Upload
kyra-tatlock
View
231
Download
2
Tags:
Embed Size (px)
Citation preview
CHAPTER 7:CHAPTER 7:DIFFERENT TYPES OF DIFFERENT TYPES OF MARKET STRUCTURESMARKET STRUCTURES
WHAT IS A MARKET?WHAT IS A MARKET?“An “An environmentenvironment in which in which
buyers and sellers interact to buyers and sellers interact to exchange goods and services exchange goods and services
for money”for money”
Remember the Product Remember the Product Market?Market?
© SWS 2008© SWS 2008 33
This is YOU!
Microsoft & Apple
1. Pure (perfect) Competition 1. Pure (perfect) Competition (PC)(PC)
2. Monopolistic Competition 2. Monopolistic Competition (MC)(MC)
3. Oligopoly 3. Oligopoly (Oli)(Oli)
4. Monopoly4. Monopoly
Markets are classified by Markets are classified by 44 structures structures (environments)(environments)
What Markets Exist?What Markets Exist?
© SWS 2008© SWS 2008 55
Market Structure How do we describe them? 5 Conditions
1.Market Power: ability for firm to raise price without losing sales. (control of prices)2.Number (#) of Firms in the market.3.Barriers of Entry- Is it easy to enter or exit the market?4.Types of Products/ Goods: Similar or Different?5.Level of Competition- How much competition is there?
© SWS 2008© SWS 2008 66
#1 Perfect Competition#1 Perfect Competition
This is a theoretical situation. This is a theoretical situation. NONO TRUE TRUE Perfectly CompetitivePerfectly Competitive MarketMarket
exists. exists.
IT IS ONLY A IT IS ONLY A THEORY!THEORY!
© SWS 2008© SWS 2008 77
#1 Perfect Competition#1 Perfect Competition
1)1) INFINITEINFINITE number ofnumber of VERY SMALLVERY SMALL firms.firms. No single seller can influence the price because no ONE firm No single seller can influence the price because no ONE firm owns a large % of the market.owns a large % of the market.
2)2) Buyers and sellers deal in Buyers and sellers deal in identicalidentical products. products. No product No product differences.differences. (EXAMPLES: Salt, Flour, Wheat, Corn)(EXAMPLES: Salt, Flour, Wheat, Corn)
3)3) Unlimited Competition:Unlimited Competition: so many firms, that suppliers so many firms, that suppliers lose the ability to set their own price.lose the ability to set their own price.
4)4) No Barriers to EntryNo Barriers to Entry. Sellers are free to enter the market, . Sellers are free to enter the market, conduct business and free to leave the market. conduct business and free to leave the market. (Low cost to (Low cost to enter)enter)
5)5) Each firm is aEach firm is a PRICE-TAKER. PRICE-TAKER. They have They have NONO market share. market share.
“CONSUMERS HAVE THE LARGEST SELECTION OF SELLERS TO BUY GOODS FROM BECAUSE NO SINGLE GOOD IS MORE APPEALING THAN ANOTHER.”
© SWS 2010© SWS 2010
#1 Perfect CompetitionConsider the market for salt. Consider the market for salt. Firms in a perfectly competitive market are Firms in a perfectly competitive market are price takersprice takers. . (They (They taketake the price they are given; they can’t change the the price they are given; they can’t change the price)price) Prices are fixed. Prices are fixed. NO ONE SINGLE NO ONE SINGLE producer controls the market. producer controls the market. (just (just 100s of small firms) They have 100s of small firms) They have NO MARKET POWER!NO MARKET POWER!
If you want salt…you get salt no matter what brand. If you want salt…you get salt no matter what brand. In other words, no one will buy an overpriced pound of In other words, no one will buy an overpriced pound of salt. Why should they? salt. Why should they? A $4 pound is the same as the $3.50 one, so there is no A $4 pound is the same as the $3.50 one, so there is no reason to spend that extra money.reason to spend that extra money.
MARKET POWER = MARKET POWER = “the ability to set one’s OWN prices”
The AGRICULTURAL MARKET is the best The AGRICULTURAL MARKET is the best example of a perfectly competitive market.example of a perfectly competitive market.
© SWS 2010© SWS 2010
Monopolistic CompetitionMonopolistic Competition(M.C.)(M.C.)
