1. CHAPTER 7
Market Structure – the nature and degree of competition among firms operating in a given industry

2. Why Study Market Structures?
It is useful to understand how people and companies compete.
It then becomes easier to spot marginally or non-competitive situations.
Our economy requires competition and free markets to function properly.
Government regulators are particularly interested in this kind of information.

3. In general, as competition increases, what happens to price?
It decreases.

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

5. PERFECT COMPETITION:
Many producers sell the same UNDIFFERENTIATED products
Individual firms are too small to influence the price.
Four Necessary Conditions:
Large number of buyers and sellers
No control over prices – no one buyer or seller can individually have an influence on total market quantity or total market price
Buyers and Sellers deal in identical products – no variety
Buyer will always choose the lowest priced one
What is a commodity?
1. Each firm produces so little of the product compared with the total supply that no one firm can actually hope to influence prices.
Commodity is a product that is considered the same no matter who makes it --- orange juice, corn, gasoline, sugar, etc.

6. PERFECT/PURE COMPETITION:
Buyers and sellers are well informed about the products
They know enough about the market for the product to find the best deal
Sellers are free to enter into or exit the business easily
Firms need to be able to enter the market easily when they can make money and leave the market easily when they no longer can
No strong barriers to entry which could lead to imperfect competition
Price would be lowest in true pure, or perfect competition market structure.

7. BARRIERS TO ENTRY
Factors that make it difficult for a firm to enter into the market
For example?
Start-up costs
Expenses a new firm must pay even before it can begin doing business……such as?
Technology
Technological skills are a requirement for many businesses
These barriers to entry keep many entrepreneurs from easily entering the market – lead to imperfect competition

8. Examples of (Almost) Perfect Competition
                                                  
                                                  
                                                  
Examples of (Almost) Perfect Competition
On line ticket auctions
Truck farming
Salt
Gravel
Flea markets
Garage sales
On line sales in general

9. PERFECT COMPETITION:
Price would be the lowest in true pure, or perfect competition market structure.
Competition keeps prices and production costs low
So many sellers compete that the high level of competition keeps prices down so low that they just cover the most-efficient costs of production

10. MONOPOLY A market structure with NO competition.
Only one seller of a particular good/service
A unique product/service
Controls all output so prices could be the highest in this type of market structure.
Massive barriers to entry – primary reason they have existed

11. MONOPOLY Utilize economies of scale:
Efficiency of production increases as the number of goods being produced increases. (Mass production!)
Average cost per unit decreases through increased production since fixed costs are shared over a larger number of goods.
How would you explain this?
Example: cell phones & telephone market
Today? Microsoft Operating Systems, Netflix, Intel, AARP Supplemental Insurance
New technologies work against monopolies
Example?
Any monopolies today?

12. Types of Monopolies Natural Monopoly - e.g. Utilities
Why are utilities & public transportation (natural monopolies) allowed to operate as monopolies?
Geographic Monopoly - A geographical area cannot
support more than one.
Government Monopoly - e.g. First-Class mail; also:
Technological Monopoly – Patents; Copyrights
Franchises (National parks), Licenses
Natural monopolies allowed because competition might be chaotic and resources might be duplicated and wasted.
Patents today last for 20 years (copyrights are 70 years after author’s death). Reasoning behind these monopolies is that they encourage research & development if you get a monopoly on it for 20 years.
Monopolies are considered market failures because a producer without competition is not forced to improve the quality of the product or lower prices. In this situation, the pressures of supply and demand – the driving forces of the market system – cease to work. Consumers have only 2 choices: buy the producer's goods and services or go without.
Cartel – an international monopoly – THINK OIL!!
What are the potential consequences of monopolies?
--high prices, restricted supplies, poor quality,
lack of innovation
Why are monopolies considered market (not business) failures?

13. PRICE DISCRIMINATION
Monopolies use it – divide consumers into different groups and charge different prices … based on highest maximum price each group will pay for the good/service
The prices charged are NOT based on production costs
What kind of groups?
What is needed for price discrimination to work?
Firm must have control over prices/market power
Customers divided into distinct groups based on their price sensitivity
Buyers can’t easily resell the good/service
So…works best on goods that are immediately consumed such as theme park admissions, restaurant meals
Discounted airfares
Senior citizen discounts
Rebates with products --- appliances, cars, tvs
Free kids promotions

14. Examples of Monopolies
Power company
Cable TV provider
Water and sewer
Natural gas
Post Office

15. MONOPOLISTIC COMPETITION
Producers provide the same kind of good or service but are able to DIFFERENTIATE their products from those of their competitors.
Similar conditions to pure competition except that products are not identical
Products are made a little different to attract more customers & monopolize a small portion of the market
Products similar but not identical; differences can be real or perceived

16. MONOPOLISTIC COMPETITION
4 conditions for Monopolistic Competition?
Many firms
Few barriers to entry
Little control over price
Differentiated products
What kind of factors can differentiate products --- nonprice competition?
Design & other physical characteristics, location, level of service provided, advertising
Monopolistic competition is the most common type of market structure in a market economy!

