Market Structures. [How many sellers in each industry]

Transcription

1 Market Structures [How many sellers in each industry]

2 Competition economic rivalry among businesses. Market Structure degree of competition among firms operating in the same market (autos).

3 Perfect Competition a market structure in which a large number of firms all produce the same product

4 Four Market Conditions Necessary For Perfect Competition 1. Very large number of sellers (hundreds or thousands). Each seller will have only a small share of the market. 2. Similar or identical products (sweet corn/brocolli/eggs) which means there is no reason for non-price competition. 3. Easy entry and exit into the market. 4. Absence of price controls (too many sellers & consumers). Perfect Competition and Price No one firm controls price

5 Monopolistic Competition fairly large number (25-75) of sellers competing to sell slightly differentiated products. Product differentiation (real or imaginary) is important. This is the most common market structure. Sellers try to decrease competition by making their products different from the others.

6 Market Conditions For Monopolistic Competition buyers and sellers must exist. Firms act independently but no single firm is large enough to change the supply or price of a good. 2. The products are similar but they emphasize product differentiation (differences among products). This is the one thing that separates monopolistic competition from perfect competition 3. Buyers must be well informed about differences in products. Monopolistic competitors depend on advertising. 4. Easy to enter or exit the industry.

7 Monopolistic Competition This is the most common market structure over 99% of all firms. Examples of Monopolistic Competition Blue Jeans Grocery Stores Candy Bars Dry Cleaners Rock Concerts Pizza Shoe Stores Cassette players Chicken Toothpaste Book Stores Soaps and detergents Restaurants Vacuum Cleaners Furniture Stores Barbershops Beauty Parlors Econ Textbook Co s

8 Oligopoly the chosen few (3 or 4) firms control 70% of the market. Examples of Oligopolies: Cars Big 5 GM, Ford, Chrysler, Honda, & Toyota Athletic Shoes Big 4 Nike, Reebok, New Balance, Adidas TV Networks Big 4 NBC, CBS, ABC & Fox There are also oligopolies in chewing gum, light bulbs, typewriters, photocopiers, and sewing machines.

9 Four Market Conditions For Oligopolies 1. A few sellers control over 70% of market. 2. Firms offer identical or differentiated products (real or imaginary). Advertising important. 3. Product information must be easily available. They use informative advertisement (price, quality, and special features) to introduce new products. 4. There are huge barriers to entry into the industry. The three major barriers are technological knowledge, money, & brand name loyalty. Entry is difficult because many have patents or own essential raw materials. This makes it difficult for new firms to try to compete.

10 Oligopoly and Price Oligopolies control price to some degree by creating brand name loyalty and using non-price competition. Price Leadership when one firm, usually the largest and most powerful in the industry, offers a new product at a certain price. The others then follow because they fear a price war or because they would be better off financially by doing so. Collusion a formal price agreement among competitors. This is illegal because it presents a danger to free competition. Even one from one manager to another is illegal.

11 Pure Monopoly one firm industry [ monopolist ] Pure Monopoly s Market Condition 1. One firm is the only seller. Advertising promotes image. 2. No close substitute goods are available. 3. Prohibitive barriers to entry in the industry. High investment costs and technological expertise prevent others from entering the market. Legal restrictions make entry in government-supported monopolies nearly impossible. 4. Almost complete control of market price. Monopolist have much control over price because they are the only seller. A higher price would hurt demand. The state may control the price on some legal monopolies. These single suppliers are price makers.

12 Four Types of Legal Monopolies 1. Natural Monopoly where competition would be chaotic, it is natural to give the business to one firm. Examples: Public Utilities (electric & gas) privately owned companies The government monitors the natural monopolies to ensure that they provide quality service at reasonable rates. 2. Government Monopoly monopoly owned and operated by the government. Examples: interstate highway system, public schools and public libraries, postal service, and METRO.

13 Geographic Monopoly when a firm is the only seller of a good in a specific location. The Last Chance Gas Station is the last one within 50 miles of Mexico. A general Store in a remote community has a monopoly because the area can t support two stores. Geographic monopolies are not guaranteed.

14 4. Technological Monopoly results from the invention of a new product (patent) or when technology changes how a good is produced. A patent gives an individual or firm exclusive right to produce, use or dispose of an invention or discovery for 20 years from the date of filing. Copyright gives the author or artist the exclusive right to publish, sell or produce his work for his life + 70 years. So, copyrights protect written works of art.