Market Structures Ch. 7. Essential Question What are the advantages and disadvantages of different market structures?

Market StructuresCh. 7

Essential Question

• What are the advantages and disadvantages of different market structures?

Perfect Competition and Monopolies

• I. Perfect Competition- a market structure with many fully informed buyers and sellers of an identical product and ease of entry. (Ex: Farming- wheat, shares of stock)

• A. Four main features

1. Many buyers and sellers – no individual buyer or seller can influence price, which is determined by market demand and supply

2. Firms produce a standardized product or commodity (ex: bushel of wheat or a share of Microsoft stock) – buyers are concerned only with price

• Commodity- a product that is identical across sellers

3. Well informed buyers and sellers- (Ex: learn about farming)

4. Firms can easily enter or exit an industry

Perfect Competition and Monopolies

• B. Example markets

1. Most agricultural products (wheat, corn, etc.) are the best example

2. Shares of large corporations, and foreign exchange (yen, euros, and pounds)

• C. Market price

1. Once market price is established, one can sell all they want at that price

2. Try to maximize profit

Perfect Competition and Monopolies

• II. Monopoly – a sole supplier of a product with no close substitutes- illegal in U.S.

- (extreme opposite of perfect competition)

• A. Features

1. Sole supplier of a product with no close substitutes

2. More market power (but not total power) than any other market structure

- Ex: Gas- you do not have to buy it, you could bike to work

Perfect Competition and Monopolies

• 3. Barriers to entry (3 types)- restrictions on the entry of new firms into an industry

• a. Legal restrictions -patents, licenses, and other legal restrictions, provide monopolies for some businesses- or government monopolies – Ex: U.S. Postal Service and 1st class mail (competitors are Fed Ex, UPS, etc), sellers of lottery tickets (by state) or liquor (by county)

Perfect Competition and Monopolies

• b. Economies of scale – a single firm can provide more of something cheaper than 2 or more companies – providers of electricity, gas power have this type of natural monopoly -protect public interests

• Or another natural monopoly includes geographic monopolies like the only store or gas station for miles.

• c. Control of essential resources – China is a monopoly supplier of pandas to zoos. Alcoa controlled bauxite, key raw material in aluminum. And DeBeers controls >90% of diamond supply in Africa

Perfect Competition and Monopolies

• B. Monopolies may not earn a profit.

• C. True monopolies are rare – railroads controlled shipping goods across country until trucks were invented

Monopolistic Competition and Oligopoly

• III. Monopolistic Competition – contains elements of monopoly and perfect competition- a market structure with low entry barriers and many firms selling products differentiated enough that each firm’s demand curve slopes downward- (Many competitors/5 or more firms)

Monopolistic Competition and Oligopoly

• A. Features

1. Low barriers to entry (easy to get into)

2. Slightly different products (product differentiation)

-QT v. Shell

3. Importance of advertising and shelf space

-Cereal Ex: Raisin Bran (healthy), Luck Charms (better tasting)

4. Often operate with excess capacity

• B. Examples include: cereals, books, gas stations, fast food restaurants

Monopolistic Competition and Oligopoly

• IV. Oligopoly (2-4 firms)- a market structure with a small # of firms whose behavior is interdependent (Example- the car/auto industry, cigarettes)

-The Big 3 Auto Makers (GM, Ford, Chrysler)

• B. Features

1. Market is dominated by a few sellers (2-4 firms control > 75% of industry)

Ex: Soft drinks (Coke v. Pepsi)

2. Barriers to entry

a. economies of scale- buy in bulk

b. high cost of entry

c. product differentiation costs – Big $ on advertising

differentiated- firms sell products that differ

-Ex: Ford v. Toyota

Monopolistic Competition and Oligopoly

• 3. Firms are interdependent – don’t rely on each other

• 4. Collusion – (ILLEGAL) an agreement among firms in the industry to divide the market and fix the price= set the price

• 5. Cartels – (ILLEGAL) a group of firms that agree to act as a monopoly to increase market price and maximize their profits- like OPEC

• What is OPEC? Organization of the Petroleum Exporting Countries (12 countries)

(Both collusion and cartels are illegal in the U.S.)