CHAPTER 7 Market Structures

SECTION 1

What is Perfect Competition?

THE CHARACTERISTICS OF PERFECT COMPETITION A Market Structure is basically an economic model that allows

economists to examine competition among businesses in the same industry.

Perfect Competition is the ideal model of a market economy. It is basically a model because real markets are never perfect.

THE CHARACTERISTICS OF PERFECT COMPETITION

There are 5 traits of Perfect Competition – 1. Numerous buyers and sellers – no 1 buyer or seller has control over market 2. Standardized Product – a product that is considered identical in all aspects

in a market 3. Freedom to enter and exit markets – No regulations you can buy and sale

as you please. 4. Independent buyers and sellers – no one can join together (buyers or

sellers) to influence prices 5. Well-informed buyers and sellers – both buyers and sellers are well

informed of the product and the market

COMPETITION IN THE REAL WORLD

Since no markets in the real world have all the qualities of perfect competition they are considered an imperfect competition

SECTION 2

The Impact of Monopoly

CHARACTERISTIC OF A MONOPOLY

The farthest end of the spectrum from a perfect competition is a monopoly

A monopoly is where only 1 seller sales a product and there are no substitutes for it.

Pure monopolies are as rare as perfect competition

A cartel is formal organization of sellers of products that agree to act together to set prices and limit output.

A monopoly is bad because it is considered a price maker meaning it can decide what it’s own price is with no competition to change it

CHARACTERISTIC OF A MONOPOLY

There are 3 characteristics to a monopoly :

1. Only 1 seller – A single business controls the industry of an object

2. A restricted, regulated market – Where government will allow a single business to control a market. An example would be local utilities.

3. Control of Prices – Since there is no competition the businesses have complete control of the prices of a market.

TYPES OF MONOPOLIES Natural Monopolies – A situation when the costs of production are at

their lowest only when 1 firm provides output (example – water company)

Government Monopolies – A monopoly that exists because the government either owns and runs the business or authorizes only 1 producer (example – The Post Office)

Technological Monopolies – A monopoly that exists because the firm controls a manufacturing method, invention, or type of technology. (example – patent / copyright)

Geographic Monopolies – There are no other products or sellers within a certain region. (example – sports teams in areas)

PROFIT MAXIMIZED BY MONOPOLIES

In order to maximize profit in a monopoly businesses still have to get prices at the best price in order to encourage consumers to purchase their product.

SECTION 3

Other Market Structures

CHARACTERISTICS OF MONOPOLISTIC COMPETITION Monopolistic Competition -is where many sellers offer similar but not

standardized products

Product Differentiation and non-price competition are the distinguishing features of monopolistic competition Product differentiation – the attempt to distinguish a product from a similar

product Non-Price competition – using factors other than price to attract customers

(style, service, advertising, giveaways, etc.)

CHARACTERISTICS OF MONOPOLISTIC COMPETITION Monopolistic Competition has 4 major characteristics –

1. Many sellers and buyers – example hamburger joint.

2. Similar but different products – slight differences in hamburgers

3. Limited Control of Prices – prices are not in total control of producers due to large number of sellers

4. Freedom to enter or exit market – If they want to exit the market they can if they want to enter they can with very little barriers

CHARACTERISTICS OF AN OLIGOPOLY

In an Oligopoly there are very few sellers in the market that offer a similar product

There are fewer firms because there is a higher startup cost in an Oligopoly

There are 4 major characteristics of an Oligopoly –

1. Few sellers and many buyers – breakfast cereal is an example. If 4 firms control atleast 40% of the market it is considered an Oligopoly

2. Standardized or Differentiated Products – There are so few businesses that control the market that the costs of startup and production are generally to high to join the market

3. More control of prices – Since there are fewer sellers they can control the prices much easier

4. Little freedom to enter or exit the market – The costs are so high to startup it is hard to enter and equally as hard to exit the market after making it in the market

COMPARING MARKET STRUCTURES

COMPARING MARKET STRUCTURES

SECTION 4

Regulation and Deregulation Today

PROMOTING COMPETITION The Government will put in regulations to control businesses to ensure a

fair market place

Anti-trust legislation laws define monopolies and give Government the power to control them and break them up if necessary

The (FTC) Federal Trade Commission and Department of Justice share the power to break these trusts up

ENSURING A LEVEL PLAYING FIELD

Businesses work together to ensure unfair practices at times some of the ways they do this is as follows:

1. price fixing – Competing businesses work together to set the prices.

2. market allocations – when competing businesses negotiate the divide up the market

3. Predatory pricing – setting prices below cost in order to keep smaller businesse from being able to compete

PROTECTING CONSUMERS If the Government feels a business is practicing an unfair practice they will

send a cease and desist order which is a ruling that requires a firm to stop the unfair practices

In order to prevent this from happening the government requires businesses to have public disclosures where they reveal product information to the public

DEREGULATING INDUSTRIES Deregulation of industries is where the Government will take

regulations away from industries and allow them to work more freely