Download large number of firms

Market Structures
What is a Market Structure?
• Degree of Competition among firms
operating in the same MARKET
What is Competition?
• Economic rivalry among businesses in
the same MARKET
Pure/Perfect Competition
• A market structure in which a large
number of firms all produce the same
product
• Simplest Market
• Each firm produces so little of supply=
no single firm can influence price
• Seller only controls what they produce
4 Conditions for Pure Competition
• Large number of sellers. Each with only a
small share of market
• Identical Products: No reason for non-price
competition
• Informed Buyers and Sellers: No influence on
Price Controls and no need to advertise
• Easy Market Entry and Exit
Conditions for Pure Competition
A purely competitive market has many suppliers selling
identical products called commodities.
• Can lead to imperfect competition
• Technology- markets that require a high degree of
technology are not found in a perfect competition
market
• Start-up costs- expenses a new business must pay
before the first product reaches the customer
– Markets with high start up costs are not found in a
perfectly competitive market
– Ex.: the start up cost of a sandwich shop is much lower
than a lumber mill
Barriers to Entry and Competition
A movie production company requires so much equipment
that it usually has high start-up costs.
Price, Output, and Purely Competitive Markets
• One of the primary characteristics of purely competitive
markets is that they are efficient.
• Competition within these markets keeps both prices and
production costs low.
• Firms must use all inputs—land, labor, organizational
skills, machinery and equipment—to their best advantage.
• Prices that consumers pay and the revenue that
suppliers receive accurately reflect how much the
market values the inputs used to produce the product.
• In a purely competitive market, prices correctly represent
the opportunity costs of each product.
Price, Output, and Purely Competitive Markets
In pure competition, suppliers must match the lowest
supplier’s price or exit the market. Why are consumers
unwilling to pay one supplier’s higher price in such a
market?
Non-Price Competition
• Competition through other ways
than by lowering price
Non-Price methods of Competition
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Advertising
Service level (word of mouth and
repeat customer
Physical Characteristics
Location
Monopolistic Competition
• Fairly large # of sellers
• Slightly differentiated products
• Product differentiation is vital
• Most Common market structure
• Extensive advertising (need to inform)
• Sellers decrease competition through
different products
Market Conditions for Monopolistic
Competition
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•
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Large # of buyer and sellers
Products are similar (emphasize
differences among products)
Buyers must be informed about
differences in products
Sellers have slight control over price
Few artificial barriers to entry
Monopolies
Market dominated by a single seller
Characteristics of a Monopoly
• Technology and Change
• New Technology can cut FIXED COST and make
many small companies as efficient as 1 large
firm.
• Much control over price (a high price hurts
demand)
• Market Power: ability of a company to change
prices and output (ex: monopolist)
Price discrimination: Division of customers into
groups based on how much they will for good
Pure Monopoly’s Characteristics
• One Firm
• No Close substitute goods are available
• Prohibitive barriers to entry:
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High Investment Costs
Technological Expertise
Legal Restrictions
Ownership of a scarce factor of production
• Almost complete control of market price
• No need for advertising
Natural Monopolies
• Runs most efficiently when one large firm
provides all the output
• Competition would be chaotic, impractical,
inconvenient and unworkable
• Average costs are lowest when all output is
produced by single firm
• 1 or both firms will not be able to cover costs
and go out of business
Ex: Public Water Company
Government Monopoly
• Owned and operated by the government
• Ex: Hwy system, public schools/libraries,
Postal service
The Role of Government
• Franchises and Licenses
• Contract issued to firm to sell goods to an
exclusive market
• Grants rights to operate (especially with
scarce resources) (Land, Radio/TV)
• Industrial Organizations
• Gov. allows restriction of firms in market
• MLB restricts # of locations and teams
Technological Monopoly
• Results from the invention of a new product
(patent) or when technology changes the way
a good is produced
• Patent gives exclusive rights for 20 years
• Copyright gives authors/artists exclusive rights
Geographic Monopoly
A firm is the only seller of a good in a
specific location
Economies of Scale
• “Economies of mass production”
• Exist when firms are large enough to take
advantage of mass production techniques
• Producers average cost of production drops
as production rises
Oligopolies: firms control 70% of the
market
• Few sellers control over 70% of market
• Firms offer identical/differentiated products
• Advertisement is important
•
Product info must be easily available
(informative advertisement to introduce new
products)
• Huge barriers to entry
•
Technological knowledge, money and brand
name loyalty
• Control some prices by creating band name
loyalty and using non-price competition
• Must show customers why they should by
product instead of competitors
Examples:
• Cellphones: AT&T, Verizon, Sprint
• Autos: GM, Ford, Toyota
• Shoes: Nike, Reebok, New Balance,
Adidas
• Cereal: Quaker Oats, General Mills,
Kellogg
• TV: NBC, CBS, ABC, Fox
• Others: gum, light bulbs, copy
machines, cameras
• Price Leadership: 1 firm (largest/most powerful)
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offers product at a price…others follow out of
fear of a price war. Legal because it does not
involve agreements among competitors
Collusion: formal price agreement among
competitors. Illegal because it is dangerous to
competition
Price Fixing: agreement among competitors to
sell at the same/similar prices (output of collusion)
Cartel: formal organization of producers that
agree to coordinate prices and production (illegal)
Very
Many
Agric. products
Fishery
Some
Fair
Fair amount
Amount
Extensive
Extensive
Cable TV
Water
Output Decisions
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The Monopolist’s Dilemma
Falling Marginal Revenue
Setting a Price
Profits
Output Decisions
A company that has a monopoly on a particular product, such
as a new drug, may find that increasing output lowers its
marginal revenue.
Anti-Trust Legislation
• Trust: Legally formed combinations of corporations
or companies
• Sherman Anti-Trust Act: Designed to monitor and
regulate big business, prevent monopolies, block
mergers and break up existing monopolies
• Trend of deregulation: removal of some
government controls over market
• Federal Trade Commission: 1914. Investigate
structure and behavior of firms engaging in
interstate commerce.
• Treble Damages: awards to any person or
private company that sustains injury or
financial loss because of an anti-trust
violation (3x the actual damages.