17. Examples of Monopolistic Competition
Clothing shops
Gas stations
Grocery stores
Athletic wear
Fast food restaurants
Business supply stores
Home Supply Stores
Pet foods

18. OLIGOPOLY
Market structure with just a few sellers of a similar good or service.
If 4 largest firms in an industry produce 70% - 80% of industry's output
High barriers to entry technological, government, market reality – start up costs
Product may be standardized as in steel, or there may be variety / differentiated products – as in automobiles

19. OLIGOPOLY
Single firms have ability to change output, sales, and prices for the industry
Firms tend to act together and sometimes collusion or price fixing takes place
Price wars – good for producer or consumer?
What is collusion? What does it lead to?
What is a cartel? Why do they usually not last?
Collusion – illegally setting price and production levels
Leads to price fixing – agreement among firms to sell at the same price
Cartel – agreement by a formal organization, such as OPEC, to coordinate prices and production
illegal in U.S.
Usually don’t last IF all producers not included …. Left out producers could undercut prices
also, members have a tendency to cheat
OPEC – supplies 40% of world’s oil- controls 75% of oil reserves

20. Examples of Oligopolies
Soft drink producers
Automobiles manufacturing
Domestic airlines
Mobile phone service
Cereal makers
                           

21. Which market structure would you like best if …..
You owned a business and were concerned only with profits?
You were starting a new business?
You are the consumer?
You were a business owner - an oligopoly or monopolistic competition?
You owned an advertising agency?

22. General Rule: as competition increases, price …..?
As competition decreases, market control …?

23. Market Failures Lack of Competition
No competition = a market failure
What problems are caused by a lack of competition?
Inefficient resource allocation
Higher prices, reduced output
Business can become too big and become a political force
Monopolies have inefficient resource allocation
no incentive to use them efficiently
spend on perks instead
Monopolies also can create artificial shortages
Large company doesn’t even have to be a monopoly to have major political power
can ask for tax breaks – subsidies, etc. and will get them – WALMART!

24. Role of Government in Markets
WAYS GOVERNMENTS CONTROL MONOPOLIES:
Antitrust Legislation
Began in late 1800’s with Sherman Antitrust Act
Broke up Standard Oil and American Tobacco in 1911
1982 – AT&T broken up into 7 companies
Also breaks up mergers
…inadequate competition
Sherman Act – vague, inadequate
Clayton Act – price discrimination
FTC – cease and desist orders

26. Role of Government in Markets
REGULATING AGENCIES – such as….?
OSHA, FDA, FCC, FAA, EPA, EEOC, SEC
Requiring public disclosure so that people have adequate information to make decisions – stocks, banks, etc.
DEREGULATION
Done when government regulation has become too expansive and is reducing competition
Deregulation = removal of some gov’t control over a market
What types of industries?
Airlines, trucking, banking, RR, natural gas, TV broadcasting
FCC regulates broadcasts by granting licenses to radio and tv stations. Also sets standards and monitors programs for indecent content. (fine and penalties)
Deregulation allowed – or forced – firms in these industries to compete by eliminating price controls and barriers to entry
Antitrust laws strengthen gov’t control but deregulation weakens it
Deregulation has opened up the market ..
Airlines – complicated – opened up lots of new airlines … but they got gobbled up as large airlines competed aggressively for the busiest routes. Upshot – one dominant airline at a busy airport
9-11 caused problems for airlines .. Revenues down since people wouldn’t fly but security costs, fuel and insurance costs rose. Many filing bankruptcy

27. Do its low-price benefits outweigh its impact on competition?
So what about Wal-Mart?
Do its low-price benefits outweigh its impact on competition?
Wal-Mart Christmas sweat shops
Wal-Mart female class action lawsuit, 2011…..lost
Walmart Exposed --- Videos you were never meant to see:
../../Econ Videos/Wal-Mart store growth.mp4
Watch it grow!

28. Basic Principle of the Power of Market Structures:
Basic Principle of relation between Price and Competition?

29. Comparison of Market Structures