CHAPTER 7: DIFFERENT TYPES OF MARKET STRUCTURES WHAT IS A MARKET? An environment in which buyers and...

CHAPTER 7:CHAPTER 7:DIFFERENT TYPES OF DIFFERENT TYPES OF MARKET STRUCTURESMARKET STRUCTURES

WHAT IS A MARKET?WHAT IS A MARKET?“An “An environmentenvironment in which in which

buyers and sellers interact to buyers and sellers interact to exchange goods and services exchange goods and services

for money”for money”

Remember the Product Remember the Product Market?Market?

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This is YOU!

Microsoft & Apple

1. Pure (perfect) Competition 1. Pure (perfect) Competition (PC)(PC)

2. Monopolistic Competition 2. Monopolistic Competition (MC)(MC)

3. Oligopoly 3. Oligopoly (Oli)(Oli)

4. Monopoly4. Monopoly

Markets are classified by Markets are classified by 44 structures structures (environments)(environments)

What Markets Exist?What Markets Exist?

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Market Structure How do we describe them? 5 Conditions

1.Market Power: ability for firm to raise price without losing sales. (control of prices)2.Number (#) of Firms in the market.3.Barriers of Entry- Is it easy to enter or exit the market?4.Types of Products/ Goods: Similar or Different?5.Level of Competition- How much competition is there?

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#1 Perfect Competition#1 Perfect Competition

This is a theoretical situation. This is a theoretical situation. NONO TRUE TRUE Perfectly CompetitivePerfectly Competitive MarketMarket

exists. exists.

IT IS ONLY A IT IS ONLY A THEORY!THEORY!

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#1 Perfect Competition#1 Perfect Competition

1)1) INFINITEINFINITE number ofnumber of VERY SMALLVERY SMALL firms.firms. No single seller can influence the price because no ONE firm No single seller can influence the price because no ONE firm owns a large % of the market.owns a large % of the market.

2)2) Buyers and sellers deal in Buyers and sellers deal in identicalidentical products. products. No product No product differences.differences. (EXAMPLES: Salt, Flour, Wheat, Corn)(EXAMPLES: Salt, Flour, Wheat, Corn)

3)3) Unlimited Competition:Unlimited Competition: so many firms, that suppliers so many firms, that suppliers lose the ability to set their own price.lose the ability to set their own price.

4)4) No Barriers to EntryNo Barriers to Entry. Sellers are free to enter the market, . Sellers are free to enter the market, conduct business and free to leave the market. conduct business and free to leave the market. (Low cost to (Low cost to enter)enter)

5)5) Each firm is aEach firm is a PRICE-TAKER. PRICE-TAKER. They have They have NONO market share. market share.

“CONSUMERS HAVE THE LARGEST SELECTION OF SELLERS TO BUY GOODS FROM BECAUSE NO SINGLE GOOD IS MORE APPEALING THAN ANOTHER.”

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#1 Perfect CompetitionConsider the market for salt. Consider the market for salt. Firms in a perfectly competitive market are Firms in a perfectly competitive market are price takersprice takers. . (They (They taketake the price they are given; they can’t change the the price they are given; they can’t change the price)price) Prices are fixed. Prices are fixed. NO ONE SINGLE NO ONE SINGLE producer controls the market. producer controls the market. (just (just 100s of small firms) They have 100s of small firms) They have NO MARKET POWER!NO MARKET POWER!

If you want salt…you get salt no matter what brand. If you want salt…you get salt no matter what brand. In other words, no one will buy an overpriced pound of In other words, no one will buy an overpriced pound of salt. Why should they? salt. Why should they? A $4 pound is the same as the $3.50 one, so there is no A $4 pound is the same as the $3.50 one, so there is no reason to spend that extra money.reason to spend that extra money.

MARKET POWER = MARKET POWER = “the ability to set one’s OWN prices”

The AGRICULTURAL MARKET is the best The AGRICULTURAL MARKET is the best example of a perfectly competitive market.example of a perfectly competitive market.

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Monopolistic CompetitionMonopolistic Competition(M.C.)(M.C.)

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#2 Monopolistic Competition#2 Monopolistic Competition

1)1) LARGELARGE number of number of large large companies companies (but fewer than perfect (but fewer than perfect competition).competition).

Sellers can influence the price through creating a Sellers can influence the price through creating a product product identityidentity

2)2) Products are Products are NOT exactly identicalNOT exactly identical, , BUT VERY SIMILAR,BUT VERY SIMILAR, so so companies use companies use PRODUCT DIFFERENTIATIONPRODUCT DIFFERENTIATION

3)3) Heavy Competition:Heavy Competition: Firms must remain aware of their Firms must remain aware of their competitor’s actions, but they each have some ability to competitor’s actions, but they each have some ability to control their own prices.control their own prices.

