CHAPTER # 7 Market & Market Structure

CHAPTER # 7 Market & Market Structure

MonopolyOligopoly

Technological MonopolyTechnological Monopoly“Patent”

Ex: Rubik’s Cube

Government MonopolyGovernment MonopolyOwned & operated by G

Ex: U.S. Mail State Highways

Natural MonopolyNatural MonopolyCompetition would be

chaotic. It is naturalto give it to one co.

Ex: Utilities

Geographic MonopolyGeographic MonopolyOnly seller in a specific area

Example: Remote Store

Greyhound

Forney HighForney High

Basic Cable RateBasic Cable Rate

Cable TVCable TV

Waste Waste ManagementManagement

TXUTXU

U.S. MailU.S. Mail

Rubik’s Rubik’s CubeCube

MonopolyMonopoly[mono(1) poly (seller)]

Control over price: TotalProduct: unique

Ex: Comcast Cable TV

Monopolistic CMonopolistic Competitionompetition[Element of monopoly with

“product differentiation”]

Many [25-75] sellersControl over price: Some

Ex: Blue Jeans

““Price MakersPrice Makers””

MarketMarket[buyer & seller]StructuresStructures

[How many sellers] OligopolyOligopolyOliogo (few) poly (seller)

[A few control 70% of market

Differentiated ODifferentiated O ligopolyligopolyDifferentiated Products

Autos & Sneakers

Pure OligopolyPure OligopolyIdentical Products

(steel)

Control over price: Fair AmountDifferentiated or Identical

Perfect CompetitionPerfect CompetitionVery many [100s] of sellers

Control over price: NoneProducts: Identical

(Agricultural & fishery)

PerfectCompetition

MonopolisticCompetitionOligopoly

Pure MonopolyControl over PriceControl over Price

Most CompetitiveMost Competitive

MonMonopolistic opolistic CompetitionCompetitionPerfect CompetitionPerfect Competition

DARTDART

Price TakerPrice Taker

Blue JeansBlue Jeans

Barber ShopsBarber ShopsBeauty ShopsBeauty Shops

ReebokReebok[undifferentiated]

DuopolyDuopoly

Definition of Market

• Market is an area where buyer and seller meet with each other for the purpose of exchange of goods and services for money.

Types of advertising

• Competitive Advertising: Your product is better than the substitutes available

• Informative Advertising: To give information on price, quality, special features about product.

CLASSIFICATION OF MARKET

1 Perfect Competition.

2 Imperfect Competition.

Perfect CPerfect Competitionompetition – has a very large number of sellers (hundreds or thousands) of the same product (any agriculture or fishery product). They are all selling the same undifferentiated productsundifferentiated products (oranges).

Four Four Market ConditionsMarket Conditions Necessary For Perfect Competition Necessary For Perfect Competition

1. Very largelarge number of sellers (hundreds or thousands). Each seller will have only a small share of the market.

2. Similar or identicalidentical products (sweet corn/brocolli/eggs) which means there is no reason for non-price competition.

C C 3. EasyEasy entry and exit into the market.

4. AbsenceAbsence of price controls (too many sellers & consumers). Firm is price taker.

MonopolisticMonopolistic CompetitionCompetition – fairly large number (25-7525-75) of sellers competing to sell slightly differentiated products. Product differentiationdifferentiation (real or imaginaryreal or imaginary) is vital.This is the most common market structuremost common market structure.

Sellers try to decrease competitiondecrease competition by making their products different from the others. Since each firmattempts to make its product unique,product unique,uniqueunique, there is an “element of monopoly”,“element of monopoly”, thus monopolistic competitionmonopolistic competition. Product Product differentiationdifferentiation, when it is successful, enablesa firm to “establish a kind of monopoly”“establish a kind of monopoly” so that loyal customers will prefer it rather than buy from the competition. [They try to monopolize monopolize a smalla small portion portion of the marketof the market.].]

Even virtually identical products may be differentiateddifferentiated by brand name, packaging,by brand name, packaging, or designdesign but they are still similarsimilar. They have all the conditions of perfect competition except for product “differentiation.”“differentiation.”

