1. CHAPTER # 7 Market & Market Structure

2. Most Competitive Market Structures Basic Cable Rate TXU
Greyhound
Natural Monopoly
Competition would be
chaotic. It is natural
to give it to one co.
Ex: Utilities
Basic Cable Rate
Blue Jeans
Beauty Shops
Monopolistic Competition
[Element of monopoly with
“product differentiation”]
TXU
Waste
Management
Barber Shops
Forney High
“Price Makers”
Government Monopoly
Owned & operated by G
Ex: U.S. Mail
State Highways
DART
Geographic Monopoly
Only seller in a specific area
Example: Remote Store
Monopoly
Oligopoly
Many [25-75] sellers
Control over price: Some
Ex: Blue Jeans
U.S. Mail
Monopoly
[mono(1) poly (seller)]
Control over price: Total
Product: unique
Ex: Comcast Cable TV
Rubik’s
Cube
Monopolistic Competition
Perfect Competition
Technological Monopoly
“Patent”
Ex: Rubik’s Cube
Market
[buyer & seller]
Structures
[How many sellers]
Most Competitive
Oligopoly
Oliogo (few) poly (seller)
[A few control 70% of market
Cable TV
Duopoly
Perfect Competition
Very many [100s] of sellers
Perfect
Competition
Monopolistic
Oligopoly
Pure Monopoly
Control over price: Fair Amount
Differentiated or Identical
Differentiated Oligopoly
Differentiated Products
Autos & Sneakers
Control over price: None
Products: Identical
(Agricultural & fishery)
Reebok
Pure Oligopoly
Identical Products
(steel)
[undifferentiated]
Price Taker
Control over Price

3. Definition of Market
Market is an area where buyer and seller meet with each other for the purpose of exchange of goods and services for money.
TIME
Market can be classified into three main categories according to time.
Very short period , Short Period Market, and Long Period Market
SPACE
According to this classification the market can be divided into four categories.
Local Market, Regional Market, National Market, or International Market.
Commodities
A market can also be divided according to the type of commodities it deals in. In this division we have the following types of market.
General Market, Specialized Market, Capital Market, Foreign exchange Market etc

4. Types of advertising
Competitive Advertising: Your product is better than the substitutes available
Informative Advertising: To give information on price, quality, special features about product.

5. CLASSIFICATION OF MARKET
Perfect Competition.
Imperfect Competition.

6. Perfect Competition – has a very large number of sellers (hundreds or thousands) of the same product (any agriculture or fishery product). They are all selling the same undifferentiated products (oranges).
Competition – economic rivalry among businesses.
5 Market Structure – degree of competition
among firms operating in the same market (autos).

7. Four Market Conditions Necessary For Perfect Competition
1. Very large number of sellers (hundreds or thousands).
Each seller will have only a small share of the market.
2. Similar or identical products (sweet corn/brocolli/eggs)
which means there is no reason for non-price competition.
C Easy entry and exit into the market.
4. Absence of price controls (too many sellers & consumers).
Firm is price taker.
Perfect Competition and Price
No one firm controls price. Lowering price would
lower profits as consumers would buy similar
substitutes. Prices are set by the market rather
than by the firms. These firms are “price takers.”

8. Sellers try to decrease competition by making their products different
Monopolistic Competition – fairly large number (25-75) of sellers competing to sell slightly differentiated products. Product differentiation (real or imaginary) is vital. This is the most common market structure.
Sellers try to decrease competition
by making their products different
from the others. Since each firm
attempts to make its product unique,
unique, there is an “element of monopoly”,
thus monopolistic competition.
Product differentiation, when it is successful, enables
a firm to “establish a kind of monopoly” so that loyal
customers will prefer it rather than buy from the
competition. [They try to monopolize a small portion
of the market.]

9. Even virtually identical products may be differentiated
by brand name, packaging, or design but they are still
similar. They have all the conditions of perfect competition
except for product “differentiation.”
They use “nonprice” methods of competition such as
advertising and improved service to increase sales.
Reputation is important [builds loyalty]. Most manufactured
goods are made by only a few producers.

10. 4 Market Conditions For Monopolistic Competition
Farily large number of sellers must exist.
2. The products are similar but they emphasize product
differentiation (differences among products). This is the one
thing that separates monopolistic competition from perfect
competition.
The differences may be real or imaginary (a refrigerator with
plastic or metal trays). Aspirin, by federal law, has to have
certain chemicals but people believe highly advertised aspirin
is better. Revlon offers 157 shades of lipstick – 41 are pink.
3. Buyers must be well informed about differences in products.
Monopolistic competitors rely on informative and competitive
advertising.
4. Easy to enter or exit the industry. Few restrictions exist.

