Download Market Structures

Market Structures
How does competition affect
your choices?
Mrs. Bradley
Economics
Perfect Competition
• Four characteristics
1. Many buyers and sellers in the market.
2. Sellers offer standardized products (products
that are nearly the same).
3. Buyers and sellers must be well-informed.
4. Sellers must easily be able to get into and out of
the market.
Terms to know
• Perfect competition: a market structure in
which a large number of firms all produce the
same product, and no single seller controls
supply or prices.
• Commodity: a product, such as petroleum or
milk, that is considered the same no matter
who produces or sells it
Terms
• Barrier to entry: any factor that makes it
difficult for a new firm to enter a market.
• What businesses have a lot of barriers?
Imperfect Competition
• Barriers to entry can lead to imperfect
competition.
• Imperfect competition: any market structure
besides perfect competition
• What factors prevent firms from entering a
market?
Start-up Costs
• The costs that a new business must pay before
it can open are called start-up costs.
• High start-up costs make it difficult to enter a
market.
Technology
• How does technology prevent firms from
entering the market?
– Training costs
– Machinery
– Computers
Perfect competition…
• … keeps prices and production costs low.
• BUT does perfect competition exist???
Monopoly
• …not the game.
• A monopoly is a market in which a single seller
has control.
• A drug that only one company produces.
• A toy that only one company produces.
Three characteristics of a monopoly
• 1. There is only one seller.
• 2. There are no close substitutions.
• 3. Getting into and out of the market is
difficult.
• Can you think of some examples of
monopolies?
Economies of scale
The factors that cause a producer’s average cost
per unit to fall as more units are produced.
Monopolies have economies of scale.
lower production costs
lower cost loans
cheaper raw materials
Government Monopoly
• .. A monopoly created by the government.
• How? By limiting competition through
– Granting patents
– Granting copyrights
– Protecting ingenuity inspires people to create.
– Other people can’t steal their work.
Monopolies use ….
• Price discrimination: charging different
consumers different prices.
– This type of pricing creates more sales – those
who are willing to pay the high price and those
who can only afford the lower price.
– Other companies besides monopolies use price
discrimination.
Market Power
• The ability of a company to control prices and
total market output.
• Monopolies definitely have it…..
– BUT so do other companies.
Limits to price discrimination
• Price discrimination requires 3 conditions:
1. Some market power
2. Distinct customer groups
3. Difficult resale: so people can buy low and resell
at a higher price.
Monopolistic Competition
• Many companies compete to sell products
that are almost the same.
– Jeans, cereals, shoes, restaurants
– Can you think of any examples?
Conditions necessary for monopolistic
competition
•
•
•
•
1. Many firms
2. Few barriers to entry
3. Little control over price
4. Differentiated products
– Differentiation: making a product different from
other, similar products
Nonprice Competition
• A way to attract customers through style,
service or location, but not a lower price.
• There are four forms of nonprice
competitions.
Nonprice Competition
1. Physical features:
– New color, size, shape, taste
2. Location:
Gas stations, movie theaters and grocery
stores succeed or fail based on their
locations.
More factors
• Service Level:
– Better service attracts and keeps customers.
• Advertising:
– Firms advertise because it works.
Oligopoly
• A market structure in which a few large firms
dominate a market.
– 1. Few sellers in the market. (cereals, soft drinks,
major appliances)
– 2. A nearly standardized product
• If one company comes out with a new flavor, others
soon copy. What’s an example of this?
– 3. Difficulty entering the market
• Usually because start-up costs are very high.
How do oligopolies control the
market?
• Prices depend on what the other sellers do.
• Sometimes oligopolies break the law by trying
to control prices.
– Collusion: a secret agreement among competing
firms to cooperate with one another.
– Price fixing: an agreement among firms to sell at
the same or very similar prices.
– Cartels: a formal organization of producers that
agree to coordinate prices and production
ILLEGAL!
• Price fixing and cartels are against the law in
the United States!
– But not in other countries. What is the most wellknown cartel?
Regulation and Deregulation
• Sometimes the government regulates
competition.
• Besides price fixing, some firms have used
predatory pricing to drive other firms out of
the market.
• Predatory pricing: selling a product below cost
for a short period of time to drive competitors
out of the market.
Government protects competition
• People demanded protection from big
companies.
– Sherman Antitrust Act 1890
• Trust: an illegal grouping of companies that
discourages competition.
• Antitrust laws: laws that encourage
competition in the marketplace.
Antitrust laws exist…
• .. To break up monopolies.
• AT & T -- was the only phone company at one
time
• Merger: when two or more companies join to
form a single firm.
• The government can BLOCK mergers if a
monopoly will result.
Deregulation
• … the removal of some government controls
over a market.
Occurred in the late 1970’s and 1980’s.
Mixed success.
Airlines: lower prices, poorer service
Cable television: higher prices