1. FOUR MARKET STRUCTURES

2. Imperfect Competition The seller has NO control over price.
FOUR MARKET STRUCTURES
Perfect
Competition
Monopolistic
Competition
Pure
Monopoly
Oligopoly
Imperfect Competition
Characteristics of Perfect Competition:
Examples of Perfect Competition: Avocado farmers, sunglass huts, and hammocks in Mexico
Many small firms
Identical products (perfect substitutes)
Easy for firms to enter and exit the industry
Seller has no need to advertise
Firms are “Price Takers”
The seller has NO control over price.

3. Imperfect Competition
FOUR MARKET STRUCTURES
Perfect
Competition
Monopolistic
Competition
Pure
Monopoly
Oligopoly
Imperfect Competition
Characteristics of Pure Monopoly:
Examples of Perfect Competition: Avocado farmers, sunglass huts, and hammocks in Mexico
Single Firm
Unique Good (no close substitutes)
Price Maker
High Barriers to Entry
Some Advertising (Increase Interest)

4. Examples of Monopolies

5. Four Origins of Monopolies
Geography is the Barrier to Entry
Ex: Nowhere gas stations, De Beers Diamonds, Chicago Bears, Cable TV, US Cellular Hot Dogs…
-Location or control of resources limits competition and leads to one supplier.
2. The Government is the Barrier to Entry
Ex: Water Company, Firefighters, The Army, Pharmaceutical drugs, rubicks cube…
-Government allows monopoly for public benefits or to stimulate innovation.
-The government issues patents to protect inventors and forbids others from using their invention. (They last 20 years)

6. Four Origins of Monopolies
3. Technology or Common Use is the Barrier to Entry
Ex: Microsoft, Intel, Frisbee, Music Industry, Blu-Ray v HD-DVD…
-Patents and widespread availability of certain products lead to only one major firm controlling a market.
4. Mass Production and Low Costs are Barriers to Entry
Ex: Electric Companies (Com Ed)
If there were three competing electric companies they would have higher costs.
Having only one electric company keeps prices low
-Economies of scale make it impractical to have smaller firms.
Natural Monopoly- It is NATURAL for only one firm to produce because they can produce at the lowest cost.

7. Characteristics of Monopolistic Competition:
Perfect
Competition
Monopolistic
Competition
Monopolistic
Competition
Pure
Monopoly
Pure
Monopoly
Oligopoly
Oligopoly
Characteristics of Monopolistic Competition:
Relatively Large Number of Sellers
Differentiated Products
Some control over price
Easy Entry and Exit (Low Barriers)
A lot of non-price competition (Advertising)

8. Characteristics of Oligopolies:
FOUR MARKET MODELS
Perfect
Competition
Monopolistic
Competition
Pure
Monopoly
Oligopoly
Characteristics of Oligopolies:
A Few Large Producers (Less than 10)
Identical or Differentiated Products
High Barriers to Entry
Control Over Price (Price Maker)
Mutual Interdependence
Firms use Strategic Pricing
Examples: OPEC, Cereal Companies, Car Producers

9. The study of how people behave in strategic situations
Game Theory
The study of how people behave in strategic situations
An understanding of game theory helps firms in an oligopoly maximize profit.

10. SIMULATION! Why learn about game theory?
Oligopolies are interdependent since they compete with only a few other firms.
Their pricing and output decisions must be strategic as to avoid economic losses.
Game theory helps us analyze their strategies.
SIMULATION!
Princess Bride -

11. What is each player’s dominate strategy?
Video: Split or Steal
What is each player’s dominate strategy?
Firm 2
Split
Steal
Split
Half, Half
None, All
(Begin with this one, stop before talk)
(show to end)
Firm 1
All, None
None, None
Steal

12. Both Deny = 5 Years in jail each Both Confess= 10 Years in jail each
The Prisoner’s Dilemma
Charged with a crime, each prisoner has one of two choices: Deny or Confess
Prisoner 2
Deny
Confess
Both Deny = Years in jail each
Confess = Free
Deny =20 Years
Deny
Prisoner 1
Confess = Free
Deny = 20 Years
Both Confess= 10 Years in jail each
Confess

13. Both Confess = 5 Day Suspension
The Prisoner’s Dilemma
Two students are called into the Dean’s Office. Both were caught on camera entering the room where a crime was committed. Each prisoner has one of two choices: remain Silent or Blame the other.
Student 2
Silent
Blame
3 day suspension
Confess = Free
Silent = Expulsion
Silent
Have two volunteers simulate prisoners with the above scenario
If both parties remain silent or collude, both will continue to profit from this situation and their tacit collusion. 
However, if one party chooses to blame, this action could precipitate a downward spiral, in which all parties end up with a much less favorable result.
The conclusion is the same: when comparing the options of collusion and competition, all parties will obtain a more favorable result if they do not compete with each other.
Student 1
Confess = Free
Silent = Expulsion
Both Confess = 5 Day Suspension
Blame

14. Payoff matrix for two competing bus companies
You Try IT!
Payoff matrix for two competing bus companies
Oligopoly – interdependent decision making
Early
No, better for them to go late if Roadway goes late
$900