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Chapter 7 Market Structures Aww, Snap!
Perfect Competition ►Perfect Competition – a market where a large number of firms are all producing essentially the same product
Perfect Competition ►Four Conditions for Perfect Market: § Many buyers and sellers participate § Sellers offer identical products ►Products that are the same no matter who makes or sells them are commodities
Perfect Competition ►Four Conditions for Perfect Market: § Buyers and sellers are well informed about products § Sellers are able to enter and exit the market freely
Barriers to Entry ►Barriers – factors that make it difficult for new firms to enter a market ►Barriers lead to imperfect competition
Examples of Barriers ►Start-Up Costs – The expenses a new business must pay before it can enter the market ►High Start-Up Costs prevent new firms from entering
Examples of Barriers ►Technology – how much training does it take to enter the market?
Examples of Barriers ►Government – may require licensing, certification, approval, etc.
Price and Output ►A perfectly competitive market produces the lowest sustainable prices possible ►With many firms competing, each firm lowers its prices to the point of just covering their costs
Monopoly ►Monopoly – Barriers prevent firms from entering a market that has a single supplier
Factors that Create a Monopoly ► 1. Economies of Scale – average cost of production always drops, never increases ► 2. Natural Monopoly – market runs most effectively when one large firm provides all output
Factors that Create a Monopoly ►Natural Monopolies are usually given special status by the government, but the government is allowed to control their prices ►New technologies can destroy a natural monopoly
Government Monopolies ►Government Monopoly – a monopoly created by the government
Typical High School Boy Questions? Wait… what’s a government monopoly?
Government Monopolies ►Government Monopoly – a monopoly created by the government § There are 3 types of government monopolies, each with a different reason for being formed
Three Kinds of Government Monopoly ►Technological Monopoly – government issues a patent § Patent – exclusive rights to sell a good or service for a specific period of time
Three Kinds of Government Monopoly ►Franchises and Licenses § Franchises – government allows company to create an exclusive market for their brand name and products
Three Kinds of Government Monopoly ►Franchises and Licenses § Licenses – government grants a firm the right to operate a business
Three Kinds of Government Monopoly ►Industrial Organizations – government allows companies in an industry to restrict the number of firms in the market
Output Decisions ►Do you emphasize price or output? § Price-Takers – in a competitive market, businesses have no control over their own prices § Price-Setters – in a noncompetitive market, business can choose what price to charge
Falling Marginal Revenue ►MR = price in perfect competition, and does not change ►In a monopoly, however, MR begins falling at a point ►Therefore, monopolies set production where MR = MC, but charge a higher price
Falling Marginal Revenue Price Qd TR Change MR $12 8, 000 $96, 000 - - $11 9, 000 $99, 000 +$3, 000 $3 $10 10, 000 $100, 000 +$1, 000 $1 $9 11, 000 $99, 000 -$1 8 12, 000 $96, 000 -$3
Price Discrimination ►Do you think monopolies usually charge the same price to all of their customers?
Price Discrimination ►Price Discrimination – dividing consumers into different groups and charging different prices to each group
Price Discrimination ►Monopolies are not the only companies that do this ►Any company with market power, the ability to control prices and output, can use discrimination
Price Discrimination ►The easiest way to maximize profit for a monopoly is to identify consumers who will not pay full price, and offer them a “discount” ►These are called targeted discounts – think of airline fares, manufacturers rebates, student discounts
Limits to Price Discrimination I am the limit to price discriminicization.
Limits to Price Discrimination ► 1. Firm must have some market power ► 2. There must be distinct consumer groups ► 3. It must be difficult for consumers to resell the product
Monopolistic Competition and Oligopoly Presidenting is my anti-drug.
Monopolistic Competition ►Monopolistic Competition – many companies compete in an open market, but sell products that are slightly different from one another
4 Characteristics of Monopolistic Competition ► 1. Many Firms ► 2. Few Artificial Barriers to Entry ► 3. Slight Control Over Prices ► 4. Differentiated Products
Other Means of Competition ►In a Monopolistic Competition, firms compete in a variety of ways other than prices § Physical Characteristics § Location § Service Level/Quality § Advertising and Image
Monopolistic Competition ►Economists contend that price, output, and profits in a monopolistic competition are very similar to a perfect competition
Oligopoly ►Oligopoly – a market dominated by a few large, profitable firms ►If 4 of the largest firms can claim 70% or more of the market share, it is an oligopoly
Characteristics of Oligopoly ► 1. Many Barriers to Entry ► 2. Cooperation and Collusion § Price Leadership – market leader raises prices, other firms follow suit (can also cause price war, though)
Characteristics of Oligopoly ► 1. Many Barriers to Entry ► 2. Cooperation and Collusion § Collusion – an agreement among members of an oligopoly to set prices and production levels
Characteristics of Oligopoly ► 1. Many Barriers to Entry ► 2. Cooperation and Collusion § Collusion causes price fixing, where firms agree to sell at the same or similar prices § It’s illegal, by the way
Characteristics of Oligopoly ► 1. Many Barriers to Entry ► 2. Cooperation and Collusion § Cartels – an agreement by producers to coordinate prices and production § Legal in some countries, not here
Regulation and Deregulation ►What might a firm do to increase its market power? § Form a cartel § Merge with competitors § Predatory Pricing - Temporarily lower prices to put others out of business
Regulation and Deregulation ►Government has Antitrust Laws in place to prevent such practices ►Trust – a business combination similar to a cartel ►Began with Sherman Antitrust Act in 1890
Fair or Unfair? ►Nike is one of the world’s largest and most popular shoe manufacturers ►Once Nike introduced clothing, it forced companies that wanted to buy its shoes to buy its clothes as well
Fair or Unfair? ►Disney, ABC, AOL, and Time. Warner have merged together ►They now control the Disney Channel, Cartoon Network, and the WB, which is a basic monopoly on children's programming
Regulation and Deregulation ►Government can step in and break up monopolies based on the Sherman Antitrust Act ►Famous examples: John D. Rockefeller’s Standard Oil (1911), AT&T (1982)
Regulation and Deregulation ►Government can also block mergers from happening ►Merger – when one company joins with another ►Government uses research to see whether the merger will help or hurt consumers
Regulation and Deregulation ►The Republican Party has typically supported deregulation – when the government stops making decisions about what businesses can and cannot do ►Government uses regulation and deregulation for the same purpose – to promote competition