Market Structure

Market Structure

Perfect Competition • Market Structure – The important features of a market, including the number of buyers and sellers, product uniformity across sellers, ease of entering the market, and forms of competitors.

Perfect Competition • Perfect Competition • Many buyers and sellers – no one individual can control the price

Perfect Competition • Firms produce a standardized product • Commodity – a product that is identical across producers

Perfect Competition • Buyers are fully informed about the price, quality, and availability of products, and sellers are fully informed about the availability of all resources and technology.

Perfect Competition • Firms can easily enter or exit an industry.

Perfect Competition • The best example of perfect competition is agricultural products. There are so many buyers and sellers that no single buyer or seller can influence the price. • “In perfect competition, there is no competition.”

Monopoly • A monopoly is the sole supplier of a product with no close substitutes.

Monopoly • Monopolies have a lot of market power. • Market power – the ability of a firm to raise its price without losing all sales to rivals. • In perfect competition firms have no market power.

Monopoly • A monopolized market has high barriers to entry, which are restrictions on the entry of new firms into an industry. • Legal restrictions – Entry may be illegal (in certain states only the government can sell alcohol) or restricted using licensing (you must obtain a license to be a doctor).

Monopoly • Economies of scale – Forces may reduce a firm’s average cost to produce goods as the firm’s size or scale increases in the long run. In other words, one firm can make goods more efficiently than multiple firms. • Example – The electrical grid

Monopoly • Control of essential resources – Example: China has a monopoly in supplying pandas to world zoos. The US rents Pandas from China for 1 million dollars a year.

Monopoly • Monopolists may not earn a profit – If there is no demand, there will be no profit. Many people have patents for goods that don’t sell.

Monopoly • True Monopolies are rare – Profitable markets draw competitors and substitutes even if barrier to entry is high. Also, technology changes can alter the ability for a monopoly to last. Example – Railroads had a monopoly on shipping goods but that monopoly ended when trucking began.

Monopoly and Efficiency • Competition forces firms to be efficient – to produce the maximum possible output from available resources – and to provide the product at the lowest available price.

Monopoly and Efficiency • Monopolies can charge a higher price and therefore do not have to be as efficient. • Monopolies may have too much influence on the political system. • Monopolies generally lack innovation and waste resources.

Monopoly and Efficiency • However, monopolies aren’t all bad • Due to economies of scale, monopolies may be able to offer goods cheaper because their cost is lower than if multiple firms offered the good or service

Monopoly and Efficiency • Government can force monopolies to lower prices or monopolies will keep prices low to avoid government regulation • Monopolies may keep the price low to prevent competition.

Monopolistic Competition • This market structure contains elements of both monopoly and perfect competition • Companies can influence prices because products are differentiated but barriers to entry are low

Monopolistic Competition • Product differentiation • Physical differences – some cars are boxy, some angular • Location – fast food is everywhere, that super tasty hole-in-the-wall restaurant only has one location • Services – delivery vs no delivery for food • Product image – Ipods seen as sleek and cool

Monopolistic Competition • Product differentiation costs more for firms so the products cost more. Some argue that product differentiation can be too artificial however others argue that consumers are willing to pay a higher price for choices.

Oligopoly • This market structure dominated by just a few firms. • Examples: markets for steel, oil, cars, breakfast cereals, and tobacco.

Oligopoly • Firms are interdependent. They know their actions affect the other firms in the market. • Oligopolies usually occur because of barriers to entry and economies of scale.

Oligopoly • Oligopolies may try to collude – agree to divide the market but fix the price • A group of firms that collude is called a cartel. Cartels typically produce less, charge more, earn a higher profit, and try to block the entry of other firms. • Example: OPEC – Organization of the Petroleum Exporting Countries

Oligopoly • Collusion and cartels are illegal in the United States • Cartels can dissolve if any of the members cheat and offer the product for a lower price.

Antitrust • If left alone, firms may try to become monopolies so the government institutes antitrust laws. These laws try to promote competition and prevent monopolies.

Antitrust • Companies may try to eliminate competition through mergers • Merger – the combination of two or more firms to form a single firm • Antitrust officials must approve a merger before it can happen

Antitrust • Flexible mergers – The government in recent years has allowed mergers if the firms will become more efficient or better able to compete with other large companies.

So Chrysler goes making cars like this…

To this!

Antitrust • Some natural monopolies occur such as electricity transmission or a subway systems. These monopolies may be desirable but they are also regulated.

Increased Competition in the United States • Antitrust activity – Government has prevented many mergers

Increased Competition in the United States • Deregulation – Government has reduced regulation of some markets such as trucking, airlines, and telecommunications. This has increased competition.

Increased Competition in the United States • International trade – More foreign trade increases competitors.

Increased Competition in the United States • Technological change – Technology lowers barriers to entry and has made it easier for customers to compare different products.

Market Structure