EconomicsMr. Bordelon

Market Structures

Market StructureMarket structure. The organization of a market based on the degree of competition among producers.Perfect competitionMonopolyOligopolyMonopolistic competition

Characteristics of Market Structures

Number of ProducersSimilarity of ProductsEase of Entry into Market

Control over Prices

Perfect CompetitionIn a perfectly competitive market, a large

number of firms produce essentially the same product. All goods are sold at their equilibrium price. This is the most efficient market structure.Rare. Mostly agricultural.Examples. Wheat, corn, tomatoes, milk,

commercial fishing, paper industry.

Characteristics of Perfect Competition

Most Competitive

Least Competitive

Characteristics of Perfect CompetitionMany producers and consumers. Large number of participants promotes competition.

Identical products. Buyers don’t really see a difference: milk is milk.Commodity. A product that is exactly the same no matter who produces it. Grains, cotton, sugar, oil.

Characteristics of Perfect CompetitionEasy Entry into Market. Few

restrictions. Existing producers will face competition from new firms, and no single firm will dominate the market.

No Control over Prices. Producers can not influence prices because there are too many other producers offering the same product. Market forces of supply and demand determine price of goods (Invisible Hand!).

Barriers to EntryBarrier to Entry. Obstacle that can

restrict access to a market and limit competition.Start-up costs. Initial expense of starting a

business.Financial capital.Control of resources. Both physical and human

capital.Technology.

If this is rare, why isperfect competition important?Perfect competition is the standard by which we measure all the other markets.One structure to rule them all, one structure to find them...one structure to measure them all and in the darkness box them squarely on the ears.

Questions1. Which of the following is NOT a condition for perfect

competition?(a) many buyers and sellers participate(b) identical products are offered(c) market barriers are in place(d) buyers and sellers are well-informed about goods and

services2. How does a perfect market influence output?

(a) Each firm adjusts its output so that it just covers all of its costs.

(b) Each firm makes its output as large as possible even though some goods are not sold.

(c) Different firms make different amounts of goods, but some make a profit and others do not.

(d) Different firms each strive to make more goods to capture more of the market.

Questions1. Which of the following is NOT a condition for perfect

competition?(a) many buyers and sellers participate(b) identical products are offered(c) market barriers are in place(d) buyers and sellers are well-informed about goods and

services2. How does a perfect market influence output?

(a) Each firm adjusts its output so that it just covers all of its costs.

(b) Each firm makes its output as large as possible even though some goods are not sold.

(c) Different firms make different amounts of goods, but some make a profit and others do not.

(d) Different firms each strive to make more goods to capture more of the market.

MonopolyMonopoly. Market or industry consisting

of a single producer of a product that has no close substitutes.

Monopolies are generally illegal.Government uses antitrust laws to limit the

formation of monopolies.One key thing to remember throughout

monopoly: control of price and output!

Characteristics of Monopoly

Most Competitive

Least Competitive

Characteristics of MonopolyOne producer. No competition. The

monopoly is the market.Unique product. Monopolies are the only

supplier of the product. No good substitutes, no similar goods or services.What kind of product did we call this?

The one where no matter how high the price went, consumers would still keep buying it?

Characteristics of MonopolyHigh Barriers to Entry. Since the

monopoly controls everything, it’s difficult if not impossible to get into the market at all.

High Control over Prices. Monopolists control price and output. They can set price without fear of being undercut by competitors. They can limit supply and create a shortage to raise the price even further.

Legal MonopoliesNatural MonopolyGovernment Monopoly

PatentCopyrightPublic FranchiseLicense

Natural MonopolyNatural monopoly. When a single firm

can supply a good or service more efficiently and at a lower cost than two or three competing firms can.Examples. Utilities, airports.Because natural monopolies are efficient,

governments view them as beneficial.

Natural MonopolyEconomies of scale. Greater efficiency

and cost savings that result from increased production.Businesses that acheive economies of scale

lower its average cost per unit of production by increasing its output and spreading fixed costs over a larger quantity of goods.Huh?

Natural MonopolyEconomies of Scale cont’dBob the Builder has been asked to supply

water to a new subdivision of 50 houses. To do this, it will cost his company $100,000 to put the pipes in. It costs an addition $1,000 to put in a meter.Total cost for supply water to the first

home: $101,000

Natural MonopolyEconomies of Scale cont’dBut what about the second home?

Natural MonopolyEconomies of Scale cont’dBut what about the second home?Total cost for two homes: $102,000

OR per home: $51,000

Natural MonopolyEconomies of Scale cont’dAnd the third?

Natural MonopolyEconomies of Scale cont’dAnd the third?Total cost for three homes: $103,000

OR per home: $34,333

Natural MonopolyEconomies of Scale cont’dBy the time you get to the 50th house, the

total cost to Bob the Builder is $150,000--$100,000 for the pipes and $50,000 for 50 meters.Cost per home: $3,000

Natural MonopolyEconomies of Scale cont’d• Businesses that acheive economies of scale

lower its average cost per unit of production by increasing its output and spreading fixed costs over a larger quantity of goods.

• In other words, it costs me less to build per unit because I can spread out the cost of the whole project to each product I build.

• Bob the Builder’s average total cost will decrease as he increases his production!

Natural MonopoliesEconomies of Scale cont’dSo...wait, if it works for Bob the Builder,

why can’t it also work for Bobbette the Builder?

Government MonopoliesPatents and Copyrights

Patents give inventors or creators the right to control production, sale and distribution of their technical work.

Copyrights grant artists, writers and composers the right to control a creative work.

We want to encourage investment in research and development, and creativity.

Government MonopoliesPublic Franchise. Contract issued by

government entity that gives a firm the sole right to provide a good or service in a certain area. Usually for a reduced cost of product.Examples. National parks, schools, vending

machines.Licenses. Legal permit to operate a

business or enter a market.Examples. Road paving company, parking

lot company.