© SWS 2008© SWS 2008 1010
#2 Monopolistic Competition#2 Monopolistic Competition
1)1) LARGELARGE number of number of large large companies companies (but fewer than perfect (but fewer than perfect competition).competition).
Sellers can influence the price through creating a Sellers can influence the price through creating a product product identityidentity
2)2) Products are Products are NOT exactly identicalNOT exactly identical, , BUT VERY SIMILAR,BUT VERY SIMILAR, so so companies use companies use PRODUCT DIFFERENTIATIONPRODUCT DIFFERENTIATION
3)3) Heavy Competition:Heavy Competition: Firms must remain aware of their Firms must remain aware of their competitor’s actions, but they each have some ability to competitor’s actions, but they each have some ability to control their own prices.control their own prices.
4)4) Low Barriers to Entry:Low Barriers to Entry: easier than Oligopoly and Monopoly to easier than Oligopoly and Monopoly to get started because of the less amount of competition.get started because of the less amount of competition.
5)5) Monopolistic competition takes its name and its structure Monopolistic competition takes its name and its structure from elements of from elements of monopolymonopoly and and perfect competitionperfect competition..
The The 55 conditions conditions
© SWS 2010© SWS 2010
#2 Monopolistic Competition#2 Monopolistic Competition
Essentially, all hand soaps are the same. Yet Essentially, all hand soaps are the same. Yet firms can create a firms can create a brand identitybrand identity that separates that separates their hand soap from their competitor’s. their hand soap from their competitor’s.
This This brand identitybrand identity can be formed through can be formed through packagingpackaging, , songssongs, , product supportproduct support, and , and especially advertisingespecially advertising. .
The key idea to understanding monopolistic competition is The key idea to understanding monopolistic competition is that firms sell products that are that firms sell products that are similarsimilar, but not exactly , but not exactly
alike.alike.
EXAMPLEEXAMPLE: Hand Soap: Hand Soap
If effective, consumers will positively identify a certain If effective, consumers will positively identify a certain brand and purchase it even if hand soap costs brand and purchase it even if hand soap costs moremore. .
#2 Monopolistic Competition
Product Differentiation Product Differentiation (Brand Identity):(Brand Identity):
The The real or imagined differencesreal or imagined differences between between competing products in the same industry.competing products in the same industry.
DifferentiationDifferentiation may be may be colorcolor, , packagingpackaging, , store locationstore location, , store designstore design, , store store decorationsdecorations, , deliverydelivery, , serviceservice….. ….. anything to make it stand out!anything to make it stand out!
© SWS 2008© SWS 2008 1313
#2 Monopolistic Competition
Non-Price Competition:Non-Price Competition:
Non-Price CompetitionNon-Price Competition involves the advertising of a involves the advertising of a product's appearance, quality, or design, product's appearance, quality, or design, rather than its rather than its priceprice..
Advertising to help the consumer believe that this product Advertising to help the consumer believe that this product is different and worth more money.is different and worth more money.
VS
Notice these commercials never
mention price.
© SWS 2008© SWS 2008 1414
Monopolistic CompetitionExamples
Auto, Gas, Fast Food, Airlines, etc.Auto, Gas, Fast Food, Airlines, etc.
WHAT HAPPENS WHEN
WHAT HAPPENS WHEN
COMPANIES IN A M.C.
COMPANIES IN A M.C.
MARKET FAIL?
MARKET FAIL?
They don’t close their doors, but rather merge They don’t close their doors, but rather merge with larger companies.with larger companies.
Reason: Cheaper Resources
© SWS 2008© SWS 2008 1616
MERGERS OF MONOPOLISTIC COMPANIES Sometimes companies fall victim to market failure. However, not Sometimes companies fall victim to market failure. However, not
all businesses close their doors and empty their factories and all businesses close their doors and empty their factories and stores.stores.
Many get “Many get “swallowed upswallowed up” by another company. This ” by another company. This ““take-overtake-over”” or or acquisitionacquisition of a company is known as a of a company is known as a mergermerger..
THREETHREE types of mergers: types of mergers:HORIZONTALHORIZONTAL, , VERTICALVERTICAL, and , and CONGLOMERATECONGLOMERATE..
1.) 1.) HORIZONTAL:HORIZONTAL: involve firms in the involve firms in the SAMESAME market, such as between two market, such as between two telecom companies.telecom companies.
