start up costs? Low start up costs?

4. I. Perfect Competition Price, Output, and Purely Competitive Markets
Purely competitive markets are efficient.
Competition keeps both prices and production costs low.
Output in a purely competitive market will reach the point where suppliers just covers its costs and makes minimal profit
*Who likes a purely competitive market more, consumers or producers? Why?

5. II. Monopolies Characteristics of a Monopoly Definition:
Single seller controls the entire market
Barriers prevent firms from entering the mkt
Supplies a unique product can’t get anywhere else; no close substitute
Monopolies can take advantage of the market power and charge high prices

6. II. Monopolies Characteristics 1. Economies of Scale
*Def: factors that cause a producer’s average cost per unit to fall as output arises
Figure 4.2
Bigger is better
Ex: hydroelectric plant

7. II. Monopolies Characteristics
2. Natural Monopolies: a market that runs most efficiently when one large firm provides all the output. Ex: water companies
3. Technology & Change
What is the one characteristic
all types of monopolies have in common?

8. II. Monopolies The Role of Government
*Govt Monopolies: a monopoly created by the government
Patents
Franchises & Licenses
Industrial Organizations

9. II. Monopolies C. Price Discrimination
If monopolist sets price at the max price in the mkt, can limit who will be able to purchase good
Offers different prices: price discrimination
Target discounts
* Discounted airline fares
* Manufacturer’s rebate offers
* Senior citizen/student discount s
* Children stay free

10. III. Monopolistic Competition & Oligopoly
Characteristics of Monopolistic Competition
* Def: products are similar but not identical
Four Conditions
Many firms
Few artificial barriers to entry
Little control over price
Differentiated products

11. III. Monopolistic Competition
Non-price Competition
* Competition through other ways besides lower prices
Physical Characteristics
Location
Service Level
Advertising

12. III. Monopolistic Competition
Prices, Output, and Profits
** B/w monopoly & perfect competition
Prices
Output… depends on price
Profits… just above costs
Production Costs and Variety… Producers can’t lower costs too much but can offer variety

13. III. Oligopoly Characteristics of Oligopoly
*Def: mkt dominated by a few large, profitable firms.
Barriers to Entry
Cooperation & Collusion… price war, collusion, price fixing
Cartels: more formal than collusion
Why is a price war
harmful to producers?

14. IV. Government Regulation & Competition
Market Power & Predatory Pricing
Monopolies & oligopolies have mkt power: the ability to control prices and mkt output.
Will want higher prices and lower output…reduced competition.
Engage in predatory pricing… drive competitors out of business

15. IV. Government Regulation
Government & Competition
Anti-Trust Laws: Sherman, Clayton
Regulating Business Practices
Splitting Up Monopolies
Assessing Mergers & Guidelines
FTC, FCC, Justice Dept
*What kinds of rules and regulation does the government use to break up monopolies?

16. IV. Government Regulation
Deregulation
Definition: govt no longer decides what role each company can play in a mkt.
Recent deregulated industries: airline, trucking, banking, railroad, natural gas, tv.
Allowed/ forced firms in these industries to compete by eliminating price controls and barriers to entry
Airline regulation: mixed results
** Deregulation weakens govt controls; anti-trust laws strengthen it. Same purpose: promote competition