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Market Structure

Market Structure. Market Structure. The nature and degree of competition among firms in the same industry. Perfect Competition. Market structure characterized by a large number of well-informed independent buyers and sellers who exchange identical products. A Theoretical idea.

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Market Structure

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  1. Market Structure

  2. Market Structure • The nature and degree of competition among firms in the same industry

  3. Perfect Competition • Market structure characterized by a large number of well-informed independent buyers and sellers who exchange identical products. • A Theoretical idea Q: So why does perfect competition serve as a theoretical market structure? A: Its advantages serve as a yardstick or example for other structures to be measured by.

  4. Perfect Competition Conditions • Must be a large number of buyers and sellers • Buyers and sellers deal in identical product • Each buyer and seller acts independently • Buyers and sellers are reasonably well-informed about product and prices • Buyers and sellers are free to enter into, conduct, or get out of business

  5. Monopolistic Competition • Market structure that has all the conditions of perfect competition except for identical products. • Seller has the ability to raise or lower the price • If sellers raise or lower the price enough, customers will change brands

  6. Monopolistic Competition • Characterized by product differentiation: real or perceived differences between competing products in the same industry. • To make their products stand out, they use nonprice competition: the use of advertising, giveaways, or other promotions designed to convince buyers that the product is somehow unique or fundamentally better than a competitor’s.

  7. Oligopoly • Market Structure in which a few large sellers dominate the industry • Products may be distinct like the car industry or standardized like the steel industry • When one firm changes prices, enhances product, etc the other firms usually follow or they run the risk of losing customers

  8. Monopoly • Market structure with a single seller of a particular product • Few Pure Monopolies today…very rare

  9. Characteristics of Market Structure

  10. Types of Monopolies • Natural Monopoly: market situation where the costs of production are minimized by having a single firm produce the product • IE: Public utilities • Geographic Monopoly: market structure based on the absence of other sellers in a particular geographic area • IE: Only 1 gas station in a small town

  11. Types of Monopolies • Technological Monopoly: based on a firm’s ownership or control of a production method, process, or other scientific advance • IE: item with a patent • Government Monopoly: monopoly owned and operated by the government • IE: oversee water use, weapon-grade uranium for military

  12. Market Failure • Condition that causes a competitive market to fail

  13. 5 Reasons for Failure: • Inadequate Competition • Inadequate Information – if the knowledge is important to buyers and sellers but is difficult to obtain • Resource Immobility – factors of production do not move to markets where returns are the highest • Public Goods – products that are collectively consumed by everyone • Externalities – unintended side effect that either benefits or harms a third party not involved.

  14. Externalities • Negative: harm, cost, or inconvenience suffered by a third party because of actions by others • IE: Noise from an airport, pollution • Positive: a benefit someone receives who was not involved in the activity that generated the benefit. • IE: Airport expansion provides more business for local restaurants Doesn’t matter if they are positive or negative: they are considered market failures, because their costs and benefits are not reflected in the market prices that buyers and sellers pay.

  15. The Role of Government • The government exercises its power to maintain competition within markets • Two ways that government can maintain competitive markets: • Prohibiting market structures that are not competitive • Regulating markets where full competition is not possible

  16. Antitrust Legislation • Trust: illegal combination of corporations or companies organized to hinder competition • Price Discrimination: the practice of selling the same product to different consumers at different prices • Cease and Desist Order: ruling requiring a company to stop an unfair business practice that reduces or limits competition

  17. Anti-Monopoly Legislation • Sherman Antitrust Act 1890 – Outlawed all contracts to stop the growth of trusts and monopolies • Clayton Antitrust Act 1914 – Strengthened the Sherman Act by outlawing price discrimination • Federal Trade Commission Act 1914 – Established the Federal Trade Commission to regulate unfair methods of competition in interstate commerce. • Robinson-Patman Act 1936 – Made it where everyone got the same rebates and discounts

  18. Q: Inadequate Information and Public Goods What two market failures does the government have the ability to correct? A:

  19. Improve Economic Efficiency • Promote Transparency – information and actions are not hidden and are easily available for review • Public Disclosure: requirement that businesses reveal certain information to the public • Provide Public Goods

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