They use ““nonpricenonprice”” methods of competition such as advertisingadvertising and improved serviceimproved service to increase sales. ReputationReputation is important [builds loyalty]. Most manufactured goods are made by only a few producers.

4 Market Conditions FMarket Conditions For or MonopolisticMonopolistic Competition Competition1.1. Farily large number ofFarily large number of sellers must exist.

2. The products are similarsimilar but they emphasize productproduct differentiationdifferentiation (differences among products). This is the one thing that separates monopolistic competition from perfectseparates monopolistic competition from perfect competitioncompetition.The differences may be realdifferences may be real or imaginary imaginary (a refrigerator withplastic or metal trays). AspirinAspirin, by federal law, has to havecertain chemicals but people believe highly advertised aspirinis better. RevlonRevlon offers 157 shades of lipstick157 shades of lipstick – 4141 are pinkpink.

3. Buyers must be well informed about differencesBuyers must be well informed about differences in products.Monopolistic competitors rely on informative and competitiveinformative and competitiveadvertising.advertising.

4. Easy to enter or exitEasy to enter or exit the industry. Few restrictions exist.

Monopolistic CompetitionMonopolistic Competition[element of monopoly [differentiation uniqueness] so calledmonopolistic competition]

This is the most common market structure – over 99% of all firms.

Examples of Monopolistic CompetitionExamples of Monopolistic CompetitionBlue Jeans Grocery Stores Candy BarsDry Cleaners Rock Concerts PizzaShoe Stores Cassette players ChickenToothpaste Book Stores Soaps and detergentsRestaurants Vacuum Cleaners Furniture StoresBarbershops Beauty Parlors Econ Textbook Co’s

“Econ,Econ”“Econ”

2OligopolyOligopoly – “the chosen few”“the chosen few” (3 or 4) firms control 70% of the market.

MonopolyMonopoly – 1 firm industry (Cable TV)

DuopolyDuopoly – 2 firm industry. (Coke & Pepsi)[P&G (47%) & Kim-Clark (30%) in diapers]

““Oligo”Oligo” – few in an industry. (“Big 3 or 4” or even “Big 5 or 6”)

Two Types of OligopoliesTwo Types of OligopoliesPurePure (Undifferentiated) Oligopoly – 3 or 4 producers dominate the production of an identical productidentical product (steel, zinc, copper, aluminum, lead, cement, etc)DifferentiatedDifferentiated Oligopoly – 3 or 4 producers dominate theproduction of differentiated (similar) productsdifferentiated (similar) products. [typewriters, tires, soap, cigarettes, refrigerators, cereals, TVs & autos]

Oligopoly ExamplesOligopoly Examples

Athletic ShoesAthletic Shoes–“Big 4”–Nike, Reebok, New Balance, Adidas,

CerealsCereals – “Big 3” – Quaker Oats, General Mills, & KelloggsTV NetworksTV Networks – “Big 4” – NBC, CBS, ABC & Fox

There are also oligopolies in chewing gum, light bulbs, typewriters, photocopiers, and sewing machines.

Four Market Conditions For OligopoliesFour Market Conditions For Oligopolies1. A few sellers few sellers control overcontrol over 70% 70% of market.

2. Firms offer identical or differentiatedidentical or differentiated products (real or imaginary). AdvertisingAdvertising important.

3. Product informationProduct information must be easily availableeasily available. They use informative advertisementinformative advertisement (price, quality, and special features) to introduce new products.

4. There are huge barriers to entryhuge barriers to entry into the industry. The three major barriersthree major barriers are technological technological knowledge, money, & brand name loyalty knowledge, money, & brand name loyalty. EntryEntry is difficultdifficult because many have patentspatents or own essential raw materials. This makes it difficult for new firms to try to compete.

Monopoly – the “power of one”Monopoly – the “power of one”

MonopolyMonopoly[mono(1) poly (seller)]

Control over price: TotalProduct: unique

Ex: Comcast Cable TV

TTechnologicalechnological M Monopolyonopoly“Patent”

Ex: Rubik’s Cube

Government MonopolyGovernment MonopolyOwned & operated by G

Ex: U.S. Mail State Highways

Natural MonopolyNatural MonopolyCompetition would be

chaotic. It is naturalto give it to one co.

