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Economic
Unit 6
Market Structures
“These documents are being distributed for educational discussion purposes only. They do not reflect any attempt by the North
East Independent School District, its trustees, administrators, or teachers, to promote any particular viewpoints or opinions
expressed in the documents over any others, nor do the viewpoints or opinions expressed in the documents necessarily reflect
those of the NEISD, its trustees, administrators or teachers.”
Sect 1: Highly Competitive
Markets
• Consumers benefit most from competitive
markets
• Competitive markets provide consumers
with a range of products that are….
• …Lower priced
• …Better reflect the cost of production
• …Offered by multiple sellers
Competition v. Monopoly
• The forces of supply and demand promote
competition by encouraging producers to
supply consumers with a wide selection of
goods and services
• Two types of highly competitive markets
are….
• …Perfect competition
• …Monopolistic competition
Perfect Competition
• Buyers and sellers compete directly under
the laws of Supply and Demand
• No one buyer or seller controls demand,
supply, or prices
• Nothing prevents competition among
buyers and sellers
4 Conditions of Perfect Competition
• Many buyers and sellers act independently
• Sellers offer identical products
• Buyers are well informed about products
• Sellers can enter and exit the market
easily
Many Buyers and Sellers
• Because there are many buyers and
sellers in the market, each one has a very
small share in overall purchases and sales
• No single buyer has enough power to
control demand, supply, or price
• Each buyer or seller acts independently
• This promotes competition
Identical Products
• Under perfect competition products would
be identical
• The only distinguishing thing would be
price
• Is this possible?
Informed Buyers
• Under perfect competition buyers would
be knowledgeable about products
• Sellers can compete perfectly only when
buyers can make informed decisions
Easy Market Entry & Exit
• For sellers to compete perfectly in a
market they must be free to enter a
profitable market and leave an unprofitable
market
• Ease of entry or exit depends on…
• …start-up costs
• …level of technical knowledge needed
• …amount of control held by those already
in the market
Perfect Competition As A Model
• No market is
perfectly
competitive
• This illustration
helps economists
analyze markets
and determine
how competitive
they are
Close to Perfect…
• Agricultural products come close…
• …Thousands of independent growers
• …Products are near identical (apples to
apples)
• …Buyers are generally well informed
• …Sellers can enter and exit the market
freely (cotton farmer can grow soybeans)
Monopolistic Competition
• In Monopolistic Competition, sellers offer
different rather than identical products
• Each seller tries to get monopoly like
power by selling a unique product
• Since product variation is much more
common than selling identical products,
monopolistic competition is the more
common
• Must still compete based on supply and
demand
Product Differentiation
• Sellers in monopolistic competition try to
differentiate, or point out differences
between their products and those of their
competitors
• Whether products are really different or
just seem different, sellers use product
differentiation to set their product apart
Non-Price Competition
• Non-Price competition is when sellers
compete on a basis other than price
• Emphasizing their brand name (designer
v’ non-designer)
• …Relies heavily on advertising
• …Creates a “sense of style”
• …Snob appeal
Profits
• The main goal of product differentiation
and non-price competition is to increase
profits
• This practice allows sellers to raise the
price of their product
• They attempt to increase demand for their
product and shift the market price upward
Graphing a Shift in Demand
• Companies attempt
to shift the demand
curve by using
strategies like a new
advertising campaign
• They attempt to gain
some monopoly like
control over the price
Sect. 2: Imperfectly Competitive
Markets
• Not all markets are highly competitive
• When competition is low it usually means
fewer products and less choice is available
for consumers
• An imperfectly competitive structure also
usually results in higher prices
Oligopolies
• An oligopoly is a market structure in which
a few large sellers control most of the
production of a good or service
• 3 conditions present in an oligopoly…
• …there are only a few large sellers
• …sellers offer identical or similar products
• …other sellers cannot enter the market
easily
Few Large Sellers
• A market is considered an oligopoly when
the largest three or four sellers produce
most of a markets total output (70+%)
Identical or Similar Products
• Because an oligopoly is dominated by a
few large sellers they…
• …have a lot at stake
• …are less likely to take risks
• …are not quick to offer new products
Difficult Market Entry
• The few sellers in market can maintain
their control only if other sellers cannot
easily enter the market due to…
• …high start up costs
• …government regulations
• …consumer loyalty to their products
Oligopolies at Work
• The lower number of sellers that are in a
market means that each seller has a larger
control over prices in their market
• Most use legal means to control prices
• Sometimes they might use illegal
strategies to control price
Non-Price Competition
• Advertising is used as an attempt to
develop brand loyalty
• The market for breakfast cereal is an
oligopoly where 3 companies dominate
80% of the market…
• …Kellogg’s
• …General Mills
• …Post
Interdependent Pricing
• Sellers in an oligopoly are price sensitive to prices their competition maintains
• Interdependent pricing is being very responsive to and dependent on prices of their competitions products
• They are reluctant to risk their market share by increasing their prices too far from their competition
• Thus their similar products seem to be offered at similar prices (air fares)
Price Leadership
• When one of the largest sellers in a market
takes the lead by setting a price for its
product they are exerting price leadership
• If others follow their price, the market leader
has in effect controlled the price of all
products
• If other sellers don’t follow their price they
may be forced to change their price again to
remain competitive
Price Wars
• A price war is when sellers aggressively undercut each other’s prices in an attempt to gain market share
• Price wars help consumers initially
• If the price wars continue, some sellers might be forced out of business because they lose so much money
• Usually when price wars end prices go up to former levels or even higher because some competition has been eliminated
• …gasoline
Collusion
• Collusion is when sellers secretly agree to
set production levels or prices for their
products
• This practice is illegal and carries heavy
penalties such as fines and even prison
sentences for those involved
Cartels
• Cartels are groups of producers who ban
together and openly organize a system of
price setting and market sharing…
• …Oil (OPEC)
• …DeBeers’ Diamond Cartel
• …Cartels are illegal in the United States
Monopolies
• A monopoly is a market structure where a
single seller controls all production of a
good or service
• A monopoly generally exists when…
• …there is a single seller
• …no close substitute goods are available
• …other sellers cannot enter the market
easily
Single Seller
• In San Antonio monopolies exists under
licensing agreements…
• …SAWS
• …City Public Service
Difficult Market Entry
• High start up costs
• High level of technical knowledge
• Expensive to maintain
• Government restrictions
Types of Monopolies
• Natural monopolies feature a single large
seller that produces a good or service more
efficiently
• Economies of scale allow these large sellers
to use their human, capital and other
resources to provide a particular good or
service more efficiently than if performed by
several smaller sellers
• Ex. Utilities (electricity, water, etc.)
