Chapter 7.1-4 notes

Competition and Market Structures

Market Structure • nature and degree of competition

among firms operating in the same industry.

• Economists group industries into four different market structures:1.Perfect Competition2.Monopolistic Competition3.Oligopoly4.Monopoly

Perfect Competition 5 necessary conditions:

1. large # of buyers and sellers

2. buyers and sellers deal in identical products

3. each buyer and seller acts independently

4. buyers and sellers are reasonably well-informed about products and prices

5. buyers and sellers are free to enter into, conduct, or get out of business.

• Each firm is too small to influence price; supply and demand set price

• “price takers”

Examples of p.c.

• Nothing is “perfect”

• Closest – corn, ag products, raw beef

Imperfect Competition

• There are no pure examples of perfect competition, most fall into “imperfect competition”

• Lacks one of more of the 5 conditions

• Most firms and industries fall into I.C.

• There are 3 categories: monopolistic competition, oligopoly, monopoly

Monopolistic Competition • has all the conditions of perfect competition

except for identical products• product differentiation – real or imagined

differences between competing products in the same industry

• nonprice competition – the use of advertising, giveaways or other promotional campaigns to convince buyers that the product is somehow better than another brand

• can enter the market easily; narrow price range

Examples of mon.comp.

• How many fast food restaurants can you think of that serve hamburgers?

Oligopoly

• market structure in which a few very large sellers dominate the industry

• industry is oligopoly if four firms control 40 percent of market

• product can be differentiated or standardized• interdependent behavior – oligopolies are so

large that when one firm acts the other firms usually follow

• Very difficult to enter market

Cont’d

• sometimes collusion can occur – formal agreement to price-fix or cooperate on something. Collusion = illegal

• price wars can occur b/c oligopolists usually act together; but tend to compete on a nonprice basis

Examples of Oligopoly

• Tennis balls

• Cereal

• Soft drinks

Monopoly

• market structure with only one seller of a particular product (extreme cases)

• Americans generally do not like monopolies because of price increases, sometimes “price fixing”

• monopolies are price makers instead of price takers

Types of Legal Monopolies• natural monopoly – market situation where the

costs of production are minimized by having a single firm produce the product. EX: phone company, utilities

• geographic monopoly – based on the absence of other sellers in a certain geographic area

• technological monopoly – based on the ownership or control of a manufacturing method, process, or other scientific advance Ex: patents, copyrights

• government monopoly – owned and operated by the gov’t, found at all 3 levels

Antitrust Laws

– Because monopolies can be harmful to consumers and some producers, gov’t created laws against them

– Late 1800s, trusts dominated oil, steel, railroad industries

– 1890 Sherman Antitrust Act enabled government to control monopolies

Unfair business practices

• NO market allocation

• NO predatory pricing

• Govt’ can issue and cease and desist order

• Gov’t requires public disclosure

Federal Agencies

• FDA – Food and Drug Admin.

• FTC – Federal Trade Comm.

• FCC – Federal Communications Commission

• EPA – Environmental Protection Agency

• CPSC – Consumer Product Safety Commission

Deregulation

• In 1970’s, gov’t started to deregulate some industries

• Example – Airlines

• Prices fell because of competition, but quality of service also fell, and some airlines went bankrupt