Ex: Utilities Cable TV

Geographic MonopolyGeographic MonopolyOnly seller in a specific area

Example: Remote Store

PalmTranPalmTran

““Price Makers”Price Makers”

GreyhoundSRCHSSRCHS

Cable TVCable TV

Waste Waste ManagementManagement

TXUTXUU.S.MailU.S.Mail

RRuubbiikk’’ss CCuubbee

Cable TVCable TV

DARTDART

Pure MonopolyPure Monopoly – oneone firmfirm industry [“monopolist”]

Pure Monopoly’s Market ConditionPure Monopoly’s Market Condition 1. One firmOne firm is the only selleronly seller. Advertising promotes image. 2. No close substituteNo close substitute goods are available. 3. ProhibitiveProhibitive barriers to entrybarriers to entry in the industry. High invest-High invest- ment costsment costs and technological expertisetechnological expertise prevent others from entering the market. Legal restrictionsLegal restrictions make entry in government-supported monopolies nearly impossible. 4. Almost complete controlcomplete control of market priceprice.

Four Types of Legal Four Types of Legal MonopoliesMonopolies

1. Natural MonopolyNatural Monopoly – where competition would bechaoticchaotic, it is naturalnatural to give the business to one firm. Imaginethe confusion if 5 different busses5 different busses raced each other to the corner to pick up a passenger. Competition would be impractical, inconvenientimpractical, inconvenient, & unworkableunworkable.

Waste ManagementWaste Management

GreyhoundGreyhound

2 2 GovernmentGovernment MonopolyMonopoly – monopoly ownedand operated by the government.

The difference between natural [privately owned]natural [privately owned]& government monopolies [government ownedgovernment monopolies [government owned] isthat these monopolies are owned operated by anyowned operated by anylevel of government.level of government.Examples would be interstate highway system, interstate highway system, public libraries, public libraries, publicpublic schools,schools, Postal Service, & DART Postal Service, & DART. In most cases, government monopolies deal with economiceconomic products needed for the public welfare products needed for the public welfare but which people would not be provided adequately by private industry. Most tend to provide goods thatprovide goods thatenhance enhance the the general welfare rather than seek profitsgeneral welfare rather than seek profits.

DartDart

Pilot Point HighPilot Point High[Local G][Local G]

State GState G Federal GFederal G

3 Geographic Monopoly3 Geographic Monopoly – when a firm is the only seller of a good in a specific location.

4. Technological MonopolyTechnological Monopoly – results from the inventioninvention of a newnew productproduct (patentpatent) or when technology changes the way a good is produced.

16 A patentpatent gives an individual or firm exclusive right to pro- duce, use or dispose of an invention or discovery for 20 years20 years from the date of filing.

Top 20 Patent RecipientsTop 20 Patent Recipients

1.1. 3,6213,621 IBMIBM 16. 89616. 896 KorninklijkeKorninklijke2.2. 2,4512,451 SamsungSamsung 17. 89017. 890 Infineon TechInfineon Tech3.3. 2,3662,366 CanonCanon 18. 88018. 880 TITI4.4. 2,2292,229 MatsushitaMatsushita 19. 85419. 854 SiemensSiemens5.5. 2,1102,110 Hewlett-PackardHewlett-Packard 20. 778 20. 778 HondaHonda6.6. 1,9591,959 IntelIntel7.7. 1,7711,771 SonySony8.8. 1,7321,732 HitachiHitachi9.9. 1,6721,672 ToshibaToshiba10.10. 1,6101,610 Micron TechMicron Tech11.11. 1,4871,487 FujitsuFujitsu12.12. 1,4631,463 MicrosoftMicrosoft13.13. 1,200 1,200 Seiko Seiko 14.14. 1,0511,051 GEGE15.15. 906906 Fuji PhotoFuji Photo

Patents CompanyCompany Patents CompanyCompany

Competition and the Market Competition and the Market StructureStructure

Price Control and the Market Price Control and the Market StructureStructure

Most control over price

Least control over price

VeryMany

Cable TVWater

Agric. productsFishery

Some

Fair Amount

Fair amount with

differentiatedoligopolies

Extensive

Extensive

A Summary of Market Structures

25

Cartels

• A cartel is an organization of independent firms whose purpose is to control and limit production and maintain or increase prices and profits.

