Chapter 6 Lecture. Market Structures

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Roland Herbert Beasley
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1 Chapter 6 Lecture Market Structures

2 Market Structures Two basic types of markets (1) Highly competitive markets Example is the jeans market A large selection of producers & high demand (2) Imperfectly competitive markets Example is cable TV market A few suppliers, fewer products, & usually higher prices

of producers & high demand (2) Imperfectly competitive markets

3 Highly Competitive Market Two types of highly competitive markets (1) Those with perfect competition (2) Those with monopolistic competition

4 Perfect Competition Description of perfect competition Consumers & Producers compete directly under--- Supply & Demands laws Guidelines to tell if perfect competition (1) Many buyers & sellers act independently (2) Sellers offer identical products (3) Buyers are well informed about products (4) Sellers can enter or exit the market easily

(1) Many buyers & sellers act independently (2) Sellers offer identical products (3)

5 Perfect Competition #1 Criterion--Buyers & Sellers Act Independently With many buyers & sellers no one has control of the market Competition is keen

6 Perfect Competition #2 Criterion Identical Products Sellers offer identical products Consumer compares apples to apples

7 Perfect Competition #3 Criterion Informed Buyers Buyers are knowledgeable shoppers Here are some astute buyers Buy everything Yes, I am astute!

8 Perfect Competition #4 Criterion Easy Entry & Exit Perfect Competition Sellers must be able to enter a profitable market Sellers must be able to exit unprofitable markets easily Factors of business controlling this Start up costs Technical knowledge needed Control of big companies in the market place

exit unprofitable markets easily Factors of business controlling this Start

9 Perfect Competition As A Model Perfect Competition Only Exists As a Model Closest Market is the Agricultural Market Thousands of Farmers Acting Independently They offer Identical Products (corn, beans, wheat) Buyers are well informed i.e.. grocery shopping Easy entry & exit plant different crops each year

Independently They offer Identical Products (corn, beans, wheat) Buyers are

10 Market Structure is Determined by Amount of Competition

11 Monopolistic Competition Monopolistic Competition Differs From Perfect Competition Sellers Offer Different Rather Than Identical Products Each firm tries to build a monopoly with its product Apple I-Phone Motorola Droid Phone

Rather Than Identical Products Each firm tries to build

12 Product Differentiation Sellers Try to Point out Differences in Their Product Differences Can Be Real or Perceived

13 Monopolistic Competition Non-price Competition Sellers Differentiate Through Non-Price Competition Compete on Basis Other Than Price Create Brand Name Through Advertising Air Jordan & Adidas Air

14 Monopolistic Competition Sellers Differentiate Product & Create Niche This niche creates a monopoly that dominates the market Jordan s Worth to Nike = 5.2 billion in first 14 years

15 Profits & Product Differentiation The purpose of product differentiation is to increase demand Thereby increasing price Thereby increasing profit Jordan Six Rings Boot - Men's $159.99

16 Imperfect Competitive Markets Imperfectly competitive markets mean the markets are dominated or owned by a few sellers Most common form of noncompetitive market is an oligopoly

17 Oligopoly Oligopoly: a market structure in which a few sellers control most of the production of a good or service

18 Oligopoly Oligopoly exits when: There are only a few large sellers Sellers offer identical or similar products Other sellers cannot enter the market easily

19 Oligopoly Interdependent Pricing: The practice of setting prices in a manner responsive to or dependent on one s competitors Airfare Example: Tucson to Chicago Southwest $ Northwest $ Dleta $464.00

dependent on one s competitors Airfare Example:

that all the other companies will follow If the other

20 Price Leadership In price leadership one of the largest sellers takes the lead and sets the price The leader hopes that all the other companies will follow If the other competitors follow the leader has effectively controlled the price

21 Price War Sellers begin to undercut each other in order to get market share Price wars may eliminate some competitors Once the competitors are eliminated, the remaining companies raise their prices Airline carries have been forced out of business in price wars

22 Collusion Collusion Sellers secretly agree to set production levels or prices for their products This is an illegal practice by governmental law Example: Oil producers agree to cut supply to raise prices

23 Cartels Cartel: A group of companies openly organize a system of price setting & market sharing De Beer diamonds Openly controls the sale of rough diamonds Keeps the diamonds scare thereby keeping prices high Flawless - Starring Demi Moore

24 Monopolies Monopoly: A single seller controls the market Three conditions exit for a monopoly There is a single seller No close substitute goods are available Other seller cannot enter the market easily Examples: Cable companies Satellite companies changing this

25 Types of Monopolies Technological monopoly Exits when a company produces a new technology that no one else has Either new products are created or old production becomes obsolete Example: Raytheon & some of its missile systems Raytheon Common Tri-mode Seeker

26 Patent & Copyrights Patent gives a company or individual the right to produce, use, rent, and sell an invention or discovery for 17 years Example: Prince tennis racquets Copyright protects written works and works of art Protects authors, musicians, & artist Controversy over Beatles & IPod

27 Types of Monopolies Government Monopoly Any market in which the government is the sole seller of a product Sweden all public utilities Examples in the United States Building & maintenance of roads

28 Three Factors Limiting Monopolies Power over Pricing Consumer demand If the monopoly charges too much demand could cease Cable TV at $200 per month Potential Competition Monopolies don t want competitors in If they make too much others will enter the market Government Regulation Government can step in to regulate prices

29 Market Regulation Laissez-fare policy allowed monopolies to exist Keep government out of business Trusts developed

30 Antitrust Legislation Interstate Commerce Act Sherman Antitrust Act Clayton Antitrust Act Federal Trade Commission Act The Robinson-Patman Act

31 Government Regulation of Credit Card Industry Credit Card Act of 2009 Limited interest rate hikes (can t be retroactive & 45 day notice for changes) Limited universal default (only allowed if 45 day notice is given & not retroactive) Limited credit to 21 year olds unless co-signed More time to pay Disclosure of minimum payments Banks plan for loss of revenue

32 Sherman Antitrust Act Banned agreements & actions in restraint of trade Set the tone for anti-trust legislation Broke up Standard Oil owned by John D. Rockefeller in 1911 Rockefeller controlled the entire oil industry Left only one Standard Oil of New Jersey Changed name to Exxon in 1972

33 Interstate Commerce Act Designed to break up trusts & regulate big business Created Interstate Commerce Commission Came in the administrations of Teddy Roosevelt & William Howard Taft ICA: regulated freight business of railroads Later truck freight ICC Abolished in 1995

34 Clayton Antitrust Act Government outlawed unfair business practices Outlawed price discrimination the offering of lower prices to larger companies who then put others out of business

35 Federal Trade Commission Act Passed in 1914 Part of the Progressive Era of early 1900 s to 1920 s Purpose of the act was to investigate unfair methods of competition

36 The Robinson- Patman Act Passed in 1936 Strengthened the Clayton Antitrust Act Dealt specifically with price discrimination List of the antitrust legislation on page 133 of your book

37 Some effects of deregulation Repeal of Glass-Steagall Act Let commercial banks become investment banks Exposed customers to high risk investments adding to banking meltdown Headlines: U.S. Senators John McCain and Maria Cantwell proposed reinstating the Depression-era Glass- Steagall Act that split commercial and investment banking to rein in Wall Street firms in response to the financial crisis.

Economics Chapter 7 Review

Name: Class: Date: ID: A Economics Chapter 7 Review Matching a. perfect competition e. imperfect competition b. efficiency f. price and output c. start-up costs g. technological barrier d. commodity h.