• Closely regulated by governments
Maybe a good reason for
Monopolies
• What might our city look like if it was served
by multiple electric companies?
Geographic Monopolies
• Geographic monopolies offer limited
potential profits for multiple providers
because of their remote location
• Ex. a general store in a remote area
• In our times geographic monopolies have
competition from mail order, delivery
services, and the internet
Technological Monopolies
(Patents)• A patent grants a company or an individual
the exclusive right to produce, use, rent,
and sell an invention or discovery
• Patents are granted for a term of 20 years
and give the patent holder a 20 year
monopoly to produce the product, profit
from the product
• Ex. medicines
Technological Monopolies
(Copyrights)• A copyright grants authors, musicians &
writers, the exclusive rights to publish,
duplicate, perform, and display their
creative works
• Copyrights today are granted for lifetime +
70 years from their time of publication
Government Monopolies
• Government monopolies are any market in which a government is the sole seller of a product
• The product is usually a basic necessity that cannot be provided through the normal price system…
• …Water, sewer, roads, bridges
• These types of monopolies provide goods and services that serve the general welfare of citizens and usually have public support
How Monopolies Set Prices
• High or low, consumer demand sometimes
determines the service price
• Excessively high prices might make others
enter the market even though start up
costs are high
• Government also regulate rates…
• …electricity, cable TV, water
Comparing Market Structures
Sect. 3: Market Regulation
• The US government has enacted several
pieces of legislation designed to protect
the public from actions taken by
monopolies
• Huge monopolies called trusts dominated
US industries in the late 1800’s
• Oil, steel, sugar, tobacco, meatpacking
and railroads
Laissez-Faire
• Most believe that businesses prosper
when the government does not interfere in
the marketplace
• Laissez-fare is a French term meaning “let
the people do as they will”
• Many believed that businesses were
getting too powerful and the government
responded with anti-trust legislation
Antitrust Legislation
• Antitrust Legislation was designed to…
• …monitor and regulate big business
• …prevent monopolies from forming
• …dismantle existing monopolies
• Presidents Theodore Roosevelt and
William Howard Taft made “trust-busting”
a priority of their administrations
Interstate Commerce Act
• Created the Interstate Commerce
Commission (ICC) which oversaw the
railroad freight business
• Rates charged for shipping had soared
causing farmers and merchants difficulty in
getting their products to market
• Abolished in 1995
Sherman Antitrust Act
• Banned agreements and actions that were “in
the restraint of trade”
• Language of law was vague and resulted in
numerous court actions
• John D. Rockefeller and his company,
Standard Oil Company, controlled almost all
of the US oil industry
• Using this law, the Supreme Court broke up
Standard Oil Company in 1911
• The remaining company today is Exxon/Mobil
Clayton Antitrust Act
• Enacted in 1914, this law prohibited price
discrimination-the practice of offering
different prices to different customers
under the same circumstances
Federal Trade Commission Act
• This 1914 act created the Federal Trade
Commission (FTC) to investigate unfair
methods of competition and commerce
• Still in force today
• Bernie Madoff
Robinson-Patman Act
• This 1936 law strengthened the Clayton
Antitrust Act dealing with price
discrimination
• The government continues today to enact
antitrust legislation as the need arises
US Antitrust Legislation Laws
More Recent Antitrust Breakups
• In 1982 the government broke AT&T into
several smaller units
• Ed Whitaker
• Two of the units Pacific Telesis and SBC
Communications reunited in 1996 and
reclaimed the name AT&T which is much
smaller than the original
• AT&T was headquartered in San Antonio
for several years, but moved to Dallas
recently
References
• Economics: Texas Edition: 2016. McGraw Hill Education
• Holt Economics; Texas Edition: 2003, Holt, Rinehart and
Winston
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