EXAMPLE:EXAMPLE: automaker buys an steel companyautomaker buys an steel company
Reason: Diversification
2.) 2.) VERTICAL:VERTICAL: involve one firm involve one firm buying a resource providerbuying a resource provider..
3.) 3.) CONGLOMERATE:CONGLOMERATE: a a company company buys a business in a buys a business in a UNRELATED industryUNRELATED industry..
Reason: takeover the market
MERGERS OF MONOPOLISTIC COMPANIES
Other examples of Other examples of HORIZONTAL MERGERS…HORIZONTAL MERGERS…
Reason: ownership of the market
……a a company company buys a COMPETITOR in the marketbuys a COMPETITOR in the market..
MERGERS OF MONOPOLISTIC COMPANIES
Other examples of Other examples of CONGLOMERATES…CONGLOMERATES…
Reason: Diversification
……a a company company buys a business in a UNRELATED marketsbuys a business in a UNRELATED markets..
© SWS 2008© SWS 2008 1919
#3 Oligopoly#3 Oligopoly
© SWS 2010© SWS 2010
#3 Oligopoly#3 OligopolyA market in which a A market in which a few large sellersfew large sellers control most of the control most of the
production of a good or service and they production of a good or service and they work togetherwork together on on setting prices.setting prices.
Conditions of an Conditions of an OligopolyOligopoly1)1) 3-4 Firms3-4 Firms that control the entire market by setting prices.that control the entire market by setting prices.
2)2) Products are generally identical Products are generally identical (standardized)(standardized)
3)3) High Barriers to Entry:High Barriers to Entry: Hard to enter the market because Hard to enter the market because the competitors the competitors work together work together to control all the resources to control all the resources & prices. Plus it is very expensive to make the product.& prices. Plus it is very expensive to make the product.
4)4) The actions of The actions of oneone affects affects allall the producers. the producers.
5)5) Collusion / ColludeCollusion / Collude == (Price Fixing)(Price Fixing) an agreement to act an agreement to act together or behave in a cooperative manner.together or behave in a cooperative manner.
© SWS 2008© SWS 2008 2121
#3 Oligopoly: Price Behavior#3 Oligopoly: Price Behavior
When price wars start, oligopolists would rather like to be When price wars start, oligopolists would rather like to be Independent PriceIndependent Price SettersSetters
……where a firm sets prices based on demand, cost of where a firm sets prices based on demand, cost of input and other factors input and other factors (not based on other companies prices). (not based on other companies prices).
Price WarsPrice Wars:: Series of price cuts that competitors must Series of price cuts that competitors must follow or lose business.follow or lose business. It is aIt is a fierce price competition between sellers, sometimes fierce price competition between sellers, sometimes
the price is the price is lowerlower than the cost of production. than the cost of production.Why is that bad???Why is that bad???
What happens when Oligopoly goes bad; a PRICEPRICE WARWAR will result.
MARKETSMARKETSMarket Structures Market Structures (Environments)(Environments)
COMPETITIONCOMPETITIONNONENONE MOREMORE
ENTRY INTO THE ENTRY INTO THE MARKETMARKET
IMPOSSIBLEIMPOSSIBLE EASYEASY
# OF FIRMS# OF FIRMSONEONE MANYMANY
DIFFERENTIATED DIFFERENTIATED PRODUCTSPRODUCTS
IDENTICAL IDENTICAL PRODUCTSPRODUCTS
MonopolyMonopoly
Tap waterTap waterTVATVA
OligopolyOligopoly
AutosAutosCrude oilCrude oil
Monopolistic Monopolistic CompetitionCompetition
ShoesShoesE-BusinessE-Business
DIVIDED BY TYPE DIVIDED BY TYPE OF PRODUCTSOF PRODUCTS
Perfect Perfect CompetitionCompetition
WheatWheatSaltSalt
MARKET POWERMARKET POWERTOTALTOTAL NONENONE
CONSUMER POWERCONSUMER POWERNONENONE MOREMORE
EFFICIENT OPERATIONSEFFICIENT OPERATIONSNONENONE MOREMORE
© SWS 2008© SWS 2008 2323
#4 Monopoly
© SWS 2008© SWS 2008 2424
#4 Monopoly Conditions#4 Monopoly Conditions
1)1) There is a There is a singlesingle seller seller
2)2) No substitute goodsNo substitute goods are available.are available.
