Chapter 7 Market Structures

1. Chapter 7Market Structures Aww, Snap!

2. Perfect Competition • Perfect Competition – a market where a large number of firms are all producing essentially the same product

3. Perfect Competition • Four Conditions for Perfect Market: • Many buyers and sellers participate • Sellers offer identical products • Products that are the same no matter who makes or sells them are commodities

4. Perfect Competition • Four Conditions for Perfect Market: • Buyers and sellers are well informed about products • Sellers are able to enter and exit the market freely

5. Barriers to Entry • Barriers – factors that make it difficult for new firms to enter a market • Barriers lead to imperfect competition

6. Examples of Barriers • Start-Up Costs – The expenses a new business must pay before it can enter the market • High Start-Up Costs prevent new firms from entering

7. Examples of Barriers • Technology – how much training does it take to enter the market?

8. Examples of Barriers • Government – may require licensing, certification, approval, etc.

9. Price and Output • A perfectly competitive market produces the lowest sustainable prices possible • With many firms competing, each firm lowers its prices to the point of just covering their costs

10. Monopoly • Monopoly – Barriers prevent firms from entering a market that has a single supplier

11. Factors that Create a Monopoly • 1. Economies of Scale – average cost of production always drops, never increases • 2. Natural Monopoly – market runs most effectively when one large firm provides all output

12. Factors that Create a Monopoly • Natural Monopolies are usually given special status by the government, but the government is allowed to control their prices • New technologies can destroy a natural monopoly

13. Government Monopolies • Government Monopoly – a monopoly created by the government

14. Typical High School Boy Questions? Wait… what’s a government monopoly?

15. Government Monopolies • Government Monopoly – a monopoly created by the government • There are 3 types of government monopolies, each with a different reason for being formed

16. Three Kinds of Government Monopoly • Technological Monopoly – government issues a patent • Patent – exclusive rights to sell a good or service for a specific period of time

17. Three Kinds of Government Monopoly • Franchises and Licenses • Franchises – government allows company to create an exclusive market for their brand name and products

18. Three Kinds of Government Monopoly • Franchises and Licenses • Licenses – government grants a firm the right to operate a business

19. Three Kinds of Government Monopoly • Industrial Organizations – government allows companies in an industry to restrict the number of firms in the market

20. Output Decisions • Do you emphasize price or output? • Price-Takers – in a competitive market, businesses have no control over their own prices • Price-Setters – in a non-competitive market, business can choose what price to charge

21. Falling Marginal Revenue • MR = price in perfect competition, and does not change • In a monopoly, however, MR begins falling at a point • Therefore, monopolies set production where MR = MC, but charge a higher price

22. Falling Marginal Revenue

23. Price Discrimination • Do you think monopolies usually charge the same price to all of their customers?

24. Price Discrimination NO!!

25. Price Discrimination • Price Discrimination – dividing consumers into different groups and charging different prices to each group

26. Price Discrimination • Monopolies are not the only companies that do this • Any company with market power, the ability to control prices and output, can use discrimination

27. Price Discrimination • The easiest way to maximize profit for a monopoly is to identify consumers who will not pay full price, and offer them a “discount” • These are called targeted discounts – think of airline fares, manufacturers rebates, student discounts

28. Limits to Price Discrimination I am the limit to price discriminicization.

29. Limits to Price Discrimination • 1. Firm must have some market power • 2. There must be distinct consumer groups • 3. It must be difficult for consumers to resell the product

30. Monopolistic Competition and Oligopoly Presidenting is my anti-drug.

31. Monopolistic Competition • Monopolistic Competition – many companies compete in an open market, but sell products that are slightly different from one another

32. Example

33. 4 Characteristics of Monopolistic Competition • 1. Many Firms • 2. Few Artificial Barriers to Entry • 3. Slight Control Over Prices • 4. Differentiated Products

34. Other Means of Competition • In a Monopolistic Competition, firms compete in a variety of ways other than prices • Physical Characteristics • Location • Service Level/Quality • Advertising and Image

35. Monopolistic Competition • Economists contend that price, output, and profits in a monopolistic competition are very similar to a perfect competition

36. Oligopoly • Oligopoly – a market dominated by a few large, profitable firms • If 4 of the largest firms can claim 70% or more of the market share, it is an oligopoly

37. Example

38. Example

39. Characteristics of Oligopoly • 1. Many Barriers to Entry • 2. Cooperation and Collusion • Price Leadership – market leader raises prices, other firms follow suit (can also cause price war, though)

40. Characteristics of Oligopoly • 1. Many Barriers to Entry • 2. Cooperation and Collusion • Collusion – an agreement among members of an oligopoly to set prices and production levels

41. Characteristics of Oligopoly • 1. Many Barriers to Entry • 2. Cooperation and Collusion • Collusion causes price fixing, where firms agree to sell at the same or similar prices • It’s illegal, by the way

42. Characteristics of Oligopoly • 1. Many Barriers to Entry • 2. Cooperation and Collusion • Cartels – an agreement by producers to coordinate prices and production • Legal in some countries, not here

43. Regulation and Deregulation • What might a firm do to increase its market power? • Form a cartel • Merge with competitors • Predatory Pricing - Temporarily lower prices to put others out of business

44. Regulation and Deregulation • Government has Antitrust Laws in place to prevent such practices • Trust – a business combination similar to a cartel • Began with Sherman Antitrust Act in 1890

45. Fair or Unfair? • Nike is one of the world’s largest and most popular shoe manufacturers • Once Nike introduced clothing, it forced companies that wanted to buy its shoes to buy its clothes as well

46. Fair or Unfair? • Disney, ABC, AOL, and Time-Warner have merged together • They now control the Disney Channel, Cartoon Network, and the WB, which is a basic monopoly on children's programming

47. Regulation and Deregulation • Government can step in and break up monopolies based on the Sherman Antitrust Act • Famous examples: John D. Rockefeller’s Standard Oil (1911), AT&T (1982)

48. Regulation and Deregulation • Government can also block mergers from happening • Merger – when one company joins with another • Government uses research to see whether the merger will help or hurt consumers

49. Regulation and Deregulation • The Republican Party has typically supported deregulation – when the government stops making decisions about what businesses can and cannot do • Government uses regulation and deregulation for the same purpose – to promote competition