Market StructuresHow does competition affect

your choices?

Mrs. BradleyEconomics

Perfect Competition

• Four characteristics1. Many buyers and sellers in the market.2. Sellers offer standardized products (products

that are nearly the same).3. Buyers and sellers must be well-informed.4. Sellers must easily be able to get into and out of

the market.

Terms to know

• Perfect competition: a market structure in which a large number of firms all produce the same product, and no single seller controls supply or prices.

• Commodity: a product, such as petroleum or milk, that is considered the same no matter who produces or sells it

Terms

• Barrier to entry: any factor that makes it difficult for a new firm to enter a market.

• What businesses have a lot of barriers?

Imperfect Competition

• Barriers to entry can lead to imperfect competition.

• Imperfect competition: any market structure besides perfect competition

• What factors prevent firms from entering a market?

Start-up Costs

• The costs that a new business must pay before it can open are called start-up costs.

• High start-up costs make it difficult to enter a market.

Technology

• How does technology prevent firms from entering the market?– Training costs– Machinery– Computers

Perfect competition…

• … keeps prices and production costs low.

• BUT does perfect competition exist???

Monopoly

• …not the game.• A monopoly is a market in which a single seller

has control.

• A drug that only one company produces.• A toy that only one company produces.

Three characteristics of a monopoly

• 1. There is only one seller.• 2. There are no close substitutions.• 3. Getting into and out of the market is

difficult.

• Can you think of some examples of monopolies?

Economies of scale

The factors that cause a producer’s average cost per unit to fall as more units are produced.

Monopolies have economies of scale. lower production costslower cost loanscheaper raw materials

Government Monopoly

• .. A monopoly created by the government.

• How? By limiting competition through– Granting patents– Granting copyrights

– Protecting ingenuity inspires people to create.– Other people can’t steal their work.

Monopolies use ….

• Price discrimination: charging different consumers different prices.– This type of pricing creates more sales – those

who are willing to pay the high price and those who can only afford the lower price.

– Other companies besides monopolies use price discrimination.

Market Power

• The ability of a company to control prices and total market output.

• Monopolies definitely have it…..

– BUT so do other companies.

Limits to price discrimination

• Price discrimination requires 3 conditions:1. Some market power2. Distinct customer groups3. Difficult resale: so people can buy low and resell

at a higher price.

Monopolistic Competition

• Many companies compete to sell products that are almost the same.– Jeans, cereals, shoes, restaurants

– Can you think of any examples?

Conditions necessary for monopolistic competition

• 1. Many firms• 2. Few barriers to entry• 3. Little control over price• 4. Differentiated products

– Differentiation: making a product different from other, similar products

Nonprice Competition

• A way to attract customers through style, service or location, but not a lower price.

• There are four forms of nonprice competitions.

Nonprice Competition

More factors

• Service Level:– Better service attracts and keeps customers.

• Advertising:– Firms advertise because it works.

Oligopoly

• A market structure in which a few large firms dominate a market.– 1. Few sellers in the market. (cereals, soft drinks,

major appliances)– 2. A nearly standardized product• If one company comes out with a new flavor, others

soon copy. What’s an example of this?

– 3. Difficulty entering the market• Usually because start-up costs are very high.

How do oligopolies control the market?

• Prices depend on what the other sellers do.• Sometimes oligopolies break the law by trying

to control prices.– Collusion: a secret agreement among competing

firms to cooperate with one another.– Price fixing: an agreement among firms to sell at

the same or very similar prices.– Cartels: a formal organization of producers that

agree to coordinate prices and production

ILLEGAL!

• Price fixing and cartels are against the law in the United States!

– But not in other countries. What is the most well-known cartel?

Regulation and Deregulation

• Sometimes the government regulates competition.

• Besides price fixing, some firms have used predatory pricing to drive other firms out of the market.

• Predatory pricing: selling a product below cost for a short period of time to drive competitors out of the market.

Government protects competition

• People demanded protection from big companies.– Sherman Antitrust Act 1890

• Trust: an illegal grouping of companies that discourages competition.

• Antitrust laws: laws that encourage competition in the marketplace.

Antitrust laws exist…

• .. To break up monopolies.• AT & T -- was the only phone company at one

time

• Merger: when two or more companies join to form a single firm.

• The government can BLOCK mergers if a monopoly will result.

Deregulation

• … the removal of some government controls over a market.

Occurred in the late 1970’s and 1980’s.

Mixed success.Airlines: lower prices, poorer service

Cable television: higher prices