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Market Structure

Market Structure. Chapter 7. Competitive Markets. Forces of supply/demand promote competition 2 basic types of competitive markets: Perfect Monopolistic. Perfect Competition. Ideal market structure No one producer/consumer controls demand, supply, or prices Nothing prevents competition.

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Market Structure

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  1. Market Structure Chapter 7

  2. Competitive Markets • Forces of supply/demand promote competition • 2 basic types of competitive markets: • Perfect • Monopolistic

  3. Perfect Competition • Ideal market structure • No one producer/consumer controls demand, supply, or prices • Nothing prevents competition

  4. Traits of a perfect competitive market 1. Many buyers and sellers • Prevents one buyer/seller from controlling the market • Each buyer/seller must act independently

  5. Traits of a perfect competitive market 2. Identical Products • Sellers in same industry must offer identical products (commodity)

  6. Traits of a perfect competitive market • Informed Buyers • Buyers are fully informed about the price, quality, and availability of products.

  7. Traits of a perfect competitive market 4. Easy to enter/exit market • Nothing prevents new producers from entering market • Also have the freedom to switch Means: no obstacles preventing new firms from entering.

  8. Traits of a perfect competitive market • If these conditions exist in a market, individual buyers and sellers have no control over the price. • Market price is determined by supply and demand.

  9. NO MARKET IS PERFECTLY COMPETITIVE

  10. Monopoly • A monopoly is the sole supplier of a product with no close substitutes. • Market Power- the ability of a firm to raise its price without losing all sales to rivals. • Monopolies have market power, perfect competitors do not.

  11. Chap. 7.2 Monopolistic Competition

  12. Monopolistic Competition • Differs from perfect competition in one key area: sellers offer different (slightly diff.) rather than identical products (restaurants, gas stations, drugstores, etc…) • Very common market types

  13. Coke and Pepsi are Monopolistic Competitors because: • They are part of a large cola market in the US; most of the other cola drink manufacturers have smaller more regional markets. Coke and Pepsi can be thought of very much as national colas.   • They produce slightly different products but compete for the same customers. If one of them changes their price of a product due to a “new” cola, the other will change their price to try to capture to other cola drinkers who become jaded with the “new” product. • They are part of a free market where anyone can start selling cola if they want to. One example of a new cola company is Jones cola based in Washington state.

  14. Monopolistic Competition Characteristics • Can enter or exit market easily. • There are just enough sellers that they behave competitively. • When deciding price, a particular firm does not worry about how other firms in the market will react to a price change.

  15. Product Differentiation • Sellers in monopolistic competitive markets differentiate their products in four basic ways. Through: • Physical Differences • Location • Services • Product Image

  16. Non-Competitive Markets • Oligopolies: • Market where a few top producers controls most of the market place • 3 or 4 firms account for ¾ of the total output of a good. • Steel, Oil, & Tobacco industries

  17. Traits: • Few large producers (2 – 4 producers control at least 70% of the market) • Sellers offer identical/similar products (less likely to take a risk on new products) • Other sellers can’t easily enter the market (high cost of entry and or government regulations on entry) • Usually higher prices

  18. How Oligopolies Set Price • Interdependent Pricing: this means that oligopolies set the price on their products based on the prices of their competitors. • Usually the largest producer will emerge as the price leader. • If competitors do not follow the price leader, a price war may result.

  19. Oligopolies • To decrease competition and increase profit, oligopolistic firms, particularly those that offer identical products, may try to collude, or agree on a price (illegal). • Collusion- this is an agreement among firms in the industry to divide the market and fix the price.

  20. Collusion Leads to Cartels Cartel- this is a group of firms that agree to act as a single monpolist to increase the market price and maximize the groups benefits. • illegal in US • Organized way of setting prices in the open • Ex: oil (OPEC)/diamonds

  21. Chap. 7.3 Antitrust, Economic Regulation, and Competition

  22. Antitrust • Although competition typically promotes the most efficient use of the nation’s resources, an individual firm would prefer to operate as a monopoly. • If left alone, firms may try to become monopolies or oligopolies, in which they are colluding and forming cartels.

  23. U.S. Antitrust Activity • Antitrust activity- attempts to prohibit efforts to monopolize markets. • U.S. Antitrust Activity tries to: • Promote the market structure that will lead to greater competition. • Reduce anticompetitive behavior.

  24. Antitrust Laws • Antitrust laws attempt to promote socially desirable market performance. • There are three main laws that are the backbone for the U.S. Antitrust Framework: • Sherman Antitrust Act of 1890- this outlawed the creation of trusts, restraint of trade, and monopolization.

  25. Antitrust Laws • Clayton Act of 1914- outlawed certain practices not prohibited by the Sherman Act and to help government stop a monopoly before it developed. • Federal Trade Commission Act (FTC) of 1914- established a federal body to help enforce antitrust laws.

  26. Mergers and Antitrust • Merger- the combination of two or more firms to form a single firm. • The federal antitrust officials main job is to approve or deny proposed mergers.

  27. Mergers and Antitrust • There are two types of mergers: • Horizontal Mergers- when firms in the same market merge. • Non-horizontal Mergers- All other types of mergers

  28. Regulation of Natural Monopolies • Natural Monopolies are regulated by Antitrust Laws. • This tries to control price, output, the entry of new firms, and the quality of service in industries.

  29. 2 Views of Gov’t Regulation • Why do gov’ts regulate the price and output of certain markets? 2 reasons: • Regulation for the Public Interest- this is regulation that promotes social welfare. • Regulation for Special Interest- this is regulation in the special interest of producers. (NY Taxis)

  30. Competitive Trends in the U.S. Economy • The U.S. economy has grown more competitive over the last half century. • Causes of increased competition include: • Antitrust activity • Deregulation- this reduces or eliminates government regulations on previously regulated markets such as airlines and trucking.

  31. Competitive Trends in the U.S. Economy • International Trade- foreign imports increased competition in many industries, such as foreign cars. • Technological Change- Ex: In the last two decades, the prime-time audience share of the three major television networks (NBC, CBS, and ABC) dropped from 91% to 46% as satellite and cable technology delivered many more channels.

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