Download Competition and Market Structures

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
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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?