Ch. 7: Market Structures

Section 1: Perfect Competition

• Competition balances free markets, but certain requirements need to be met for perfect competition to exist.

Perfect Condition

• Perfect competition requires the following…1. Many buyers and sellers participate2. Sellers offer identical products3. Buyers and sellers are well informed4. Sellers are able to enter and exit the market

freely/easily

1. Many Buyers and Sellers

• Having many producers and consumers creates choice, which brings down prices and improves products.

2. Identical Products

• In perfect competition, producers are selling identical products.

• Commodity- a product that is the same regardless of who produces it (gas, corn, milk)

3. Informed Buyers and Sellers

• Consumers and producers need to be informed about products and pricing to ensure competition.

• Internet has greatly advanced consumer information.

4. Easy Entry and Exit

• Producers need to be able to easily enter the market for there to be many sellers.

• How easy is it to start a business?

Barriers to Entry

• Barrier to entry: anything that causes difficulty to businesses trying to enter a market.

• Excessive barriers to entry reduce the number of producers.– Start-up costs– Legal/certification requirements

Barriers to Entry

• With your partner…– Consider to barriers to entry for your business.– List all start-up costs and legal requirements that

you would need to overcome to create your business.

Barriers to Entry

• High start-up costs and legal requirements make it difficult to enter the market.

• America is ranked highly on the list of “ease in starting a business” list.– Limited number of legal “hoops”.

Section 2: Monopoly

• Monopolization eliminates competition entirely.

Monopoly• A monopoly is a market that only has one

supplier/producer. • Eliminates competition.

Monopoly examples

• With a partner, think of examples of markets with only one provider of the good/service.

Microsoft?

How they form

• Economies of scale: average cost per unit falls as production increases.

• This makes big businesses more cost effective- enabling them to cut costs and absorb competitors.

John Rockefeller: Standard Oil

• Practiced horizontal consolidation.

Andrew Carnegie: Carnegie Steel

• Practiced vertical consolidation.

Natural Monopoly

• An industry that operates most efficiently with just one provider.– Utilities: water, electric, natural gas – Roads

Government Monopoly

• A monopoly created by the government.– Patents– Contracts

Patents• A patent is a license given to an inventor that gives

them exclusive rights to sell their product.• Good for a limited period of time.

Funny inventions

Contracts and Franchising

• Government often picks firms to make contracts with.

• Company “X” is chosen to install and stock all school vending machines.

Section 3: Monopolistic Competition

• Most markets are neither in perfect competition, nor monopolies, but somewhere in between.

Monopolistic Competition

• Monopolistic competition is when many companies compete to sell products that are similar, but not identical.

Monopolistic Competition vs

Perfect Competition• Both have many competing firms/producers• Both have few barriers to entry• However…– Perfect Competition is a market with identical

products (commodities). – Monopolistic Competition is a market with

differentiated products (most consumer goods).

Nonprice Competition• Monopolistic competitors can compete on factors

other than price…– Physical characteristics – Location– Service level– Advertising, image, or status (popularity)

Oligopoly• Oligopoly is a market with only a few firms providing goods.• Occurs in markets with high barriers to entry.

– Think: industries that would be realistically impossible for you to enter as a producer.

Collusion• Collusion is when members of oligopolies agree to

set prices and production levels.• Collusion is illegal, because the effects are the same

as a monopoly- elimination of competition.

Cartels

• Cartels are organizations that form to coordinate prices and production.

• Also illegal, and are often associated with the black market (drug cartel)

Section 4: Regulation and Deregulation

• Government attempts to balance two competing interests…– Open, accessible markets for producers– Protection for consumers

Regulation vs. Deregulation

• Too much regulation can make it difficult for producers to enter markets (raises barriers to entry)

• Too little regulation can create monopolies and predatory business practices that end up hurting consumers.

Antitrust Laws

• During the Industrial Revolution, many trusts were formed.• Trusts are like cartels and result in monopolization (Standard

Oil Trust- Rockefeller) • Government eventually broke up these trusts.

Mergers

• Mergers are when two or more companies combine into one.

• Mergers are tightly regulated to avoid monopolization.

Deregulation

• During the 1970s and 1990s, Congress passed numerous laws to deregulate, citing increased inefficiencies as a result of the laws.

Credit Crisis 2007-Present

• Many cite deregulation of Wall Street investment banks as a cause of the banking collapse in 2007.

• Lending was loosely regulated, and banks were able to knowingly make faulty loans.