Do Now

• Do you believe Wal Mart is “evil”/bad or are they just a smart corporation?

Models of Competition

Market Structure

Models of Competition

• Def: a description of the type of market that a particular business or industry operates in.

• Also know as Market Structure.

4 Types of Models of Competition

1. Perfect competition2. Monopoly 3. Monopolistic competition4. Oligopoly

Perfect Competition

• Def: A market structure in which a large number of firms (businesses) produce the same product

Four Conditions for Perfect Competition

1. Many buyers and sellers- people have lots of options to choose from when they buy.

2. Identical products – No difference in items they are exactly the same

Four Conditions for Perfect Competition (cont.)

3. Informed buyers and sellers- buyers know the prices and qualities of goods.

4. Free market entry and exit- Business can enter and exit the market when they want

Types of Businesses

• Farmer’s Market• - Have many buyers and sellers• - Veggies are identical (a carrot is a carrot)• - Buyers can compare prices and quality

(informed)• - Farmers decide to go or not

Are they many perfectly competitive business?

• NO- All 4 conditions must be met.• Ex: Products are rarely identical

Barriers of Entry

• Def- Factors that make it difficult for new firms to enter a market

• Start up costs- costs needed to create and enter a market (rent, machines, labor)

• Technology- (ex: software and pharmaceutical

companies)

Monopoly

• Def: A market dominated by a single seller. • They take advantage of their monopoly power

and charge high prices

• Natural Monopoly- Allowed to exist because the market runs better with just one firm

Ex: Monroe County Water Authority

Government Monopolies

• Patents: Licenses that give inventors exclusive rights to sell their product for a time.

Monopolistic Competition

• Def: Many companies compete in an open market to sell products that are similar but not identical

Four Conditions of Monopolistic Competition

1. Many firms- little start up costs=lots of firms

2. Few artificial barriers to entry- low barriers

3. Slight control over price- can raise prices because products are a little different. 4. Differentiated products-Can distinguish their product from others

What Types of Businesses are Monopolistically Competitive?

• Lots! Most markets exist in this model. • Ex. Soft Drinks- Coke Pepsi, Wegmans, etc• 1. Many firms (choices)• 2. Inexpensive to produce (few barriers)• 3. Coke more expensive (control Price)• 4. Some like Coke more than Pepsi (different

products)

How to get customers?

• Through Nonprice Competition : a way to attract customers through style, service or location but not a lower price.

4 Types

• 1. Characteristics of Goods: Firms distinguish products through size, color taster etc.

• 2. Location of Sale -Convenience stores

• 3. Service Level- Can charge higher price because they offer a higher level of service. Ex McDonalds vs Fancy rest.

• 4. Advertising Image- Advertising creates differences between products

Monopolistic vs Perfect Comp.Perfect Competition Monopolistic

Competition

Prices Lower, firms have no control

Higher, firms have some control

Profit Lower Higher in short term, but must work hard to keep ahead of rivals

Cost and Variety Low costs, no variety (identical products)

Higher costs for differentiation, wide variety

Oligopoly

• Def: A market dominated by a few, large firms

• Ex: Cartels• OPEC (Organization of Petroleum Exporting

Countries)- Countries that control the oil supply and manipulate prices of gas

How do they work?

• Collusion- Agreement between members to set prices and production levels

• Price Fixing- Agreement to sell at the same or similar prices

• Both are illegal in US

Do Now

• Please answer the following questions:

• 1) Describe the term monopoly• 2) What is the MAIN difference between

monopolistic and perfect competition • 3) What are some barriers of entry to start a

business?• 4) How do Cartels hurt competition?

Market Power

• Def: the ability of a company to control prices and output

• Markets dominated by monopolies and oligopolies have great market power

• Markets with many sellers (mono and perfect comp) have little to no market power

Predatory Pricing

• Def- setting the market price below cost levels for the short term to drive out competitors.

Firms in perfect comp. and mono comp. do this to gain market power

Ex: Open up my pizza shop and sell slices for $1 even though it costs $1.50 to make. I can raise the price later if I drive out competition.

Government and Competition

• The Government keeps firms from controlling prices and supply of important goods. Antitrust Laws are laws that encourage competition and break up monopolies/oligopolies in the marketplace.

4 Forms of Anti-Trust Laws

1. Regulating Business Practices-gov’t intervenes if too powerful

2. Breaking Up Monopolies- (Standard Oil AT&T)

3. Blocking Mergers- Can stop them4. Preserving Incentives-must show benefits to

consumer

Deregulation

• Def: The removal of some government controls over a market. It is used to promote competition.

• Allows for more competition, lower prices, increase in variety but can lead to layoffs and business closings

• EX: Airlines in the 80’s