11. Examples of Monopolistic Competition
Monopolistic Competition [element of monopoly [differentiation uniqueness] so called monopolistic competition] This is the most common market structure – over 99% of all firms.
Examples of Monopolistic Competition
Blue Jeans Grocery Stores Candy Bars
Dry Cleaners Rock Concerts Pizza
Shoe Stores Cassette players Chicken
Toothpaste Book Stores Soaps and detergents
Restaurants Vacuum Cleaners Furniture Stores
Barbershops Beauty Parlors Econ Textbook Co’s
The “Real World”
The “real world” of competition involves
monopolistic competition & oligopolies. Over 99%
of all firms are monopolistic competitors. However,
a few thousand oligopolies produce most of the
products in the U.S. So, our big firms are oligopolists
and our smaller firms are monopolistic competitors.
“Econ”
“Econ,Econ”

12. Two Types of Oligopolies
2Oligopoly – “the chosen few” (3 or 4) firms control 70% of the market.
Monopoly – 1 firm industry
(Cable TV)
Duopoly – 2 firm industry.
(Coke & Pepsi)
[P&G (47%) & Kim-Clark
(30%) in diapers]
“Oligo” – few in an industry.
(“Big 3 or 4” or even “Big 5 or 6”)
Two Types of Oligopolies
Pure (Undifferentiated) Oligopoly – 3 or 4 producers
dominate the production of an identical product (steel, zinc,
copper, aluminum, lead, cement, etc)
Differentiated Oligopoly – 3 or 4 producers dominate the
production of differentiated (similar) products. [typewriters,
tires, soap, cigarettes, refrigerators, cereals, TVs & autos]

13. Oligopoly Examples
Athletic Shoes–“Big 4”–Nike, Reebok, New Balance, Adidas,
Cereals – “Big 3” – Quaker Oats,
General Mills, & Kelloggs
TV Networks – “Big 4” – NBC, CBS, ABC & Fox
There are also oligopolies in chewing gum,
light bulbs, typewriters, photocopiers, and
sewing machines.

14. Four Market Conditions For Oligopolies 1
Four Market Conditions For Oligopolies 1. A few sellers control over 70% of market. 2. Firms offer identical or differentiated products (real or imaginary). Advertising important. 3. Product information must be easily available. They use informative advertisement (price, quality, and special features) to introduce new products. 4. There are huge barriers to entry into the industry. The three major barriers are technological knowledge, money, & brand name loyalty. Entry is difficult because many have patents or own essential raw materials. This makes it difficult for new firms to try to compete.
Oligopoly and Price
Oligopolies control price to some degree by creating
brand name loyalty and using non-price competition.

15. Monopoly – the “power of one”
PalmTran
SRCHS
Greyhound
Waste
Management
DART
Natural Monopoly
Competition would be
chaotic. It is natural
to give it to one co.
Ex: Utilities
Cable TV
Government Monopoly
Owned & operated by G
Ex: U.S. Mail
State Highways
U.S.Mail
“Price Makers”
TXU
Monopoly
[mono(1) poly (seller)]
Control over price: Total
Product: unique
Ex: Comcast Cable TV
Cable TV
Rubik’s
Cube
Technological Monopoly
“Patent”
Ex: Rubik’s Cube
Geographic Monopoly
Only seller in a specific area
Example: Remote Store
Cable TV
Monopoly – the “power of one”

16. Pure Monopoly – one firm industry [“monopolist”]
Pure Monopoly’s Market Condition
1. One firm is the only seller. Advertising promotes image.
2. No close substitute goods are available.
3. Prohibitive barriers to entry in the industry. High invest-
ment costs and technological expertise prevent others from
entering the market. Legal restrictions make entry in
government-supported monopolies nearly impossible.
4. Almost complete control of market price.
9 Monopolist have much control over price because they are
the only seller. A higher price would hurt demand. The state
may control the price on some legal monopolies. These single
suppliers are “price makers.”

17. Four Types of Legal Monopolies
1. Natural Monopoly – where competition would be
chaotic, it is natural to give the business to one firm. Imagine
the confusion if 5 different busses raced each other
to the corner to pick up a passenger. Competition
would be impractical, inconvenient, & unworkable.
Greyhound
Examples: Public Utilities (electric & gas) – privately owned
companies (buses-Continental Trailways) but regulated by the
government. Comcast Cable TV in Plano. The government
monitors the natural monopolies to ensure that they provide
quality service at reasonable rates.
Waste Management

18. 2 Government Monopoly – monopoly owned and operated by the government.
The difference between natural [privately owned]
& government monopolies [government owned] is
that these monopolies are owned operated by any
level of government.
Examples would be interstate highway system,
public libraries, public schools, Postal Service, & DART.
In most cases, government monopolies deal with
economic products needed for the public welfare
but which people would not be provided adequately
by private industry. Most tend to provide goods that
enhance the general welfare rather than seek profits.
Pilot Point High
[Local G]
State G
Federal G
Dart
Dart

19. 3 Geographic Monopoly – when a firm is the only seller of a good in a specific location.

