Competition

1. Competition Chapter 7

2. How do Economists Define Market Structures? • How many suppliers are there? • How large is each supplier? • Do the firms have any influence over price? • How much competition exists between firms? • What kind of economic product is involved? • Are all firms in the market selling exactly the same product or simply similar ones? • Is it easy or difficult for new firms to enter the market?

3. Market Structure • Market Structure = how much competition there is between different companies operating or creating the same product. Four Different Market Structures: • Pure Competition • Monopolistic Competition • Oligopoly • Monopoly

4. Pure Competition • Pure Competition = independent and well-informed buyers and sellers who sell exactly the same economic product. There are five conditions to a purely competitive market. Conditions: • Large number of buyers and sellers • Buyers and sellers deal in identical products • Buyers and sellers act independently. • Buyers and sellers are reasonably well informed about items for sale. • Buyers and sellers are free to enter into, conduct or get out of business.

5. Condition 1 - A Large Number of Buyers and Sellers • No one is able to affect the price of a product, instead all buyers and sellers compete equally. • Why is this important? What is an example of a product that has a large number of buyers and sellers? Pizza shops

6. Condition 2 - Buyers and Sellers deal in identical Products • Buyers do not prefer one seller’s merchandise over another’s • There is no difference in quality, no brand names, and no need to advertise. • For example – Sugar is a product that does not have much competition. Sugar is always the same compound so there is no need to advertise and no difference in quality.

7. Condition 3 - Each buyer and seller acts independently • Sellers compete against each other for the buyer’s dollar. • Buyers compete against each other for the best prices. • Since the buyers and sellers are all competing against each other, prices stay low and competition stays fair. For example: Gas stations and gas patrons

8. Condition 4- Buyers and Sellers are Reasonably Well Informed about items for sale • If a store has an item for sale, customers and sellers will know that the item is on sale. • ALL sellers will have to keep their prices low because products are the same, so customer loyalty changes solely on price. For example: Southwest Airlines

9. Condition 5- Freedom to Enter the Market • Easy for a new seller to start a business. • A single producer has trouble keeping the market for itself. • Producers have to keep prices competitive or new firms will enter the market. For example: Starting a restaurant is relatively easy, many people can join this market

10. Profit Maximization – Pure Competition • Firms are too small to influence price, therefore, supply and demand in the entire industry establishes the equilibrium price. • Then, firms decide what price will maximize their output and profit.

11. Can you think of any purely competitive markets that exist today?

12. Why do economists worry about purely competitive markets if they rarely exist?

13. Imperfect Competition = A market system that lacks 1 or more of the 5 characteristics of pure competition • Monopolistic Competition • Oligopoly • Monopoly

14. Monopolistic Competition • All of the conditions of pure competition except for identical products. • Companies compete to attract more customers and monopolize a small portion of the market. • Product Differentiation = the difference in monopolistic competition and pure competition • The difference in products may be real or perceived

15. What are you favorite brands of the following items: • Jeans • Shampoo • Computer • Cereal What differentiates your favorite from the other products that are like it?

16. Nonprice Competition – Monopolistic Competition • Advertising or promotional campaigning takes the place of competition over prices. • Producers would like you to think that their product is the best based on something other than price.

17. Coke Versus Pepsi Debate • http://www.youtube.com/watch?v=EMo6o0BtFG8 • http://www.youtube.com/watch?v=DijFob8vxgI

18. Profit Maximization – Monopolistic Competition • Usually, products will sell around the same prices. • EX: Most digital songs / books sell for around the same price • Sellers are able to raise or lower prices on their own within that range. • EX: Restaurants compete within a range of prices • If firms are successful in advertising and convincing consumers that their product is different, they may be able to raise the price even more. • EX: Apple MP3 players compared to others in the market

19. Oligopoly • A market dominated by a FEW very large sellers. • Further from pure competition than monopolistic competition is. • The exact number of firms is not the most important factor – what is more important is how much a single firm is able to change output, sales and prices for the whole industry. What are some examples of industries that are dominated by a few large corporations or firms?

20. What types of industries may be an example of an Oligopoly?

21. Interdependent Behavior - Oligopoly • Since there are so few firms, when one firm does something the others usually follow. • Collusion, or a formal agreement to set prices or cooperate in the market, often takes place in oligopolies. Although collusion is illegal, it still takes place. • Price-fixing (agreeing to charge the same price) may also take place. • Because there are so few firms and price changes can greatly affect business, price changes may not be seen very often in an oligopoly.

22. Pricing Behavior - Oligopoly • Price wars = when one firm lowers their prices and all other firms follow suit, and may lower their prices even more after the initial price cut. • Advertising or nonprice competition can help a firm get the edge if they think of a new advertising gimmick or idea. • If one firm is a lot bigger or more popular than the others, they may be the price leader, when they change their prices other firms follow to avoid a price war. • Final prices are usually higher in this market structure than in monopolistic or pure competition.

23. Monopoly • Monopoly = a market situation with only one seller of a particular product that has no close substitutes. • No pure monopoly exists. Why? • Many Americans do not like monopolies • It is relatively easy to find a substitute for a product • New technology allows new firms to enter markets that may have held a monopoly before.

24. Types of Monopolies: • Natural Monopoly = Costs are minimized by having only one firm that produces a certain product. For example, if two telephone companies merged to cut costs and only had one telephone company in a town or city. • Geographic Monopolies = no other business in the immediate area offers the same products. • Technological Monopoly = a firm or company has discovered a new manufacturing technique or idea that no one else has yet. For example – Apple when they first invented the I phone. • Government Monopoly = a business that the government owns and operates. For example, alcoholic beverage sales in PA.