1. Perfect Competition
CH 7.1
4 Conditions that exist in a perfectly competitive market
2 common barriers that prevent firms from entering a market
Prices and output in a perfectly competitive market

2. Perfectly competitive market
A market in which a large number of firms produce the exact same product
Product is available for the same price
Each firm’s contribution to the market is small
Only decision is how much to make, given the cost and market price

3. 4 Conditions for Perfect Competition
1. Many buyers and sellers
Many participants on both sides
No individual can have enough power to influence the quantity in the market
Everyone has to accept the prices as given
Market will determine price

4. 2. Identical Products
No difference between the products sold by different suppliers
Commodities - product that is the same no matter who sells it
Low grade gas, paper, milk, fruit,
Buyer will always choose the cheaper supplier

5. 3. Informed buyers and sellers
Buyers know enough to look for a good deal
Sellers too – best deal for them
Full information is provided
Clear incentives to gather/supply info
Trade off?
Time spent researching prices?
How much is your time worth?

6. 4. Free entry /exit Firms must be able to:
Enter the market - when they can make $
Exit the market - when they cannot
If a company has more competition, it has to sell its product for less
If less competition and more control, it can charge more

7. Barriers to Entry
Factors that keep firms from getting into a market and result in imperfect competition
1. Start up costs
Before you can start earning money, you have to make an investment
Higher costs = less firms
Impact of the Internet?

8. Barriers to Entry 2. Technology
Lots of technology required - higher barrier
Lots of technological know how/ skills/ training also offer higher barriers

9. Efficiency Perfectly competitive markets are very efficient
Competition keeps Prices and Costs low
Prices reflect cost
Lowest sustainable prices
Only make enough to cover your costs and profiting enough to make it worthwhile to stay in business

10. Monopoly How Economists define Monopoly How do they form
CH 7.2
How Economists define Monopoly
How do they form
Govt monopolies
How do they set price and output level
Price Discrimination

11. Monopoly
When barriers prevent firms from entering the market that has a single supplier
A market dominated by a single supplier
They take advantage of their power by charging high prices

12. Forms of monopolies Economies of scale
Condition when a producers costs go down as production goes up
Bigger is better
Hydroelectric Power

13. Forms of monopolies Natural Monopolies
Market that runs most efficiently when one large firm controls the market
In exchange for being the only firm in the market, Govt will control prices

14. Forms of monopolies Technology can affect monopolies
Improvements in technology can break up a monopoly
Telephones/ Cell phones
Cable/ Satellite
Blockbuster/Streaming (Netflix)

15. Govt Monopolies Govt regulates natural monopolies
Govt can also create monopolies
Patents
Guarantees profits on research/ investment
Franchises
contract to sell specific goods within an exclusive market
Licenses
right to operate a business

16. Output decisions
Even monopolies have to choose between output and price
Really cannot charge whatever they want
Possibility to price yourself out of the market
Elasticity of goods

17. Price discrimination
Targeting different consumers, allows you to charge different amounts
Exists all over – not just in monopolies
Market Power - ability of a company to change prices and output like a monopoly without being one

18. Price Discrimination Targeted Discounts
Identify people who would not be willing to pay top price
Give them a discount
Elderly/Students?
Identify those who need it the most
Charge them the most
Medical coverage/ prescriptions/treatment

19. Examples Airline tickets Senior/ Student discounts Kids eat/stay free
Traveling for business may cost more
Booking in advance will be cheaper
Senior/ Student discounts
Kids eat/stay free
Attract families

20. Limits on Price Discrimination
Must meet three conditions
1. Must have some market power
2. Must be able to divide customers into groups based on sensitivity to price
3. Difficult resale
Cannot sell something for a price, and then have customers sell it to others for a higher price

21. Monopolistic Competition
CH 7.3
Monopolistic Competition
Many companies compete selling similar goods
Modified perfect competition
Not identical goods
Each company has a monopoly on their version of a good
Prices will be higher than perfectly competitive

22. 4 Conditions 1. Many sellers/firms 2. Few barriers to entry
Start up costs are low
2. Few barriers to entry
3. Some control over the price
Goods are slightly different
Substitutes
4. Differentiated products*
Distinguish your goods from others

23. Nonprice Competition Ways to compete w/o changing price
Physical characteristics
Sizes, shapes, colors
Location
Service Level
Advertising, Image or status

24. Oligopoly Market dominated by a few large firms Some barriers to entry
3 or 4 firms that produce %
Some barriers to entry
High start up costs
Economies of scale

25. Cooperation and Collusion
If these 3-4 companies work together they can eliminate other competition
Collusion
Agreement to set prices and production levels
Price Fixing
Price wars

26. Cartels Agreement to organize production and prices
Usually don’t last long
Incentive to produce more = $$$
Creates too much supply
Excluding someone
Lower price than cartel

27. Comparison of Market Structures
Perf.
Comp.
Monop.
Comp.
Oligopoly
Monopoly
# of firms
Many
Many
Few
ONE
Variety
None
None
Some
Some
Control of $
None
Little
Complete
Some
Barriers to
entry
High
Complete
None
Low
Jeans,
Books
Examples
Wheat,
Stock
Public
Water
Cars,
Movie Studios

28. Regulation and Deregulation
CH 7.4
Regulation and Deregulation
How do firms use market power
Practices that the Govt regulates or bans to protect competition
Deregulation and its effects

29. Market Power
Markets with a few large firms generally have higher prices
When these companies work together they can control the prices
Predatory pricing - setting your price lower than costs to drive out competition

30. Govt and Competition
Govt policy prevents firms from controlling price and supply of a good in a market
Federal Trade Commission
Department of Justice
Anti Trust Division

31. Grouping/Cooperation of companies
Collusion
Cartels
Trusts - illegal grouping of companies that discourages competition

32. Anti Trust Laws Sherman Anti Trust Act - 1890
Outlawed mergers and monopolies that limited trade between states
Basis of most legislation today
US breaks up Standard Oil
They had controlled 88% of refined oil in US
Clayton Anti Trust Act
Prohibits certain behaviors that can lead to monopoly

33. Anti Trust Robinson-Patman Act - 1936 1982 - Govt breaks up AT&T
Laws against price discrimination
Govt breaks up AT&T
Microsoft declared Monopoly by Govt

34. Mergers Combination of one or more companies
Govt will look to see if this will lead to unfair advantages/ less competition
If the merger will lead to lower costs, lower prices or better products the govt will allow it

35. Deregulation
1970s 1980s Govt took itself out of controlling several industries
Airline, trucking, railroad, TV broadcasting, natural gas, banking
No longer controlled prices
Force firms to compete and drive prices down

36. Deregulation +/- + - Lowers barriers to entry Widespread growth
Banking industry (1980s)
Banks took more risks with loans, lost $$
Govt spent billions covering losses

37. Airline industry After deregulation, lots of new airlines popped up
Some went out of business
Some merged w/ others
Prices to big cities went down
Small cities?