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DIFFERENT TYPES OF MARKET STRUCTURES What Are Markets? A market is where buyers and sellers: –meet to exchange goods and services. –are affected by some level of competition. The market may be in one specific place or It does not exist physically at all. SWS 2006 2 1. Perfect Competition BEFORE WE BEGIN!! This is a theoretical situation. NO TRUE Perfectly Competitive Market exists. IT IS ONLY A THEORY! SWS 2006 3 The 5 conditions of perfect competition 1) Many Buyers and Sellers No single buyer or seller can influence the price. 2) Identical products. (EX: Salt, Flour, Commodity, Corn) • Commodity: product that is the same no matter who produces it 3) Informed Buyers and Sellers: Both buyers and sellers must have information 4) Easy to enter and exit. Sellers are free to enter the market, conduct business and free to leave the market. Barriers to Entry: any factor that makes it difficult for a new firm to enter a market such as Start Up Cost; which are expenses a firm must pay before it can begin to produce and sell goods SWS 2006 4 Perfect Competition Each individual firm is too small to influence prices. Price becomes fixed to everyone in the industry. EXAMPLE: Think about your composition book, do you care what brand it is or how much it was? SWS 2006 5 2. Monopoly A market dominated by a single seller Price maker. (set their own price, without regard to supply and demand, demand will not decrease with price increase) Because of their market power, can use Price Discrimination, which is when you divide customers into groups based on how much they will pay for a good. • Examples: Discounted airline fares, senior citizen, student discounts SWS 2006 6 Monopoly Other Types of Monopolies (Legal): Natural Monopoly: Market that runs more efficiently when one supplies all of the product Government Monopoly: Monopoly created by Government Ex: Patent: license that gives inventor exclusive right to sell for a period of time. Franchise: The right to sell a good or service within an exclusive market. License: Gov issued right to own business Copyright: Industrial Monopoly: Rare situation where the government allows a monopoly, such as MLB. SWS 2006 7 3. Monopolistic Competition 4 Conditions of Monopolistic Competition 1) Many Firms(but fewer than perfect competition). 2) Products are NOT exactly identical, BUT VERY SIMILAR, so companies use PRODUCT DIFFERENTIATION Differentiation: making a product different from other similar products 3) Slight Control Over Price: Firms must remain aware of their competitor’s actions, but they each have some ability to control their own prices. 4) Few barriers to entry: May enter market easily Monopolistic competition takes its name and its structure from elements of monopoly and perfect competition. SWS 2006 8 Conditions of Monopolistic Competition The point is that firms in Monopolistic Competition must use Product Differentiation & Non-price Competition to sell their products. Product Differentiation: The real or imagined differences between competing products in the same industry. Non-Price Competition: Notice these commercials never Non-Price Competition involves the advertising mention price. of a product's appearance, quality, or design, rather than its price. • Advertising helps the consumer believe that this product is different and worth more money 4. Oligopoly A market in which a two or three large sellers control most of the production of a good or service and they work together on setting prices. Conditions of an Oligopoly 1) 2) 3) Very few sellers that control the entire market. Products may be differentiated or identical High barriers to entry: Difficult to Enter the market because the competitors work together to control all the resources & prices. Big Challenge to Government due to price leadership, collusion and cartels. Collusion = an agreement to act together or behave in a cooperative manner. Cartels = a formal organization of producers that agree to fix prices and production (Most successful when limiting production and price) SWS 2006 10 The Role of Government Government has the power to maintain competition, regulate monopolies, or to run government-owned monopolies. It can also deregulate the market as well, to allow businesses to take over that product. Since the late 1800s the US have passed laws to restrict and regulate monopolies and trusts. Trust: a legally formed combination of companies. (similar to cartel, ex: Microsoft, AT&T) Deregulation: the removal of some government controls over a product (ex: trucking, airlines) SWS 2006 11