Market Structures

1
Chapter 7

• Market Structures

2

• 4 conditions for pure competition
• 1. Large numbers of buyers and sellers act
  independently
• 2. Sellers offer identical products- no
  difference in quality or brand names, no need to
  advertise
• 3. Buyers and sellers are well informed about
  prices. Price is determined by supply and demand.
  
• 4. Few barriers sellers can enter or exit the
  market easily- based on profit.

• Ex. of a Perfectly Competitive Market
• Salt, wheat, natural gas, etc.
• However, pure competition is a hypothetical
  situation all systems are actually imperfect

3
Barriers to Entry
Factors that make it difficult for new firms to
enter a market are called barriers to entry.

• Start-up Costs
• The expenses that a new business must pay before
  the first product reaches the customer are called
  start-up costs.

• Technology
• Some markets require a high degree of
  technological know-how. As a result, new
  entrepreneurs cannot easily enter these markets.

4
Defining Monopoly

• A monopoly is a market dominated by a single
  seller.
• Monopolies form when barriers prevent firms from
  entering a market that has a single supplier.
• Monopolies can take advantage of their monopoly
  power and charge high prices.

5
4 Types of Monopolies

• Natural Monopolies
• 1 seller is most efficient due to economies of
  scale
• Economies of scale- size of seller allows them to
  use resources more efficiently and economically
  than many different firms could
• Ex. Utilities, electric company, cable services

• Geographic Monopolies
• Remote areas the potential for profit is so small
  that only one seller chooses to enter a market

6

• Technological Monopoly
• 1 company invents or changes a product they
  have a monopoly b/c they are the only ones with
  this technology.

• Government Monopoly
• provide basic necessities like public
  utilitieswater and sewer services, roads,
  bridges, canals
• in the U.S. are monopolized by state and federal
  governments

7

• Why are consumers willing to pay more for one
  product than they are for a similar one?

8
Monopolistic Competition

• EXAMPLES
• Software
• Fast food burgers
• Automobiles
• Computer games
• Soft drinks
• Can you think of more?

• Products are similar but not of identical
  quality.
• Factors that differentiate store location, store
  design, manner of payment, delivery, decorations,
  service, etc.
• Brand loyalty

9
Imperfectly Competitive MarketsWhy are there
only a few large automobile manufacturers?
10
Four Conditions of Monopolistic Competition
In monopolistic competition, many companies
compete in an open market to sell products which
are similar, but not identical.
1. Many Firms As a rule, monopolistically
competitive markets are not marked by economies
of scale or high start-up costs, allowing more
firms. 2. Few Artificial Barriers to
Entry Firms in a monopolistically competitive
market do not face high barriers to entry.
3. Slight Control over Price Firms in a
monopolistically competitive market have some
freedom to raise prices because each firm's goods
are a little different from everyone else's. 4.
Differentiated Products Firms have some control
over their selling price because they can
differentiate, or distinguish, their goods from
other products in the market.
11
Oligopoly

• 3 Conditions of Oligopolies
• 1. Only a few large sellers. (Only market
  structure like this)
• 2. Sellers offer identical or similar products.
• 3. Other seller cannot easily enter the market.
  (this is due to start-up costs, government
  regulation, consumer loyalty to established
  products)

• use interdependent pricing to respond to the
  prices of competitors
• Exp. Auto industry.

12
How oligopolies control prices-legally

• 1. Price leadership- one of the largest sellers
  in the market takes the lead by setting a price.
  Others can then set prices and control all the
  prices.
• 2. Price war- sellers undercut each others
  prices to try to capture market share.

13
Oligopoly
Oligopoly describes a market dominated by a few
large, profitable firms.

• Cartels
• A cartel is an association by producers
  established to coordinate prices and production.

• Collusion
• Collusion is an agreement among members of an
  oligopoly to set prices and production levels.
  Price- fixing is an agreement among firms to sell
  at the same or similar prices.

14
Comparison of Market Structures

• Markets can be grouped into four basic
  structures perfect competition, monopolistic
  competition, oligopoly, and monopoly