3)3) A A price-makerprice-maker: : (set their own price)(set their own price)
4)4) Barriers to Entry:Barriers to Entry: impossible impossible (other sellers (other sellers cannot enter the market)cannot enter the market)
5)5) Highly Highly wastefulwasteful and and inefficientinefficient..
Exact Opposite of Pure Competition. Exact Opposite of Pure Competition.
© SWS 2010© SWS 2010
#4 Monopolies: Types#4 Monopolies: Types
1)1) Natural Monopoly:Natural Monopoly: Where costs are minimized by Where costs are minimized by having a single producer of the product.having a single producer of the product.
Sometimes government creates Sometimes government creates naturalnatural monopoliesmonopolies in the in the natural gas, water & electricity industry by franchising these natural gas, water & electricity industry by franchising these utilities.utilities.
FranchiseFranchise - the right to produce or do business in a - the right to produce or do business in a certain area under the supervision of a larger certain area under the supervision of a larger company or government.company or government.
44 Distinct Types of Monopolies:Distinct Types of Monopolies:
TVA is the largest government-owned power producer in the TVA is the largest government-owned power producer in the US. Its power facilities include 11 fossil-powered plants, 29 US. Its power facilities include 11 fossil-powered plants, 29 hydroelectric dams, three nuclear plants, and six combustion hydroelectric dams, three nuclear plants, and six combustion turbine plants.turbine plants.
The corporation transmits electricity to 8.7 million consumers. The corporation transmits electricity to 8.7 million consumers.
© SWS 2010© SWS 2010
Types of MonopoliesTypes of MonopoliesNatural MonopoliesNatural Monopolies
© SWS 2008© SWS 2008 2727
Types of Monopolies
1)1) Natural Monopoly:Natural Monopoly: Where costs are minimized by Where costs are minimized by having a single producer of the product.having a single producer of the product.
Other times Other times NaturalNatural MonopoliesMonopolies are created simply are created simply because there is no regulations or one other firms can get because there is no regulations or one other firms can get into the market because the monopoly owns all resources.into the market because the monopoly owns all resources.
44 Distinct Types of Monopolies:Distinct Types of Monopolies:
DeBeers is an African company that has (over the century) DeBeers is an African company that has (over the century) bought numerous diamond mines across the global. They bought numerous diamond mines across the global. They provide 90% of the world’s diamonds.provide 90% of the world’s diamonds.
When another diamond company reaches the point when When another diamond company reaches the point when they must sell stock to raise capital for operations, DeBeers they must sell stock to raise capital for operations, DeBeers comes in and buys a majority of the stock.comes in and buys a majority of the stock.
© SWS 2008© SWS 2008 2828
Types of Monopolies
1)1) Natural MonopolyNatural Monopoly
WHY WOULD GOVERNMENT DO THIS WHY WOULD GOVERNMENT DO THIS OR WHAT ARE THE BENEFITS OF A NATURAL MONOPOLY?OR WHAT ARE THE BENEFITS OF A NATURAL MONOPOLY?
• Economies of Scale:Economies of Scale: As natural monopolies grow larger, As natural monopolies grow larger, this reduces its production costs.this reduces its production costs.
• Because normally companies become more efficient as the Because normally companies become more efficient as the firm becomes larger over time.firm becomes larger over time.
• Example:Example: It is cheaper for the It is cheaper for the Tennessee Valley Tennessee Valley AuthorityAuthority (TVA)(TVA) to provide power in the southeast than to provide power in the southeast than two or three companies.two or three companies.
44 Distinct Types of Monopolies:Distinct Types of Monopolies:
© SWS 2008© SWS 2008 2929
Types of Monopolies
2)2) Geographic Monopoly:Geographic Monopoly: The only business in a The only business in a geographic region.geographic region.
Some of these are Some of these are decreasingdecreasing in the U.S. because of in the U.S. because of mobility of consumers.mobility of consumers.
EXAMPLE:EXAMPLE: Only Only person selling water person selling water
in the desert.in the desert.
