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Warm-Up 1) Name a product that you must always have. 2) Can you name several competing brands that you consider to be poor substitutes? 1) Make a list of as many clothing stores in this area as possible. 2) Describe how each store tries to differentiate its products from the others. The answers to these questions help determine market structure, or the nature and degree of competition among firms operating in the same industry. Pure Competition Independent and well-informed buyers and sellers of exactly the same economic product 5 Major conditions: 1. Large # of buyers and sellers exist, no one buyer or sellers is large enough or powerful enough to affect the price of the product 2. Buyers and sellers deal identical products- buyers do not prefer one seller’s merchandise over another’s Ex- Salt Pure Competition 3. Each buyer and seller acts independently- sellers compete against one another for consumers $. What do buyers want? Keeps prices low 4. Buyers and seller well-informed about items for sale Why would buyers not be loyal to one seller? 5. Buyers and sellers are free to enter into, conduct, or get out of business. Why would this freedom make it difficult for a single producer to keep the market just to itself? Pure Competition Profit Maximum- Supply and demand in the entire industry establishes the equilibrium price. **A Theoretical Situation- All five conditions for pure competition rarely exist at the same time!** Ex. Tomatoes Benchmark to evaluate Imperfect competition- lack one of more of the conditions (Most in the US are this category an are divided into monopolistic competition, oligopoly, and monopoly!) Monopolistic Competition All conditions present except for identical products! What kind of iced tea do you enjoy? Monopolistic Competition Product differentiation- products are similar, but not identical Store location, store deign, manner of payment, delivery, decorations, service, etc. What are other examples? Why is product differentiation a matter of perception than reality? Monopolistic Competition Nonprice competition- convince buyers that product is somehow better than another brand If the firm can differentiate a product in the mind of a buyer, they can raise the price Advertising plays a large role http://www.expotv.com/videos/revi ews/11/124/AleveAllDayStrongPai nReliever2FFeverRed/229896 Monopolistic Competition Profit Maximization Seller can raise or lower the price enough that consumers forgot minor differences and change brands This is way we don’t see a single price for shoes, jeans, cosmetics Many firms, products only slightly different Oligopoly A few large sellers dominate Can be in different industries (auto, steel, etc.) # of firms not as important as the ability of any single firm to cause a change in output, sales, and prices Further from pure competition than a monopolistic competition Oligopoly Interdependent Behavior- one firm does something, the rest follow (so few firms in general) Collusion: a formal agreement to set prices Price-fixing: Collusion to charge the same for a product **Price tend to be higher than those determined by competition** **Collusions against the law b/c it usually restrains trade Oligopoly Pricing Behavior- Others follow suit with prices Price war- price cuts by all producers that may lead to unusually low prices in the industry Raising prices is risky- why? Nonprice basis is best Independent pricing- setup own price based on demand, cost of inputs, etc. Price leadership- one firm takes the lead, others follow Oligopoly Price Maximization- when marginal cost is equal to marginal revenue Will charge whatever the market can support Act conservatively, seldom protest price hikes by their rivals Price much higher than monopolistic competition and even more higher than pure competition How does the final price of a product differ in an oligopoly than in a market competition? Why are oligopolists usually reluctant to raise prices? Choose an oligopoly in the United States and discuss how it relates to something we just learned! Monopoly Exact opposite of pure competition Only one seller of a particular economic product that has no close substitutes Factors that prevent monopolies: American distrust Easy to find substitutes New technologies compete **near monopolies** How does a geographic monopoly differ from a natural monopoly? Profit Maximum Graph: Monopoly The monopolist is able to set a price and quantity of output most profitable to itself What kind of curve is in box A? Why is this important? Why is there no supply curve? How many gadgets will be produced at about $7? Market Structures and Characteristics Chart Fill out with your group. In which market does nonprice competition play a major role? Why is this significant? Closure Do you think there would be any advantages to making monopolies or near monopolies break-up into smaller, competing firms? If so, what are they? If not, why would there not be?