Download Ch. 6 – Market Structures

Ch. 6 – Market Structures
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Consumers benefit most from competitive
markets
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Producers strive for market dominance
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We will look at 4 types of markets:
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1) Perfect Competition
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2) Monopolistic Competition
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3) Oligopoly
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4) Monopoly
Ch. 6, Sec. 1 – Highly Competitive
Markets
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1) Perfect (Pure) Competition:
Both consumers (buyers) and producers
(sellers) compete directly and fully under the
laws of supply and demand
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Four conditions are present:
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a) Many buyers and sellers act independently
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No single buyer or seller has power to control
demand, supply or prices – competition
Prices/production are set only by supply &
demand
Highly Competitive Markets (cont)
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b) Identical Products Choice of one product over another is based
primarily on PRICE
c) Informed Buyers Information about products is readily available
and buyers are knowledgeable
d) Easy Market Entry and Exit Producers can enter and exit easily because
start-up cost is low, technology is simple and no
single producer controls the market
Highly Competitive Markets (cont)
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2) Monopolistic Competition -
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Sellers offer different products
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Characteristics:
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a) Product Differentiation:
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Producers point out real or perceived
differences in their products
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b) Nonprice Competition:
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Advertising and creating a brand name
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c) Profits:
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Increase demand ->increase price ->increase
PROFIT
Ch. 6, Sec. 2 – Imperfectly
Competitive Markets
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Two types of imperfectly competitive markets:
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3) Oligopoly -
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a) A few (3-4) large sellers control most (70% or
more) of the market
b) Identical or similar products
c) Difficult market entry (high start-up costs,
gov't regulation, consumer loyalty)
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Examples?
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Autos, cereal, airlines, cable TV, cell phones
Oligopoly (cont)
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Nonprice Competition
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Interdependent Pricing -
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Being very responsive to – or dependent on –
the pricing actions of their competitors
Collusion Sellers secretly agree to set production levels
or prices for their products
Cartels Sellers openly organize a system of price
setting and market sharing
OPEC, diamonds
Ch. 6, Sec. 2 - Monopoly
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4) Monopoly -
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Single seller
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No close substitutes are available
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Difficult market entry
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Types of Monopolies:
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a) Natural
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Competition would be inconvenient or
impractical
Utilities
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Monopolies (cont)
b) Geographic -
In remote areas maybe only one seller is
available, less common today
c) Technological Producer develops new technology for a
product
Protected by patent or copyright (prescription
drugs)
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d) Government -
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Building & maintaining roads, bridges
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Consumer demand, potential competition and
gov't regulation all limit monopoly
Ch. 6, Sec. 3 – Market Regulation
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Era of Big Business (1865-1880's)
After the Civil War, fierce competition swept
through US markets.
Small companies were driven out of business or
taken over by large corporations
Trusts – huge monopolies formed in the oil,
steel, coal, sugar, tobacco, meat and railroad
industries
Laissez-faire: no gov't interference in business
in any way
Early Antitrust Legislation
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Interstate Commerce Act (1887):
Created the Interstate Commerce Commission
(ICC)
Railroad freight business
Trusts in the railroad business had caused
rates to soar for transport of goods
Sherman Antitrust Act (1890):
Banned actions or agreements “in restraint of
trade”
Too vague, trusts avoided the law
Early Antitrust Legislation (cont)
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Standard Oil Company – John D. Rockefeller
This trust controlled almost the entire oil
business in US
1911 Standard Oil was broken up into several
smaller companies
Standard Oil of New Jersey remained and in
1972 became ---->
EXXON
Early Antitrust Legislation (cont)
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Clayton Antitrust Act (1914):
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Clarified and strengthened Sherman Act
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Specifically prohibited, price setting and price
discrimination
Prohibited mergers that reduced competition,
exclusive sales contracts and local price cutting
Federal Trade Commission Act (1914):
Created the FTC to investigate and unfair
competition and commerce
Antitrust Policy in Recent Decades
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Key cases in recent years:
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1) American Telephone & Telegraph (AT&T)
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Gov't intervened to break-up this company and
created the “Baby Bells” to service regions
around the country (SW Bell, NYNEX, Bell
Atlantic, etc)
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2) Microsoft – Windows/Internet Explorer
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3) Clear Channel Communications?
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1,170 radio stations, 19 TV stations and
700,000 billboards – purchased SFX largest
producer of live music shows