Chapter 7: Market Structure 1. Perfect Competition 2. Monopoly 3. Monopolistic Competition and Oligopoly 4. Regulation and Deregulation

Property Management Software. Real-Estate-Google-Monopoly http://www.trexglobal.com. (accessed October 2, 2010).

How does Competition

How does Competition

affect your choices?

affect your choices?

1. Perfect Competition The simplest market structure in which a large number of

firms all produce the same product an no single seller controls supply or price

New York Stock

Exchange

Free Software

Street Vendors

Fishing Market,

Vegetable or fruit

vendors

New York Stock Exchange

A Stock Exchange located at 11 Wall Street Lower Manhattan, NYC Largest by market capitalization of its listed companies at $11.92 trillion as of Aug

2010

Four Conditions

Many Buyers and Sellers participate in the market

Sellers offer identical products- commodity -a product that is the same no matter who produces or sells it

Examples notebook paper, paper clips, sugar, low grade gasoline

Buyers and Sellers are well informed

Sellers are able to enter and exit the market freely

InformedBuyers and

Sellers

Free Market Entry and Exit

No control Over Price

Identical Products

Many BuyersAnd Sellers

PerfectCompetition

Barriers to Entry Any factor that

makes it difficult for a new firm to enter a market

Imperfect competition - a market structure that fails to meet the conditions of perfect competition

Start-Up Costs -expenses a new business must pay before it can begin to produce and sell goods

Technology -need a lot of preparation and study

Perfect Competition

Number of Firms:Many

Variety of Goods:None

Barriers to Entry:None

Control over Prices:None

Price and Output Competition within Perfect Competition market keep both

prices and production costs low

Quantity (Output)

Price

DemandSupply

Equilibrium Price

Equilibrium

Quantity

5

50

10

10

Market Equilibrium in Perfect Competition

What factors allow a perfectly competitive market to reach equilibrium?

What prevents any on firm from raising its prices?

2. Monopoly A market in which a single seller dominates Economies of Scale -factors that cause a producer’s average

cost per unit to fall as output rises Natural monopolies -a market that runs most efficiently

when one large firm provides all of the output Technology and Change – can ruin monopolies (example AT&T

to cell phones)

To prevent resources from being wasted, public water is a natural monopoly.

Nivangune, Geetai, A Clean Desk=A Healthier You, Medimanage.com (accessed October 2, 2010

Effects on Economies Of Scale

Average Total Cost Curve Without Economies of Scale

Average Total Cost Curve Average Total Cost Curve With Economies of ScaleWith Economies of Scale

Cost

Cost

OutputOutput

Average Costs Rises when output exceeds a certain level.

Average Costs of production falls when firms produce more

Why do production costs fall as output increases? Describe the cost curve for a firm without economies of scale.

Perfect Competition vs. Monopoly

Perfect Competition

Number of Firms:Many

Variety of Goods:None

Barriers to Entry:None

Control over Prices:None

Monopoly

Number of Firms:One

Variety of Goods:None

Barriers to Entry:Complete

Control over Prices:Complete

How are monopolies similar to perfect competition? Different?

Government Monopolies

A Monopoly created by the government A Patent - license giving inventor exclusive right for a specific

period of time Franchise -a contract that gives a single firm the right to sell its

goods within an exclusive market License -gov’t issued right to operate a business Industrial Organizations -Major League Baseball

Output Decisions

Monopolies face limited choice –either output or price

Monopolistic Dilemma -if a company produces more, the price will fall, if it produces less, the price will rise

Falling Marginal Revenue-if company decrease price, demand will increase, but marginal revenue will decrease

Setting a Price -Marginal revenue is slightly higher than the price

PricePrice Week Week DemandDemand

Total Total RevenueRevenue

Change Change in Revin Rev

Marginal Marginal RevenueRevenue

$12 $12 8,0008,000 $96,000$96,000 ------ ------

$11$11 9,0009,000 $99,000$99,000 $3,000$3,000 $3$3

$10$10 10,00010,000 $100,000$100,000 $1,000$1,000 $1$1

$9$9 11,00011,000 $99,000$99,000 $$--1,0001,000 $$--11

$8$8 12,00012,000 $96,000$96,000 --3,000$3,000$ $$--33

Demand Schedule for a Product

Output Decisions When 8,000 doses are made, the

market price is 12. PricePrice Week Week DemandDemand

Total Total RevenueRevenue

Change Change in Revin Rev

Marginal Marginal RevenueRevenue

$12 $12 8,0008,000 $96,000$96,000 ------ ------

$11$11 9,0009,000 $99,000$99,000 $3,000$3,000 $3$3

$10$10 10,00010,000 $100,000$100,000 $1,000$1,000 $1$1

$9$9 11,00011,000 $99,000$99,000 $$--1,0001,000 $$--11

$8$8 12,00012,000 $96,000$96,000 --3,000$3,000$

$$--33

Demand Schedule for a Product

Prices

Output108 120

8

10

12

As production rises to 11,000 As production rises to 11,000 doses, the price falls to $9doses, the price falls to $9..

Why does revenue fall production increases from 10,000 to 11,000? How does producing fewer goods benefit a monopolist?

Price Discrimination The division of consumers into groups based on how much they will pay for

a good Market Power -ability to control prices and total market output Targeted Discounts -discounted airline fares, Manufacturers’ Rebates,

Senior citizen discounts, children . . . free

Setting a Price in a Monopoly

Output

Price

0 9,000

$3

$11 DemandMarket Price

a

b

c

Margina

l Cost

Marginal Revenue

How does Point C show the benefits to consumers in a perfectly competitive market?

