Turn to your partner and tell them three words you think of when you hear the word

COMPETITION

Competition and Markets

Every business firm operates in a MARKET STRUCTURE

Copy this chart on a full sheet or 2 of paper:

Market Structure

# of Sellers

Types of Products

Barriers to Entry

Control Over Price

Examples

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

Perfect Competition

• Many buyers and many sellers

• The market is perfectly transparent– Everyone has access to all relevant information

Perfect Competition

• All firms sell identical products.

Perfect Competition

• It’s easy to get into and out of the market.

Perfect Competition

• Sellers are price takersprice takers. They must sell their product at the equilibrium price and not one penny more

Perfect Competition

• A market may not satisfy one or more of the four conditions and still be perfectly competitive

• What determines whether a market is perfectly competitive or not is if firms (sellers) in the market are price takersprice takers.

Perfect Competition

• Wheat Market, Corn Market, Stock Market, other agricultural markets

Critical Thinking

• Some of the 200 firms in Market X, a perfectly competitive market, are incurring losses. How will these losses influence….

– seller’s entrance/exit to the market?– the supply of the good produced in the market?– the price of the good?

• How can a seller determine whether or not they are a price takerprice taker?

• Can he/she sell any of the product for Can he/she sell any of the product for even one cent more than equilibrium even one cent more than equilibrium price?price?

Turn to your partner and tell them three words you think of when you hear the word

MONOPOLY

Monopoly

• there is 1 seller.

Monopoly

• The product sold is UNIQUE – there are no close substitutes

Monopoly

• Extremely high barriers to entry…it’s hard to get into a monopoly market.

• Legal Barriers– public franchise– patents– copyrights

• Extremely Low Per-Unit Costs– a natural monopoly

• Exclusive ownership of an essential resource

“government monopolies”

“market monopoly”

Monopoly

• US postal service 1st class mail

• Vista Irrigation District

• Cox Cable

• historically:– Alcoa– DeBeers– Standard Oil– AT&T

Monopoly

• Monopolists are price searchersprice searchers. They can sell some of their product at various prices.

• The demand curve will determine how much they can sell and at what price.

• Price will be determined based upon their decision on how much to produce.

Market Structure

# of Sellers

Types of Products

Barriers to Entry

Control Over Price

Examples

Perfect Competition

many identical Low or none

Price takers

Monopoly 1 Unique Extremely

highPrice searchers

Monopolistic Competition

Oligopoly

OXYMORON ???

• CONSTANT VARIABLE• TERRIBLY GOOD• VEGETARIAN MEATBALL• THUNDERING SILENCE• GOING NOWHERE• JUMBO SHRIMP• ANTI-MISSILE MISSILE• HOPELESSLY OPTIMISTIC

Monopolistic Competition

• shares characteristics of both perfectly competitive and monopoly markets.

Monopolistic Competition

• there are many buyers and sellers

Monopolistic Competition

• Firms sell slightly differentiated products

Monopolistic Competition

• Easy entry and exit from the market

Monopolistic Competition

• Price Searchers

• They can sell some of their products at various prices because they sell slightly differentiated products.

• They decide how much to produce by searching for the price where they can sell all of their output

Monopolistic Competition

• Burgers

• Clothing

• Coffee Houses

• Gas Stations

• Cosmetics

• Movie Theaters

• Auto Mechanics

Competitors and Monopoly

• Many businesses would like to become a monopoly

– they advertise perceived differences

• Competition depends on two factors:1. How close to unique the product is

2. How easy it is for sellers to enter the market

With your neighbor…

• Think about a monopolistically competitive company from which you have made a recent purchase.– What are the substitutes’ prices?

• Why can there be a range of prices?

– Why did you purchase the one you did?

Oligopoly

•Name five American car manufacturers

Oligopoly

• There are few sellers.

• A few sellers account for a large percentage of sales

Oligopoly

• Firms produce identical or slightly differentiated products.

Oligopoly

• Entry into the market is difficult.• low per-unit costs• patents • control of resources

Oligopoly

• Price SearchersPrice Searchers• slightly differentiated products• difficult to get in the market • the few sellers may be able to control price through

agreement or cooperative action– cartel agreements (illegal)

Oligopoly

• cars

• cereal

• airlines

• entertainment

Identifying Oligopoly Industries• Economist determine whether a market is an oligopoly by

looking at the percentage of sales accounted for by the top four firms in the industry– 6 major film studios = 90% of revenue

• 20th century, Warner Brothers, Paramount, Columbia, Universal, Walt Disney• Dreamworks (Viacom bought—owned by Paramount)

– 2008 became independent again but distributed by Disney• Leading Indies: Lionsgate, Summit Entertainment, MGM (former Biggie!)

– 4 music companies = 80% of revenue• Sony, EMI, Universal, Warner

– 6 book publishers – 3 television networks (1950-1970)

• ABC/Disney• CBS• NBC Universal• 2 added since

– Time Warner– News Corporation (FOX)

– Food processors: Kraft, Nestle, PepsiCo

Market Structure

# of Sellers

Types of Products

Barriers to Entry

Control Over Price

Examples

Perfect Competition

many identical Low or none

Price takers

Monopoly 1 Unique Extremely

highPrice searchers

Monopolistic Competition

Many Slightly differentiated

Easy entry

Price searchers

Oligopoly Few sellers

Identical or slightly differentiated

Difficult

entry

Price Searchers

Review

• Firm A is a perfectly competitive firm. Why can’t it sell its product for one penny higher than equilibrium price?

• Buyers would know that they could buy Buyers would know that they could buy that identical product for the cheaper price. that identical product for the cheaper price. Why would they pay one penny more? Why would they pay one penny more?

Review

• To become an attorney, a lawyer must pass the bar examination. Is the bar examination a barrier to entry in the law market?

• YesYes

Review

• Firms in a monopolistic competitive market produce slightly differentiated products. How might these products be differentiated?

• Besides differences in product, they could be Besides differences in product, they could be sold in different locations, by different people, in sold in different locations, by different people, in a store, online or by phone. They can be a store, online or by phone. They can be bundled with different services or sales bundled with different services or sales conditions.conditions.

Review

• How can profits be “competed away” in a perfectly competitive market?

• It’s an easy market to enter. When It’s an easy market to enter. When businesses see the high profits, they enter businesses see the high profits, they enter the market. More supply lowers the the market. More supply lowers the price…price…

Review

• What are the two major factors that decide how much competition a firm faces?

• How close to unique is the product?How close to unique is the product?

• How easy is it to get into the market for How easy is it to get into the market for this product?this product?

“Stupid is as stupid does.”As you watch the clip from “Forest Gump,” note the process

related to Bubba Gump Shrimp’s position in the shrimping market.

1. Before the hurricane, how does the shrimping industry resemble a perfectly competitive market?

2. How does the hurricane change the market price and quantity of shrimp? (Use supply & demand graphs to illustrate.)

3. How did the hurricane create a monopoly for Bubba Gump Shrimp? Use the characteristics of a monopoly to support your answer.

4. Do you think Forest can maintain his monopoly status over time? (In other words, are there barriers to entry?) Explain.

Homework

MyVote California• Research your assigned topic.

– Be prepared to develop a short 2-3 minute presentation with your group outlining the five parties on the gubernatorial and senatorial race.

• Select one:» American Independent» Green» Peace and Freedom» Libertarian

• Democratic and Republican--all

• Company Analysis Sheets (Stock Market Part I) due Friday, October 22.