Imperfectly Competitive Markets

Oligopolies – market structure in which a few large sellers control most of the production of a good or service

3 Conditions • Only a few large sellers

• Similar or identical products

• Other sellers can’t enter/exit the market easily

Oligopolies at Work

Non-Price Competition: differentiation

Price Leadership

Price War

Interdependent Pricing

Auto companies often look to competitors before pricing new models

• Why price my model lower than the competition?

• Relying on brand name loyalty

Price Leadership

One seller decides:

• Production costs are eating into profits

• Must raise prices!

• Other sellers sometimes follow suit

Price War

Collusion

• Did baseball owners secretly agree to hold down player salaries?

Powerful members of an oligopoly agree to limit competition and control the market

Cartels

Powerful members of an oligopoly openly agree to limit competition and control production/prices, etc.

Organization of Petroleum Exporting Countries

OPEC

Monopolies

• Market structure where one seller dominates the market

• No competition exists

3 Conditions:

• There is a single seller

• No close substitute goods

• Other sellers can’t enter market easily

Consequences of Monopolies:

• Consumers have limited choices

• Prices tend to be high

• No incentive for producer to be efficient

Limitations on Monopolies

Consumer Demand:

• If prices too high, demand will be zero!

Potential Competition:

• If profits high enough, other sellers will compete

Government Regulation:

• Ensure competition, protect consumers and other producers

Types of Monopolies

Natural Monopoly

• Competition is inconvenient or impractical

• Often due to economies of scale

• Not common!

Geographic Monopoly

• Exists when a market’s potential profits are limited by it’s geographic location

• Not enough demand to support more than one seller

• Not common: communications, mobility of society, etc

• Example: mom and pop grocery store out in the country

Technical Monopoly

When a producer develops a new technology that changes the way an existing product is made or allows for the creation of a new product.

Government grants a patent

• Protects company’s investment in research and development – 17 years

• 17 year monopoly!

• No other company can manufacture or sell the product

Government Monopoly

Exists when government allows cities, counties, etc to monopolize products and services.