Download Market Structures - Spring Branch ISD

Market Structures
[How many sellers in each industry]
Competition
– economic rivalry among businesses.
Market Structure – degree of competition
among firms operating in the same market (autos).
Perfect Competition
a market structure in which a large number
of firms all produce the same product
Four Market Conditions Necessary For Perfect Competition
1. Very large number of sellers (hundreds or thousands).
Each seller will have only a small share of the market.
2. Similar or identical products (sweet corn/brocolli/eggs)
which means there is no reason for non-price competition.
3. Easy entry and exit into the market.
4. Absence of price controls (too many sellers & consumers).
Perfect Competition and Price
“No one firm controls price”
Monopolistic Competition– fairly large
number (25-75) of sellers competing to sell
slightly differentiated products. Product
differentiation (real or imaginary) is important.
This is the most common market structure.
Sellers try to decrease competition by
making their products different from the
others.
Market Conditions For Monopolistic
Competition
1. 25-75 buyers and sellers must exist. Firms act
independently but no single firm is large enough to
change the supply or price of a good.
2. The products are similar but they emphasize
product differentiation (differences among
products). This is the one thing that separates
monopolistic competition from perfect
competition
3. Buyers must be well informed about differences
in products. Monopolistic competitors depend on
advertising.
4. Easy to enter or exit the industry.
Monopolistic Competition
This is the most common market structure – over 99% of all firms.
Examples of Monopolistic Competition
Blue Jeans
Dry Cleaners
Shoe Stores
Toothpaste
Restaurants
Barbershops
Grocery Stores
Rock Concerts
Cassette players
Book Stores
Vacuum Cleaners
Beauty Parlors
Candy Bars
Pizza
Chicken
Soaps and detergents
Furniture Stores
Econ Textbook Co’s
Oligopoly
– “the chosen few” (3 or 4) firms
control 70% of the market.
Examples of Oligopolies:
• Cars – “Big 5” – GM, Ford, Chrysler, Honda, &
Toyota
• Athletic Shoes–“Big 4”–Nike, Reebok, New
Balance, Adidas
• TV Networks – “Big 4” – NBC, CBS, ABC & Fox
• There are also oligopolies in chewing gum, light
bulbs, typewriters, photocopiers, and sewing
machines.
Four Market Conditions For Oligopolies
1. A few sellers control over 70% of market.
2. Firms offer identical or differentiated
products (real or imaginary). Advertising important.
3. Product information must be easily available. They
use informative advertisement (price, quality, and
special features) to introduce new products.
4. There are huge barriers to entry into the industry.
The three major barriers are technological
knowledge, money, & brand name loyalty.
Entry is difficult because many have patents or own
essential raw materials. This makes it difficult for new
firms to try to compete.
Oligopoly and Price
Oligopolies control price to some degree by
creating brand name loyalty and using non-price
competition.
Price Leadership – when one firm, usually the largest
and most powerful in the industry, offers a new
product at a certain price. The others then follow
because they fear a price war or because they would
be better off financially by doing so.
Collusion – a formal price agreement among
competitors.
• This is illegal because it presents a danger to free
competition. Even one email from one manager to
another is illegal.
Pure Monopoly – one firm industry [“monopolist”]
Pure Monopoly’s Market Condition
1. One firm is the only seller. Advertising promotes image.
2. No close substitute goods are available.
3. Prohibitive barriers to entry in the industry. High investment costs and technological expertise prevent others from
entering the market. Legal restrictions make entry in
government-supported monopolies nearly impossible.
4. Almost complete control of market price.
Monopolist have much control over price because they are
the only seller. A higher price would hurt demand. The state
may control the price on some legal monopolies. These single
suppliers are “price makers.”
Four Types of Legal Monopolies
1.
Natural Monopoly – where competition would be
chaotic, it is natural to give the business to one firm.
Examples: Public Utilities (electric & gas) – privately owned
companies
The government monitors the natural monopolies to ensure
that they provide quality service at reasonable rates.
2. Government Monopoly – monopoly owned and
operated by the government.
Examples: interstate highway system, public schools
and public libraries, postal service, and METRO.
Geographic Monopoly – when a firm is the
only seller of a good in a specific location.
• The “Last Chance Gas Station” is the last one
within 50 miles of Mexico.
• A general Store in a remote community has a
monopoly because the area can’t support two
stores.
• Geographic monopolies are not guaranteed.
4. Technological Monopoly– results from the
invention of a new product (patent) or when
technology changes how a good is produced.
A patent gives an individual or firm exclusive
right to produce, use or dispose of an invention
or discovery for 20 years from the date of filing.
Copyright – gives the author or artist the exclusive
right to publish, sell or produce his work for his
life + 70 years. So, copyrights protect written
works of art.