EXAMPLE:EXAMPLE: Turner Field Turner Field
© SWS 2008© SWS 2008 3030
3)3) Technological Monopoly:Technological Monopoly: Firm has Firm has discovered a new process or product.discovered a new process or product.
Constitution has given government the right to grant Constitution has given government the right to grant technological monopolies technological monopolies (protect property rights)(protect property rights)
Patent:Patent: 20 years exclusive rights to a developed 20 years exclusive rights to a developed technology.technology.
Copyright:Copyright: Life plus 70 years. Life plus 70 years. (Artists and writers) (Artists and writers)
Types of Monopolies
© SWS 2008© SWS 2008 3131
4)4) Government Monopoly:Government Monopoly: operated completely or partially operated completely or partially by the government. by the government.
Liquor sales in some GA counties, uranium production, water, etc.Liquor sales in some GA counties, uranium production, water, etc. Similar to Similar to natural monopolies.natural monopolies. Adam Smith would be pissed.Adam Smith would be pissed.
Types of Monopolies
Healthcare in Healthcare in CanadaCanada
Uranium in Uranium in USAUSA
Alcohol Suppliers Alcohol Suppliers in Swedenin Sweden
© SWS 2010© SWS 2010
GovernmentGovernmentvs.vs.
Monopolies Monopolies
© SWS 2008© SWS 2008 3333
Government vs. Monopolies
TrustTrust:: a a legallylegally formed combination of companies. formed combination of companies.
Since the late 1800s the US have passed laws to Since the late 1800s the US have passed laws to restrict and regulate restrict and regulate truststrusts..
Government has the power to Government has the power to maintain competitionmaintain competition, , regulate monopolies, or to run government-owned regulate monopolies, or to run government-owned monopolies.monopolies.
AntiAntitrusttrust Legislation Legislation
© SWS 2008© SWS 2008 3434
The Role of Government
1890 - Sherman Antitrust Act:1890 - Sherman Antitrust Act: law against those law against those companies that hindered competition or made companies that hindered competition or made competition impossible because of the competition impossible because of the “restraint of “restraint of trade”trade” that was created. that was created.
Basically outlawing monopolies.Basically outlawing monopolies.
1887: Interstate Commerce Act
1887 PRESENT
1890: Sherman Antitrust Act
Antitrust LegislationAntitrust Legislation
© SWS 2008© SWS 2008 3535
The Role of Government
1914 - Federal Trade Commission Act:1914 - Federal Trade Commission Act: passed to enforce the Clayton Antitrust Act. It gave passed to enforce the Clayton Antitrust Act. It gave the authority to issue the authority to issue Cease and Desist Order.Cease and Desist Order.
1887: Interstate Commerce Act
1887 PRESENT
1890: Sherman Antitrust Act
1890: Sherman Antitrust Act
Cease and Desist Order:Cease and Desist Order: FTC ruling requiring a company FTC ruling requiring a company to stop an unfair business practice that reduces or limits to stop an unfair business practice that reduces or limits competition.competition.
1914: Federal Trade Commission Act
1914: Federal Trade Commission Act
MARKETSMARKETSMarket Structures Market Structures (Environments)(Environments)
COMPETITIONCOMPETITIONNONENONE MOREMORE
ENTRY INTO THE MARKETENTRY INTO THE MARKETIMPOSSIBLEIMPOSSIBLE EASYEASY
# OF FIRMS# OF FIRMSONEONE MANYMANY
DIFFERENTIATED DIFFERENTIATED PRODUCTSPRODUCTS
IDENTICAL IDENTICAL PRODUCTSPRODUCTS
MonopolyMonopoly
Tap waterTap waterTVATVA
OligopolyOligopoly
AutosAutosCrude oilCrude oil
Monopolistic Monopolistic CompetitionCompetition
ShoesShoesE-BusinessE-Business
DIVIDED BY TYPE DIVIDED BY TYPE OF PRODUCTSOF PRODUCTS
Perfect Perfect CompetitionCompetition
WheatWheatSaltSalt
MARKET POWERMARKET POWERTOTALTOTAL NONENONE
CONSUMER POWERCONSUMER POWERNONENONE MOREMORE
EFFICIENT OPERATIONSEFFICIENT OPERATIONSNONENONE MOREMORE
© SWS 2008© SWS 2008 3737
STUDY FOR YOUR TEST!!STUDY FOR YOUR TEST!!