4)4) Low Barriers to Entry:Low Barriers to Entry: easier than Oligopoly and Monopoly to easier than Oligopoly and Monopoly to get started because of the less amount of competition.get started because of the less amount of competition.

5)5) Monopolistic competition takes its name and its structure Monopolistic competition takes its name and its structure from elements of from elements of monopolymonopoly and and perfect competitionperfect competition..

The The 55 conditions conditions

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#2 Monopolistic Competition#2 Monopolistic Competition

Essentially, all hand soaps are the same. Yet Essentially, all hand soaps are the same. Yet firms can create a firms can create a brand identitybrand identity that separates that separates their hand soap from their competitor’s. their hand soap from their competitor’s.

This This brand identitybrand identity can be formed through can be formed through packagingpackaging, , songssongs, , product supportproduct support, and , and especially advertisingespecially advertising. .

The key idea to understanding monopolistic competition is The key idea to understanding monopolistic competition is that firms sell products that are that firms sell products that are similarsimilar, but not exactly , but not exactly

alike.alike.

EXAMPLEEXAMPLE: Hand Soap: Hand Soap

If effective, consumers will positively identify a certain If effective, consumers will positively identify a certain brand and purchase it even if hand soap costs brand and purchase it even if hand soap costs moremore. .

#2 Monopolistic Competition

Product Differentiation Product Differentiation (Brand Identity):(Brand Identity):

The The real or imagined differencesreal or imagined differences between between competing products in the same industry.competing products in the same industry.

DifferentiationDifferentiation may be may be colorcolor, , packagingpackaging, , store locationstore location, , store designstore design, , store store decorationsdecorations, , deliverydelivery, , serviceservice….. ….. anything to make it stand out!anything to make it stand out!

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#2 Monopolistic Competition

Non-Price Competition:Non-Price Competition:

Non-Price CompetitionNon-Price Competition involves the advertising of a involves the advertising of a product's appearance, quality, or design, product's appearance, quality, or design, rather than its rather than its priceprice..

Advertising to help the consumer believe that this product Advertising to help the consumer believe that this product is different and worth more money.is different and worth more money.

VS

Notice these commercials never

mention price.

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Monopolistic CompetitionExamples

Auto, Gas, Fast Food, Airlines, etc.Auto, Gas, Fast Food, Airlines, etc.

WHAT HAPPENS WHEN

WHAT HAPPENS WHEN

COMPANIES IN A M.C.

COMPANIES IN A M.C.

MARKET FAIL?

MARKET FAIL?

They don’t close their doors, but rather merge They don’t close their doors, but rather merge with larger companies.with larger companies.

Reason: Cheaper Resources

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MERGERS OF MONOPOLISTIC COMPANIES Sometimes companies fall victim to market failure. However, not Sometimes companies fall victim to market failure. However, not

all businesses close their doors and empty their factories and all businesses close their doors and empty their factories and stores.stores.

Many get “Many get “swallowed upswallowed up” by another company. This ” by another company. This ““take-overtake-over”” or or acquisitionacquisition of a company is known as a of a company is known as a mergermerger..

THREETHREE types of mergers: types of mergers:HORIZONTALHORIZONTAL, , VERTICALVERTICAL, and , and CONGLOMERATECONGLOMERATE..

1.) 1.) HORIZONTAL:HORIZONTAL: involve firms in the involve firms in the SAMESAME market, such as between two market, such as between two telecom companies.telecom companies.

EXAMPLE:EXAMPLE: automaker buys an steel companyautomaker buys an steel company

Reason: Diversification

2.) 2.) VERTICAL:VERTICAL: involve one firm involve one firm buying a resource providerbuying a resource provider..

3.) 3.) CONGLOMERATE:CONGLOMERATE: a a company company buys a business in a buys a business in a UNRELATED industryUNRELATED industry..

Reason: takeover the market

MERGERS OF MONOPOLISTIC COMPANIES

Other examples of Other examples of HORIZONTAL MERGERS…HORIZONTAL MERGERS…

Reason: ownership of the market

……a a company company buys a COMPETITOR in the marketbuys a COMPETITOR in the market..

MERGERS OF MONOPOLISTIC COMPANIES

Other examples of Other examples of CONGLOMERATES…CONGLOMERATES…

Reason: Diversification

……a a company company buys a business in a UNRELATED marketsbuys a business in a UNRELATED markets..

