Download Market Structures without Pictures

Market Structures
Market Structures
• Perfect Competition
• Monopolistic Competition
• Oligopoly
• Monopoly
Perfect Competition
• Many buyers and sellers
• Each participant sells a homogenous
(identical) product
• Buyer will not pay extra for one particular
company’s goods because they are the same
• Buyer always chooses the supplier with the
lowest price
Perfect Competition
• Most consistently meets the criteria of
the pure supply and demand model
Perfect Competition
• Competitors known as
“price takers”
• No control over the
price of their product
• Price is set by the laws of
supply and demand at market equilibrium
• Can sell as much product as they can produce at
market price and receive a small profit
Perfect Competition
• Entry and exit in the market is easy
• Buyers and sellers
are well-informed
by the market about
products and prices
(presumes perfect
information.)
Perfect Competition
• Example: Share in the stock market
– When buying a share of a company’s stock, you are
buying a share of ownership in the company that
issued the stock
– The value of all shares increases and decreases
equally
– No difference between shares of stock (within
the same class of share)
Perfect Competition
• Example: Share of stock
• There are many shares available from any particular
corporation
• Any adult may buy a share
• Entering the market (buying a share) and exiting the
market (selling a share) is simple because stock is very
liquid
• Liquid assets are those that can be easily and quickly
sold at their market value for cash
Perfect Competition
• Example: Share of stock
• Buyers have relevant information about a stock
• Price
• Performance over time
• Information about the stock is regularly published and available
from:
• The stock market itself
• Financial media
• Print: Wall Street Journal; Financial Times
• Television: CNBC, Fox Business News
Commodities
• Category of products that exists in perfect competition
– Often (but not always)
substances that come
from the
earth
– The same or virtually
the same no matter
where
produced
– Maintain roughly
universal price
– Fungible = equivalent no matter who produces it
Commodities
– Examples of
Commodities
• Notebook paper
• Milk
• Petroleum
• Metals
– Primarily traded in
the U.S. on the:
– Chicago Board of Trade
– New York Mercantile Exchange (“The Merc”)
Monopolistic Competition
• Similar to perfect competition
• Biggest exception is the nature of the product itself
• Includes most retail markets where there are a
number of competing sellers
Monopolistic Competition
• Many buyers and sellers
• Characterized by low economies of scale and
low start up costs
• Economies of scale – the more a
company makes, the less expensive each
unit becomes
• Start up costs – non-recurring costs
associated with setting up a business
Monopolistic Competition
• Distinguished from perfect competition by
product differentiation
• Products similar enough to be substitutes
but are not identical
• Each firm holds a monopoly over its own
product
• Firms have freedom to make products
different enough in some way to attract
buyers
Monopolistic Competition
• Few barriers
to entry
• No patents,
franchises,
or legal
limitations
to enter
market
• Competitors enter market with ease
Monopolistic Competition
• Too many producers to coordinate to keep
out new competitors
• Like perfect
competition
Monopolistic Competition
• Non-price competition allows producers
some control over prices
• Compete on variables
other than price: style,
quality, color, etc.
• Advertise to try to
differentiate goods to
attract consumers
Non-Price Competition
Monopolistic Competition
• Example: Shirt industry
• Plenty of shirts available on the market
• All serve same basic function
• However, there is variety demanded by
consumers:
• Style, Color, Types, Quality, Design
Oligopoly
• Few sellers in the market
• Economists define
as when 4 of the
largest firms
produce 70-80% of
the output
• Working alone or
together, dominant
firms set prices for goods
Oligopoly
• Attempt to avoid price competition, price
deflation
• Could trigger a downward spiral of
competitively lower prices
• Companies could lose profits without
gaining market share
Oligopoly
• Market leader is usually also the pricing leader
• Market
leader – the
company
with the
largest
market
share
• Market share = size of the company/size of the industry
Oligopoly
• Pricing leader – the company that usually
makes pricing changes first, causing other
industry participants to adjust their relative
prices in response
Oligopoly
• Significant barriers to entry
• Accounts for the fact that few survive the
•
•
•
•
competition
High start-up
costs
Strong
loyalty
Long
established
brands
Government regulations
customer
Oligopoly
• Sometimes due to huge economies of scale
• Average cost of
production decreases as
output increases
• A few firms reach these
economies of scale and
levels of efficiency
before the market becomes too crowded
Oligopoly
• Competitors often able to coordinate to not
lower prices in ways that avoid breaking
government
anti-trust laws
(press releases)
Collusion
• An agreement
between 2 or more
parties made in secret
to illegally limit
competition
Cartel
• A formal agreement among “competing” firms
to fix prices, marketing, and production
Antitrust Laws
• A collection of laws which regulates
businesses to promote fair competition for
the benefit of consumers
• Sherman Act of 1890
Differentiated Oligopoly
• Products are not exactly alike according to
style and design
• Work to make their brands and models stand
apart
• Makes non-price competition the most
distinguishing characteristic
Differentiated Oligopoly
• Each firm must find its own way to win
customers without lowering prices
• Example: Auto industry
• Automobile industry financing incentives
• Free service plans
• Heavily advertized features of models to
make them stand out from others
Differentiated Oligopoly
• Example: Breakfast cereal industry
• Only 4 cereal makers
• 100s of brands appealing to wide range of
tastes
Pure Oligopoly
• Products are homogenous (identical)
• Cannot be differentiated
• Like perfect competition in this respect
• Only a few producers
• Unlike perfect competition
Pure Oligopoly
• Non-price competition exists, but difficult
• Must build image, but usually without large
advertising budgets
• Service
• Speedy delivery
• Quality service
Pure Oligopoly
• Example industries:
• Salt
• Sand
• Gravel
• Glass windows
Monopoly
• Single seller of goods produces 70-80% of
output
• Disliked because they are “price makers”
• Discouraged by anti-trust laws
• AT&T was last true example (1981)
• Before cellular communication and Internet
• NFL, NBA, MLB all operate under
government-sanctioned monopolies
Monopoly
• Forms when barriers to entry are very high
• High start-up costs
• Low per-unit operating costs
• No substitutes
• Little to no non-price competition
• Due to unique nature of the good or service
being monopolized
Monopoly
• Government sometimes encourage monopolies
• Patents issued by the Congressional Patent Office
• Give inventor or developer of a new product or
service exclusive operating rights for a set period of
time
• Guarantee companies can profit from costly research
without competition
• Encourages firms to develop new products that
benefit all, and contribute to higher standard of living
• Patents usually expire after a number of years
Monopoly
• Government licensing
• Utilities often have exclusive rights to
operate in a certain locality
• Water
• Electric
• Pay a licensing fee to a city, county, or
commission
Monopoly
• Government franchising and licensing (cont’d)
• In a competitive market competing utilities
would:
• Run separate lines
• Clutter landscape
• Possibly make service unprofitable for
both utilities
Monopoly
• Companies are also franchised to do exclusive
business in a government facility
• Food concessions at government-built
stadiums
• Corporate pizza business in school
cafeteria
Duopoly
• A market structure
in which two
companies control
at least 70-80% of
the market.