Questions1.A monopoly is

(a) a market dominated by a single seller.(b) a license that gives the inventor of a new product the

exclusive right to sell it for a certain amount of time.(c) an industry that runs best when one firm produces all the

output.(d) an industry where the government provides all the output.

2.Price discrimination is (a) a factor that causes a producer’s average cost per unit to fall

as output rises.(b) the right to sell a good or service within an exclusive market.(c) division of customers into groups based on how much they

will pay for a good.(d) the ability of a company to change prices and output like a

monopolist.

Questions1.A monopoly is

(a) a market dominated by a single seller.(b) a license that gives the inventor of a new product the

exclusive right to sell it for a certain amount of time.(c) an industry that runs best when one firm produces all the

output.(d) an industry where the government provides all the output.

2.Price discrimination is (a) a factor that causes a producer’s average cost per unit to fall

as output rises.(b) the right to sell a good or service within an exclusive market.(c) division of customers into groups based on how much they

will pay for a good.(d) the ability of a company to change prices and output like a

monopolist.

OligopolyOligopoly. Market or industry dominated

by just a few firms that produce similar or identical products.

Arise because of economies of scale, which give bigger producers an advantage over smaller ones.

Some competition.Firms in an oligopoly do not have to be as

large.

Characteristics of Oligopoly

Most Competitive

Least Competitive

Characteristics of OligopolyFew Producers. Small number of firms

control the market. If top four producers supply more than 60% of the market, then this is an oligopoly.

Similar Products. Same product, minor variations.

Characteristics of OligopolyHigh Barriers to Entry. High start-up

costs, existing firms may have made large investments and enjoy economies of scale, customers reluctant to give up loyal to old brands.

Some control over price. Some competition. Firms influenced by price decisions of other firms in market—interdependence.

When Oligopolies Behave BadlyOligopolies are not in and of themselves

illegal. However, they can act illegally. Or sometimes just misbehave.

When Oligopolies Behave BadlyPrice Leadership. In an oligopoly

dominated by a single firm, the dominant firm sets a price and other smaller firms may follow.However, dominant firm may cut prices in

order to take business away from competitors or force them out of business—anti-competitive! Bad!

If others lower their prices, market could enter a price war, benefiting consumers, but bad for sellers.

When Oligopolies Behave BadlyCollusion. When producers get together

and make agreements on production levels and pricing.Illegal. Unfairly limits competition.

When Oligopolies Behave BadlyCartel. Organization of producers

established to set production and price levels for a product.Illegal in the United States.Not on global market.

OPEC. Organization of the Petroleum Exporting Companies often set price and output (hey, that sounds familiar!) artificially.

Works primarily with commodities: oil, sugar, coffee, etc.

When Oligopolies Behave BadlyKey point! When firms in an oligopoly

work together to control the market, they act like a monopoly. As such they can use market power to limit competition and raise prices.

Monopolistic CompetitionMonopolistic Competition. Large

number of producers provide goods that are similar but varied.

Oftentimes this means creating a brand, which consumers will show brand loyalty to.

Characteristics of Monopolistic Competition

Most Competitive

Least Competitive

Characteristics ofMonopolistic CompetitionMany Producers. Many competitors

means more competition.Differentiated products. Similar

product, with significant variations.Product differentiation. Distinguish g/s

from other firms, even when those products are close substitutes for each other.

Examples. Shoes—Nike, Reebok. Computers—HP, Apple.

Characteristics ofMonopolistic CompetitionFew Barriers to Entry. Start-up costs are

relatively low. Many firms can enter and earn a profit.

Some Control over Prices. Because producers control their brands, they have some control over price. BUT because products are close substitutes, market power is limited.If prices raise too much, customers will

substitute.Too many producers for price leadership

or collusion to be possible.

Questions1.The differences between perfect competition and monopolistic

competition arise because(a) in perfect competition the prices are set by the government.(b) in perfect competition the buyer is free to buy from any seller he

or she chooses.(c) in monopolistic competition there are fewer sellers and more

buyers.(d) in monopolistic competition competitive firms sell goods that are

similar enough to be substituted for one another.

2.An oligopoly is(a) an agreement among firms to charge one price for the same

good.(b) a formal organization of producers that agree to coordinate price

and output.(c) a way to attract customers without lowering price.(d) a market structure in which a few large firms dominate a market.

Questions1.The differences between perfect competition and monopolistic

competition arise because(a) in perfect competition the prices are set by the government.(b) in perfect competition the buyer is free to buy from any seller he

or she chooses.(c) in monopolistic competition there are fewer sellers and more

buyers.(d) in monopolistic competition competitive firms sell goods that are

similar enough to be substituted for one another.

2.An oligopoly is(a) an agreement among firms to charge one price for the same

good.(b) a formal organization of producers that agree to coordinate price

and output.(c) a way to attract customers without lowering price.(d) a market structure in which a few large firms dominate a market.

Price DiscriminationPrice Discrimination. Division of

customers into groups based on how much they will pay for a good.

Market Power. Ability of a company to change prices and output.

Targeted Discounts. Discounts aimed at characteristics of a particular consumer—elderly, students, military, etc.

Price Discrimination1. Some market power. MUST have some

control over prices.2. Distinct consumer groups. Divides

customers into distinct groups based on sensitivity to price.

3. Difficult resale. If one group of customers could buy the product, then resell it to someone else for a profit, then the firm can not enforce price discrimination.

Non-Price DiscriminationNon-price competition. Competition

through ways other than lower prices.Differentiation. Making a product

different from other similar products.

Non-Price Discrimination1. Physical characteristics.2. Location3. Service Level4. Advertising, Image, Status