Equilibrium of a firm in Monopolistic competition

• The firm whether operating under perfect competition or Monopoly, wants to maximize profit. In order to achieve this objective the firms goes on producing a commodity as long as the MR is greater than MC. When MR=MC, it is then in equilibrium and produces the best level of output. If a firm produces less than or more than the MR=MC output, it will then not be making maximum of profits.

Four cases of price and output determination under Perfect Competition

Following are the possible cases in perfect competition.

A firm will earn Super Normal profit ,if the point where MR=MC is greater than ATC

A firm will earn Normal profit ,if the point where MR=MC=ATC

A firm will Incur Loses if MR=MC is below ATC A firm will Shut down if the point where MR=MC is

even above the AVC.

Costs Relevant to a Firm

35.00 4 118.00 14.00 29.50 140.00 22.0035.00 5 130.00 12.00 26.00 175.00 45.0035.00 6 147.00 17.00 24.50 210.00 63.0035.00 7 169.00 22.00 24.14 245.00 76.0035.00 8 199.00 30.00 24.88 280.00 81.0035.00 9 239.00 40.00 26.56 315.00 76.0035.00 10 293.00 54.00 29.30 350.00 57.00

P = MR Output Total Cost

Marginal Cost

Average Total Cost

Total Revenue

ProfitTR-TC

— 0 40.00 — — 0 –40.0035.00 1 68.00 28.00 68.00 35.00 –33.0035.00 2 88.00 20.00 44.00 70.00 –18.0035.00 3 104.00 16.00 34.67 105.00 1.00

(a) Abnormal Profit case

(b) Normal Profit case (c) Loss case

Determining Profits/Loss Graphically

Quantity Quantity Quantity

Price65 60 55 50 45 40 35 30 25 20 15 10

5 0

65 60 55 50 45 40 35 30 25 20 15 10

5 01 2 3 4 5 6 7 8 9 10 12 1 2 3 4 5 6 7 8 9 10 12

D

MC

A P = MR

B ATCProfit

MC

ATC

MC

ATC

Loss

65 60 55 50 45 40 35 30 25 20 15 10 5 0 1 2 3 4 5 6 7 8 910 12

P = MRP = MR

Price Price

Visual 3.4http://apeconomics.ncee.net

Average Fixed, Average Variable andAverage Costs

The Shutdown Point

• The shutdown point is the point at which the firm will be better off, if it shuts down because– it cannot even cover Average Variable Costs.

Visual 3.6http://apeconomics.ncee.net

Profit, Loss and Shutdown

Spot Quiz..

Here is the graph of Rake making company showing abnormal profit. Find the following;

1 MR ?2 Profit per unit?3 Profit maximizing Quantity

Long-Run Competitive Equilibrium

• Zero profit does not mean that the entrepreneur does not get anything for his efforts.

Normal profit – the amount the owners of business would have received in the next-best alternative.

2 Monopolistic competition– Large number of firms in the industry– May have some element of control over price due

to the fact that they are able to differentiate their product in some way from their rivals – products are therefore close, but not perfect, substitutes

– Entry and exit from the industry is relatively easy – few barriers to entry and exit

Price and output determination under Monopolistic competition

• Maximizing Profits Firms produce the quantity where MC =MR and charge the highest price that sells that quantity

Case 1 Abnormal Profit

AR

AC

P

$ 140

Pric

e pe

r Gal

lon

Gallons of Gasoline per Week

12,000

$150

MR

MC

E

C

$180

$100

Show Graphically the level of output where a firm earns Abnormal Profit in monopolistic competition.

Case 2 Losses situation

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