Market StructureThe nature and degree of competition

among firms operating in the same industry

Large number of buyers and sellers Buyers and sellers deal in identical products

with no difference in quality Buyer and sellers act independently Buyers and sellers are reasonably well-

informed about products and prices Buyers and sellers are free to enter into,

conduct, or get out of business

Perfect Competition

Supply and demand set the equilibrium price

After a price is set industry decides on output

The maximum profit occurs when the Marginal cost of a product equals the marginal revenue.

Look at page 165

Profit Maximization in Perfect Competition

Few perfect markets exist◦ Vegetable farming….roadside markets

Imperfect markets lacks one or more of the conditions.

Theory

This structure has all conditions of perfect competition except for identical products.

Therefore it monopolizes a small portion of the market.

Monopolistic

Real or imagined differences between competing products in the same industry◦ Different brands◦ Are they really real or do they just appear real?◦ Nike, Adidas, New Balance?

Product Differentiation

Use of advertising, giveaways, or other promotional campaigns to convince buyers that the product is somehow better than another brand.

Non-price Competition

Narrow price range-◦ Sellers raise or lower the price within this narrow

range to keep buyers from switching brands.◦ Think about shoes…what is the most you will pay?◦ What if they are too cheap? Does that affect you?

Monopolistic Competition and Profit Maximization

A market structure in which a few very large sellers dominate the industry.◦ Auto-industry◦ The number of firms is not as important as the

ability to change output◦ Further from perfect competition than monopoly

Oligopoly

When one firm acts another follows◦ Employee pricing

Collusion-a formal agreement to set prices in a cooperative manner

Price Fixing-agreeing to change the same or similar prices. This is almost always higher than the market price.

Interdependent Behavior

One company changes expecting the others to follow.◦ What if they do not?◦ Why do they?◦ Think about gas prices.

Pricing behavior

Marginal cost equals marginal revenue. Much higher than perfect competition and

higher than monopolistic competition.

Profit maximization

Opposite end of the spectrum from perfect competition.

Only one seller of a particular product Extreme case. In some rural areas internet and phone

companies

Monopoly

Natural monopoly- costs of production are minimized by having a single firm produce the product

Phone lines and gas lines Cost of production falls as the firm gets

larger

Types of monopolies

Absence of other sellers in that area◦ Byron Nebraska has one grocery story and one

gas station…closest is 18 miles

Geographic monopoly

A patent may be granted for 20 years and copyrights last for lifetime plus 50 years.◦ Disney was great at this.

Technological monopoly

Only the government can provide the service or good.◦ Weapons and resources

Government Monopoly

They have the greatest ability to set price. They also have the largest profit opportunity.

The price market allows them to charge more and produce less.

Profit maximization