Limits of Price Discrimination

Market must meet three conditions Some market Power -must have some control Distinct Customer Groups – seniors v. citizens Difficult resale-

3. Monopolistic Competition and Oligopoly

A market structure in which many companies sell products that are similar but not identical

Different from perfect competition because products are not similar

Examples – Jeans, bagel shops, ice cream stands, gas stations, retail store

Like, NO,Tyler, I wouldnever go out with you!

•Jeans are an example of monopolistic competition because jeans can vary size, color, style, and designer

•“Are those bugle boy jeans you are wearing.”

Four Conditions

Many firms -not marked by economies of scale

Few article barriers to entry

Little control over price -will buy others if price rises

Differentiated products -making a product different from others, but similar

MonopolisticCompetition

Number of Firms:Many

Variety of Goods:Somed

Barriers to Entry:Low

Control over Prices:Limited

Non price Competition A way to attract customers through style, service, or location, but not

at a lower price Physical characteristics -running shoes, pens, cars, and toothpaste Location -will fail or succeed based on location Service Level -fast food, dinners Advertising, image, or status – designer names

•The designer athletic shoes are way more expensive than the sensible sneakers, but you buy them anyways.

•Status along with designer shoe is a form of non price competition

•Wawa is closer to Mr. Schenk’s house than Giant. For a late night snack, he will go to Wawa for peanut butter cups, even though they are cheaper at Giant

Prices, Output, and Profits

Prices – competition curves raising prices Output – falls pretty fairly Profits – earn just enough to cover costs

Oligopoly

A market structure in which a few large firms dominate a market

Markets for air travel, automobiles, breakfast cereals, and household appliances

Pepsi, Coke, Coca Cola

Oligopoly

Number of Firms:A Few

Variety of Goods:Some

Barriers to Entry:High

Control over Prices:Some

Oligarchy Barriers to entry -technological or

through government licenses or patents-high start up costs

Price Wars -a series of competitive price cuts that lowers the market price below the cost of production

Collision – illegal agreement among firms to divide the market

Price fixing- an agreement among firms to charge one price for the same good

Cartel -a formal organization of producers that agree to coordinate prices and production

The U.S. government decides to go after an agri-business giant with a price-fixing accusation, based on the evidence submitted by their star witness, vice president turned informant Mark Whitacre Mark Whitacre has worked for lysine developing company ADM for many years and has even found his way into upper management. But nothing has prepared him for the job he is about to undertake - being a spy for the FBI. Unwillingly pressured into working as an informant against the illegal price-fixing activities of his company, Whitacre gradually adopts the idea that he's a true secret agent. But as his incessant lies keep piling up, his world begins crashing down around him

The OPEC Cartel The Organization of Petroleum

Exporting Countries (OPEC) is an international cartel of major oil producers. OPEC members produce about 40% of the world’s oil and control about 75% of the world’s oil reserves. Members meet regularly to set production quotas. Most experts agree that world oil supplies are not sufficient to meet increased demand. In 2008, Libya’s OPEC delegation made a prediction: “The easy, cheap oil is over.”

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1stQtr

EuropeanUnion

OPEC

Non-OPEC

Russia

Share of Total Oil Reserves

Who controls most of the oil reserves? How about the least? How does that affect the

United States?

Powerful trusts in the late 1800’s led Congress to pass antitrust legislation.

4. Regulation and Deregulation

Sometimes the government takes steps to promote competition because markets with more competition have lower prices.

Market Power -ability of a firm to control prices and total output

Predatory Pricing -selling a price below cost for a short period of time to drive competition out

Government and Competition Sherman Anti Trust – laws that encouraged competition

in the market place Government broke up monopolies Blocking Mergers -when two or more companies join to

form single firm

Key

Even

ts in

Fed

eral

Ant

iTru

st P

olic

y DateDate EventEvent

19011901 Theodore Roosevelt became President and begins Theodore Roosevelt became President and begins enforcing the 1890enforcing the 1890’’s Sherman AntiTrust Act, which s Sherman AntiTrust Act, which outlaws mergers and monopolies that restrain trade outlaws mergers and monopolies that restrain trade between states.between states.

19111911 Supreme Court breaks up RockefellerSupreme Court breaks up Rockefeller’’s Standard Oil s Standard Oil Trust Company Trust Company

19501950 CellerCeller--Kefauver Act allows government to stop Kefauver Act allows government to stop mergers that could hurt competitionmergers that could hurt competition

19821982 AT&T agrees to break up its local phone service into AT&T agrees to break up its local phone service into several companiesseveral companies

20012001 Department of Justice settles its lawsuit with Department of Justice settles its lawsuit with Microsoft.Microsoft.

Deregulation The removal of some government controls over a market Decided in the late 1970’s, Congress deregulated some of

the market because it was reducing competition. Deregulated the airlines, trucking, banking, railroad, natural

gas, and television broadcasting industries

Regulation and DeregulationGovernment Passes Antitrust Laws

Laws are used to regulate business

New laws limit unfair business

Deregulation promotes competition

Comparison of Market Structures

Perfect Perfect CompetitionCompetition

Monopolistic Monopolistic CompetitionCompetition

OligopolyOligopoly MonopolyMonopoly

Number of Number of FirmsFirms

ManyMany ManyMany A Few A Few DominateDominate

OneOne

Variety of Variety of GoodsGoods

NoneNone SomeSome SomeSome NoneNone

Control over Control over PricesPrices

None None LittleLittle SomeSome CompleteComplete

Barriers to Barriers to EntryEntry

None None LowLow HighHigh CompleteComplete

ExamplesExamples Wheat, Wheat, Shares of Shares of stockstock

Jeans, BooksJeans, Books Cars, Movie Cars, Movie Studios, Studios, Soda Soda CompaniesCompanies

Public WaterPublic Water