Download Ch. 7 Market Structures

Chapter 7
Perfect Competition (theoretical)
•
Large # of buyers and sellers (B/S)
exchange identical products under five
conditions:
1. There should be a large # of B/S
2. The products should be identical
Perfect Competition, continued
3. B/S should act independently
4. B/S should be well-informed
5. B/S should be free to enter, conduct, or
get out of business
Perfect v. Imperfect Competition
• Under perfect
competition, supply and
demand set the
equilibrium price, and
each firm sets a level of
output that will maximize
its profits at that price.
• Imperfect competition
refers to market
structures that lack one or
more of the five
conditions of perfect
competition
Monopolistic Competition
• Meets all the requirements of perfect
competition minus the identical products
• NONPRICE COMPETITION: public relations,
giveaways, advertising, promotional
campaigns
• Use product differentiation-real or imagined.
Ex?
• How do cell phone, fragrance, or junk food
companies differentiate their products?
Oligopoly
• Few very large sellers dominate the
industry. Ex?
• Further away from perfect competition
than monopolistic competition
• Act interdependently by lowering prices
soon after the first seller announces the
cut. **Prefer non-price competition
• May all agree formally to set prices
(collusion), which is illegal
Two forms of Collusion
1. Price-fixing-an agreement to set a price that is
often above market price
2. Dividing the market for guaranteed sales
-price wars-Pushing prices lower than the cost of
production (short run)
Final prices are likely to be higher than under MonComps and much higher under Per-Comp
Monopoly
• Only one seller in a particular market. Ex?
• Four types: Natural, Geographical,
Technological, Government
• The monopolist is larger than a perfect
competitor, allowing it to be the price
maker versus the price taker.
Natural Monopoly
• Single firm or business produces a product
or provides a service because it minimizes
the overall costs (public utilities)
Geographic Monopoly
• The location cannot support two or more
such business (small town drugstore)
Technological Monopoly
• Producer has exclusive rights through
patents or copyrights to produce or sell a
particular product
Government Monopoly
• Government provides products or services
that private industry cannot adequately
provide (uranium processing)
Market Failures and
Government Response
Market Failures
•Inadequate
Competitio
n
Decreases in
competition
can lead to
several
consequences
that create
market
failures
• Inefficient
resource
allocation
– Where is
the
incentive
to use
resources
carefully?
• Higher
prices and
Reduced
Output
– Artificial
shortages
cause
higher
prices.
• Economic and
Political Power
– Many firms use $$ to
further the political
careers of relatives
and friends.
– Revolving Door…
• Both sides of the
Market
– Failures on the
demand side are
harder to correct than
failures on the supply
side.
Inadequate Information
• To redistribute product and $$ where it
needs to be, everyone must have
adequate, reliable, easy-to-find
information…
otherwise the market fails!!
Resource Immobility
• The FOP cannot move to a new market
where returns are higher = market failure
• Ex?
• Steel mills, auto assembly plants, military
bases
Externalities
Costs (-) or benefits (+) of production or
consumption of a good spill over onto nonproducers or consumers.
•
•
•
•
•
Positive or Negative?
New airport expansion
Both. Why?
New sports stadium
Both. Why?
The costs and benefits are not reflected in
the market prices that buyers and sellers
pay for the original product. Thus, it is a
market failure
Public Good
• While the market is successful in satisfying
individual wants and needs, it may fail to
provide for the collective.
…so the government has to provide
these services.
Where Does Government Fit
In?
Antitrust
Legislation
• Prevent market
failures due to
inadequate
competition
• Remember
Sherman (1890)
and Clayton
(1914) Anti-trust
Acts?
Government Regulation
Internalizing Externalities
• A firm causes pollution  The Gov taxes
firms
• 1st: As firm’s production costs ↑, supply ↓
• 2nd: Price ↑ = Demand ↓
• Taxes are used to clean pollution
Thus, polluting firms and their customers,
rather than innocent third parties, are
forced to pay for the cost of the pollution
clean-up
Public Disclosure
Direct
Indirect
• Provide the market with
• Includes gov’t support of
data to prevent market
the Internet and
failures due to
availability of
inadequate information
government documents
on Web sites.
• Businesses are required
by federal law, to reveal
• Businesses post
information to the public
information about their
own activities on their
• “Truth in Advertising”
company websites.
laws prevent sellers from
making false claims
about products.
Modified Free Enterprise
Government intervention keeps ‘em
honest by:
•
•
•
•
•
Promoting competition
Preventing monopolies
Regulating industry
Fulfilling the need for public goods
U.S. economy is mixture of different market
structures, business organizations, and
government regulation