20. 4. Technological Monopoly – results from the
invention of a new product (patent) or when
technology changes the way a good is produced.
16 A patent gives an individual
or firm exclusive right to pro-
duce, use or dispose of an
invention or discovery for
20 years from the date of filing.
To obtain a patent, you must go to the Patent
Office after doing research to make sure the
patent has not already been patented. Then
You hire a patent lawyer to file your patent.
All of this takes about 18 months. The total
cost for a patent runs about $5,000.
17 It is very expensive to wage a patent
infringement suit, around $300,000.

21. Top 20 Patent Recipients Patents Company Patents Company
3,621 IBM Korninklijke
2,451 Samsung Infineon Tech
2,366 Canon TI
2,229 Matsushita Siemens
2,110 Hewlett-Packard Honda
1,959 Intel
1,771 Sony
1,732 Hitachi
1,672 Toshiba
1,610 Micron Tech
1,487 Fujitsu
1,463 Microsoft
1, Seiko
1,051 GE
906 Fuji Photo

22. Competition and the Market Structure

23. Price Control and the Market Structure
Least control over price
Most control over price

24. Characteristics of Market Structures
Very
Many
Agric. products
Fishery
Some
Extensive
Fair
Amount
Fair amount
with
differentiated
oligopolies
Extensive
Cable TV
Water

25. A Summary of Market Structures

26. Cartels
A cartel is an organization of independent firms whose purpose is to control and limit production and maintain or increase prices and profits.

27. Equilibrium of a firm in Monopolistic competition
The firm whether operating under perfect competition or Monopoly, wants to maximize profit. In order to achieve this objective the firms goes on producing a commodity as long as the MR is greater than MC. When MR=MC, it is then in equilibrium and produces the best level of output. If a firm produces less than or more than the MR=MC output, it will then not be making maximum of profits.

28. Four cases of price and output determination under Perfect Competition
Following are the possible cases in perfect competition.
A firm will earn Super Normal profit ,if the point where MR=MC is greater than ATC
A firm will earn Normal profit ,if the point where MR=MC=ATC
A firm will Incur Loses if MR=MC is below ATC
A firm will Shut down if the point where MR=MC is even above the AVC.

29. Costs Relevant to a Firm
P = MR
Output
Total Cost
Marginal Cost
Average Total Cost
Total Revenue
Profit
TR-TC —
40.00
–40.00
35.00 1
68.00
28.00
–33.00 2
88.00
20.00
44.00
70.00
–18.00 3
104.00
16.00
34.67
105.00
1.00
35.00 4
118.00
14.00
29.50
140.00
22.00 5
130.00
12.00
26.00
175.00
45.00 6
147.00
17.00
24.50
210.00
63.00 7
169.00
24.14
245.00
76.00 8
199.00
30.00
24.88
280.00
81.00 9
239.00
40.00
26.56
315.00 10
293.00
54.00
29.30
350.00
57.00

30. Determining Profits/Loss Graphically
(a) Abnormal Profit case
(b) Normal Profit case
(c) Loss case
Quantity
Price 65 60 55 50 45 40 35 30 25 20 15 10 5 1 2 3 4 6 7 8 9 12 D MC A
P = MR B
ATC
Profit
Loss

31. Average Fixed, Average Variable and Average Costs
Visual 3.4

32. The Shutdown Point
The shutdown point is the point at which the firm will be better off, if it shuts down because
it cannot even cover Average Variable Costs.

33. Profit, Loss and Shutdown
Visual 3.6

34. Spot Quiz..
Here is the graph of Rake making company showing abnormal profit. Find the following;
1 MR ?
2 Profit per unit?
3 Profit maximizing Quantity

35. Long-Run Competitive Equilibrium
Zero profit does not mean that the entrepreneur does not get anything for his efforts.
Normal profit – the amount the owners of business would have received in the next-best alternative.

36. 2 Monopolistic competition
Large number of firms in the industry
May have some element of control over price due to the fact that they are able to differentiate their product in some way from their rivals – products are therefore close, but not perfect, substitutes
Entry and exit from the industry is relatively easy – few barriers to entry and exit

37. Price and output determination under Monopolistic competition
Maximizing Profits
Firms produce the quantity where MC =MR and charge the highest price that sells that quantity

38. Case 1 Abnormal Profit MC AC AR MR $180 P $150 Price per Gallon $ 140
$100 E
12,000
Gallons of Gasoline per Week

39. Show Graphically the level of output where a firm earns Abnormal Profit in monopolistic competition.

40. Case 2 Losses situation

41. THANKS