7-3: OTHER MARKET STRUCTURES. CHARACTERISTICS OF MONOPOLISTIC COMPETITION Monopolistic competition:...

7-3: OTHER MARKET STRUCTURES

CHARACTERISTICS OF MONOPOLISTIC COMPETITION

Monopolistic competition: when many sellers offer similar, but not standardized products

CHARACTERISTICS OF MONOPOLISTIC COMPETITION (CONTINUED)

2 features of monopolistic competition are product differentiation and nonprice competitionProduct differentiation: attempt to

distinguish a product from similar products

CHARACTERISTICS OF MONOPOLISTIC COMPETITION (CONTINUED)

Nonprice competition: using factors other than low price, such as style, service, advertising, or giveaways to convince consumers to buy their products

4 CHARACTERISTICS OF MONOPOLISTIC COMPETITION

1. Many sellers and many buyersMeaningful competition existsExample: there are many

restaurants where you can buy a hamburger

4 CHARACTERISTICS OF MONOPOLISTIC COMPETITION (CONTINUED)

2. Similar but differentiated productsSellers try to

convince consumers that their product is different from that of the competition

4 CHARACTERISTICS OF MONOPOLISTIC COMPETITION (CONTINUED)

3. Limited control of pricesProduct differentiation gives

producers limited control over price

Consumers will buy substitute goods if the price goes too high

4 CHARACTERISTICS OF MONOPOLISTIC COMPETITION (CONTINUED)

4. Freedom to enter or exit the marketNo huge barriers to enter a

monopolistically competitive market

When firms make a profit, other firms enter the market and increase competition

EXAMPLES OF MONOPOLISTIC COMPETITION

Banks Sporting GoodsRadio Stations Fish and SeafoodClothing JewelryComputers Health SpasFrozen Foods Apparel StoresCanned Goods Convenience Stores

OLIGOPOLYDefinition: market

structure in which only a few sellers offer a similar productFew large firms

have a large market share: percent of total sales in a market

OLIGOPOLY (CONTINUED)

There are few firms in an oligopoly due to high start-up costs—the expenses that a new business faces when it enters a market

4 CHARACTERISTICS OF OLIGOPOLIES 1. Few sellers and

many buyersGenerally where

the 4 largest firms control 40% of the market

Example: breakfast cereal industry

4 CHARACTERISTICS OF OLIGOPOLIES (CONTINUED)2. Standardized or differentiated products

Products can be standard such as steelThey try to differentiate themselves based on brand name, service, or location

Or, products can be differentiated such as cereal and soft drinksThey use marketing strategies to separate them from competitors

4 CHARACTERISTICS OF OLIGOPOLIES (CONTINUED)

3. More control of pricesEach firm had a large enough

share of the market that its decisions about price and supply affect one another

4 CHARACTERISTICS OF OLIGOPOLIES (CONTINUED)

4. Little freedom to enter or exit marketSet-up costs are highFirms have established brands,

making it hard for new firms to enter the market successfully

OLIGOPOLY EXAMPLES

Soft drinks/Sodas: Coca-Cola (44%) – Coke, Sprite, Barq, Fanta, Mello

Yello, etc.

Pepsi (32%) – Pepsi, Mountain Dew, Mug, Slice, etc.

Cadbury Schweppes (16%) – Seven-Up, Dr. Pepper, Schweppes, A & W, Canada Dry, Sunkist, Squirt, etc.

OLIGOPOLY EXAMPLES

CPU chips – Duopoly (an industry with only two firms): Intel and AMD

Beer: Anheuser-Busch, Coors, Miller

Automobiles (GM, Chrysler, Toyota, etc.)

7-4: REGULATION AND DEREGULATION TODAY

REGULATION

Definition: set of rules or laws designed to control business behavior to promote competition and protect consumers

ANTITRUST LEGISLATION

Definition: laws that define monopolies and give government the power to control them and break them up

TRUST Trust: when a group of firms are

combined to reduce competition in an industry

Example: Standard Oil Company

MERGER

Merger: when 2 firms join together to become 1If a merger will eliminate

competition it will be denied by the government

ENFORCING ANTITRUST LEGISLATION

The FTC and the Department of Justice are responsible for enforcing antitrust laws

DEREGULATION

Definition: reducing or removing government control of a businessResults in lower prices for

consumers and more competition

Example: airline industry was deregulated in 1978

QUESTIONS1. In 2005, a major U.s. automaker announced a

new discount plan for its cars for the month of June. It offered consumers the same price that its employees paid for new cars. When the automaker announced in early July that it was extending the plan for another month, the other 2 major U.S. automakers announced similar plans. What market structure is exhibited in this story and what specific characteristics of that market structure does it demonstrate?

2. Why do manufacturers of athletic shoes spend money to sign up professional athletes to wear and promote their shoes rather than differentiating their products strictly on the basis of physical characteristics such as design and comfort?

3. The Telecommunications Act of 1996 included provisions to deregulate the cable industry. In 2003, consumers complained that cable rates had increased by 45% since the law was passed. Only 5% of American homes had a choice of more than 1 cable provider in 2003. Those homes paid about 17% less than those with no choice of cable provider. How effective had deregulation been in the cable industry by 2003? Explain your reasoning.