Download Unit 3 – Market Structures

Chapter 7
Market Structures
4 conditions for
pure competition:
• Ex. of a Perfectly
Competitive Market
• Salt, wheat, natural
1. Large numbers of buyers
and sellers act independently gas, etc.
2. Sellers offer identical
• However, pure competition
products- no difference in
is a hypothetical situation all
quality or brand names, no
systems are actually
need to advertise
imperfect
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.
Barriers to Entry
Factors that make it difficult for new firms to enter a
market are called barriers to entry.
Start-up Costs
Technology
• The expenses that a
• Some markets require
new business must pay
a high degree of
before the first product
technological knowreaches the customer
how. As a result, new
are called start-up
entrepreneurs cannot
costs.
easily enter these
markets.
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.
4 Types of Monopolies
Natural Monopolies
Geographic Monopolies
• 1 seller is most efficient due to
• Remote areas the potential
economies of scale
for profit is so small that only
• Economies of scale- size of
one seller chooses to enter a
seller allows them to use
market
resources more efficiently and
economically than many
different firms could
• Ex. Utilities, electric company,
cable services
Technological
Government Monopoly
Monopoly
• provide basic necessities
like public utilities—water
• 1 company invents
or changes a product and sewer services, roads,
bridges, canals
& they have a
the U.S. are monopolized
monopoly b/c they • in
by state and federal
are the only ones
governments
with this technology.
Why are
consumers
willing to pay
more for one
product than
they are for
a similar
one?
Monopolistic Competition
• Products are similar but
not of identical quality.
• Factors that
differentiate: store
location, store design,
manner of payment,
delivery, decorations,
service, etc.
• Brand loyalty
EXAMPLES:
• Software
• Fast food burgers
• Automobiles
• Computer games
• Soft drinks
• Can you think of more?
Imperfectly
Competitive
Markets
Why are there only
a few large
automobile
manufacturers?
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.
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.
2. Few Artificial Barriers to
Entry
Firms in a monopolistically
competitive market do not
face high barriers to entry.
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.
Oligopoly
3 Conditions of Oligopolies:
• use interdependent
1. Only a few large sellers.
pricing to respond
(Only market structure
to the prices of
like this)
2. Sellers offer identical or
competitors
similar products.
3. Other seller cannot easily
• Exp. Auto industry.
enter the market. (this is
due to start-up costs,
government regulation,
consumer loyalty to
established products)
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 other’s
prices to try to capture market share.
Oligopoly
Oligopoly describes a market dominated by a few
large, profitable firms.
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.
Cartels
• A cartel is an
association by
producers established
to coordinate prices
and production.
Comparison of Market Structures
• Markets can be grouped into four basic
structures: perfect competition, monopolistic
competition, oligopoly, and monopoly
Comparison of Market Structures
Number of firms
Variety of goods
Control over prices
Barriers to entry and exit
Examples
Perfect
Competition
Monopolistic
Competition
Oligopoly
Monopoly
Many
Many
Two to four dominate
One
None
Some
Some
None
None
Little
Some
Complete
None
Low
High
Complete
Wheat,
shares of stock
Jeans,
books
Cars,
movie studios
Public water