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Chapter 7
Market Structures
Aww, Snap!
Market Structure
► Market
structure refers to the ways that
competition occurs, based on the number of
firms, the similarity of the products being
sold and the ease of entry for new firms or
exit for existing firms.
► Four Basic Structures
*Perfect Competition
*Monopolistic
*Monopoly
*Oligopoly
Barriers to Entry
►Barriers
– factors that make it
difficult for new firms to enter a
market
►Barriers lead to imperfect
competition
Examples of Barriers
►Start-Up
Costs – The expenses a
new business must pay before it
can enter the market
►High Start-Up Costs prevent new
firms from entering
Examples of Barriers
►Technology
– how much training
does it take to enter the market?
Examples of Barriers
►Government
– may require
licensing, certification, approval,
etc.
Perfect Competition
►Perfect
Competition – a market
where a large number of firms are
all producing essentially the same
product
Conditions Perfect Competition
►Many
buyers and sellers
participate
►Sellers offer identical
products
►Products
that are the same
no matter who makes or sells
them are commodities
Perfect Competition
 Buyers and sellers are well
informed about products
 Sellers are able to enter and
exit the market freely
Price and Output
►A
perfectly competitive market
produces the lowest sustainable
prices possible
►With many firms competing, each
firm lowers its prices to the point of
just covering their costs
Monopoly
►Monopoly
– Barriers prevent firms
from entering a market that has a
single supplier
Factors that Create a Monopoly
►1.
Economies of Scale – average
cost of production always drops,
never increases
►2. Natural Monopoly – market runs
most effectively when one large
firm provides all output
Factors that Create a Monopoly
►Natural
Monopolies are usually
given special status by the
government, but the government is
allowed to control their prices
►New technologies can destroy a
natural monopoly
Government Monopolies
►Government
Monopoly – a
monopoly created by the
government
Typical High School Boy
Questions?
Wait…
what’s a
government
monopoly?
Government Monopolies
►Government
Monopoly – a
monopoly created by the
government
 There are 3 types of government
monopolies, each with a different
reason for being formed
Three Kinds of Government
Monopoly
►Technological
Monopoly –
government issues a patent
 Patent – exclusive rights to sell a
good or service for a specific
period of time
Three Kinds of Government
Monopoly
►Franchises
and Licenses
 Franchises – government allows
company to create an exclusive
market for their brand name and
products
Three Kinds of Government
Monopoly
►Franchises
and Licenses
 Licenses – government grants a
firm the right to operate a
business
Three Kinds of Government
Monopoly
►Industrial
Organizations –
government allows companies in
an industry to restrict the number
of firms in the market
Output Decisions
►Do
you emphasize price or output?
 Price-Takers – in a competitive
market, businesses have no
control over their own prices
 Price-Setters – in a noncompetitive market, business can
choose what price to charge
Price Discrimination
►Do
you think
monopolies
usually charge
the same price
to all of their
customers?
Price Discrimination
Price Discrimination
►Price
Discrimination
– dividing
consumers into
different groups
and charging
different prices to
each group
Price Discrimination
►Monopolies
are not
the only companies
that do this
►Any company with
market power, the
ability to control
prices and output,
can use
discrimination
Price Discrimination
►The
easiest way to maximize
profit for a monopoly is to
identify consumers who will not
pay full price, and offer them a
“discount”
►These are called targeted
discounts – think of airline fares,
manufacturers rebates, student
discounts
Limits to Price Discrimination
►1.
Firm must have some market
power
►2. There must be distinct consumer
groups
►3. It must be difficult for
consumers to resell the product
Monopolistic Competition
►Monopolistic
Competition – many
companies compete in an open
market, but sell products that are
slightly different from one another
Example
4 Characteristics of Monopolistic
Competition
►1.
Many Firms
►2. Few Artificial Barriers to Entry
►3. Slight Control Over Prices
►4. Differentiated Products
Other Means of Competition
►In
a Monopolistic Competition,
firms compete in a variety of
ways other than prices
 Physical Characteristics
 Location
 Service Level/Quality
 Advertising and Image
Oligopoly
►Oligopoly
– a market dominated by
a few large, profitable firms
►If 4 of the largest firms can claim
70% or more of the market share,
it is an oligopoly
Example
Example
Characteristics of Oligopoly
►1.
Many Barriers to Entry
►2. Cooperation and Collusion
 Price Leadership – market leader
raises prices, other firms follow
suit (can also cause price war,
though)
Characteristics of Oligopoly
►1.
Many Barriers to Entry
►2. Cooperation and Collusion
 Collusion – an agreement among
members of an oligopoly to set
prices and production levels
Characteristics of Oligopoly
►1.
Many Barriers to Entry
►2. Cooperation and Collusion
 Collusion causes price fixing,
where firms agree to sell at the
same or similar prices
 It’s illegal, by the way
Characteristics of Oligopoly
►1.
Many Barriers to Entry
►2. Cooperation and Collusion
 Cartels – an agreement by
producers to coordinate prices
and production
 Legal in some countries, not
here
Regulation and Deregulation
►What
might a firm do to increase
its market power?
 Form a cartel
 Merge with competitors
 Predatory Pricing - Temporarily
lower prices to put others out
of business
Regulation and Deregulation
►Government
has Antitrust Laws in
place to prevent such practices
►Trust – a business combination
similar to a cartel
►Began with Sherman Antitrust Act
in 1890
Fair or Unfair?
►Nike
is one of the world’s largest
and most popular shoe
manufacturers
►Once Nike introduced clothing, it
forced companies that wanted to
buy its shoes to buy its clothes
as well
Fair or Unfair?
►Disney,
ABC, AOL, and TimeWarner have merged together
►They now control the Disney
Channel, Cartoon Network, and
the WB, which is a basic
monopoly on children's
programming
Regulation and Deregulation
►Government
can step in and break
up monopolies based on the
Sherman Antitrust Act
►Famous examples: John D.
Rockefeller’s Standard Oil (1911),
AT&T (1982)
Regulation and Deregulation
►Government
can also block
mergers from happening
►Merger – when one company joins
with another
►Government uses research to see
whether the merger will help or
hurt consumers
Regulation and Deregulation
►The
Republican Party has typically
supported deregulation – when
the government stops making
decisions about what businesses
can and cannot do
►Government uses regulation and
deregulation for the same purpose
– to promote competition