Chapter 6 Lecture Market Structures
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
Highly Competitive Market Two types of highly competitive markets (1) Those with perfect competition (2) Those with monopolistic competition
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
Perfect Competition #1 Criterion--Buyers & Sellers Act Independently With many buyers & sellers no one has control of the market Competition is keen
Perfect Competition #2 Criterion Identical Products Sellers offer identical products Consumer compares apples to apples
Perfect Competition #3 Criterion Informed Buyers Buyers are knowledgeable shoppers Here are some astute buyers Buy everything Yes, I am astute!
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
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
Market Structure is Determined by Amount of Competition
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
Product Differentiation Sellers Try to Point out Differences in Their Product Differences Can Be Real or Perceived
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
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
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
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
Oligopoly Oligopoly: a market structure in which a few sellers control most of the production of a good or service
Oligopoly Oligopoly exits when: There are only a few large sellers Sellers offer identical or similar products Other sellers cannot enter the market easily
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 $428.00 Northwest $464.00 Dleta $464.00
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
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
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
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
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
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
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
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
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
Market Regulation Laissez-fare policy allowed monopolies to exist Keep government out of business Trusts developed
Antitrust Legislation Interstate Commerce Act Sherman Antitrust Act Clayton Antitrust Act Federal Trade Commission Act The Robinson-Patman Act
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
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
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
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
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
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
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.