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#3 Oligopoly#3 Oligopoly

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#3 Oligopoly#3 OligopolyA market in which a A market in which a few large sellersfew large sellers control most of the control most of the

production of a good or service and they production of a good or service and they work togetherwork together on on setting prices.setting prices.

Conditions of an Conditions of an OligopolyOligopoly1)1) 3-4 Firms3-4 Firms that control the entire market by setting prices.that control the entire market by setting prices.

2)2) Products are generally identical Products are generally identical (standardized)(standardized)

3)3) High Barriers to Entry:High Barriers to Entry: Hard to enter the market because Hard to enter the market because the competitors the competitors work together work together to control all the resources to control all the resources & prices. Plus it is very expensive to make the product.& prices. Plus it is very expensive to make the product.

4)4) The actions of The actions of oneone affects affects allall the producers. the producers.

5)5) Collusion / ColludeCollusion / Collude == (Price Fixing)(Price Fixing) an agreement to act an agreement to act together or behave in a cooperative manner.together or behave in a cooperative manner.

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#3 Oligopoly: Price Behavior#3 Oligopoly: Price Behavior

When price wars start, oligopolists would rather like to be When price wars start, oligopolists would rather like to be Independent PriceIndependent Price SettersSetters

……where a firm sets prices based on demand, cost of where a firm sets prices based on demand, cost of input and other factors input and other factors (not based on other companies prices). (not based on other companies prices).

Price WarsPrice Wars:: Series of price cuts that competitors must Series of price cuts that competitors must follow or lose business.follow or lose business. It is aIt is a fierce price competition between sellers, sometimes fierce price competition between sellers, sometimes

the price is the price is lowerlower than the cost of production. than the cost of production.Why is that bad???Why is that bad???

What happens when Oligopoly goes bad; a PRICEPRICE WARWAR will result.

MARKETSMARKETSMarket Structures Market Structures (Environments)(Environments)

COMPETITIONCOMPETITIONNONENONE MOREMORE

ENTRY INTO THE ENTRY INTO THE MARKETMARKET

IMPOSSIBLEIMPOSSIBLE EASYEASY

# OF FIRMS# OF FIRMSONEONE MANYMANY

DIFFERENTIATED DIFFERENTIATED PRODUCTSPRODUCTS

IDENTICAL IDENTICAL PRODUCTSPRODUCTS

MonopolyMonopoly

Tap waterTap waterTVATVA

OligopolyOligopoly

AutosAutosCrude oilCrude oil

Monopolistic Monopolistic CompetitionCompetition

ShoesShoesE-BusinessE-Business

DIVIDED BY TYPE DIVIDED BY TYPE OF PRODUCTSOF PRODUCTS

Perfect Perfect CompetitionCompetition

WheatWheatSaltSalt

MARKET POWERMARKET POWERTOTALTOTAL NONENONE

CONSUMER POWERCONSUMER POWERNONENONE MOREMORE

EFFICIENT OPERATIONSEFFICIENT OPERATIONSNONENONE MOREMORE

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#4 Monopoly

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#4 Monopoly Conditions#4 Monopoly Conditions

1)1) There is a There is a singlesingle seller seller

2)2) No substitute goodsNo substitute goods are available.are available.

3)3) A A price-makerprice-maker: : (set their own price)(set their own price)

4)4) Barriers to Entry:Barriers to Entry: impossible impossible (other sellers (other sellers cannot enter the market)cannot enter the market)

5)5) Highly Highly wastefulwasteful and and inefficientinefficient..

Exact Opposite of Pure Competition. Exact Opposite of Pure Competition.

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#4 Monopolies: Types#4 Monopolies: Types

1)1) Natural Monopoly:Natural Monopoly: Where costs are minimized by Where costs are minimized by having a single producer of the product.having a single producer of the product.

Sometimes government creates Sometimes government creates naturalnatural monopoliesmonopolies in the in the natural gas, water & electricity industry by franchising these natural gas, water & electricity industry by franchising these utilities.utilities.

FranchiseFranchise - the right to produce or do business in a - the right to produce or do business in a certain area under the supervision of a larger certain area under the supervision of a larger company or government.company or government.

44 Distinct Types of Monopolies:Distinct Types of Monopolies:

TVA is the largest government-owned power producer in the TVA is the largest government-owned power producer in the US. Its power facilities include 11 fossil-powered plants, 29 US. Its power facilities include 11 fossil-powered plants, 29 hydroelectric dams, three nuclear plants, and six combustion hydroelectric dams, three nuclear plants, and six combustion turbine plants.turbine plants.

The corporation transmits electricity to 8.7 million consumers. The corporation transmits electricity to 8.7 million consumers.

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Types of Monopolies

1)1) Natural Monopoly:Natural Monopoly: Where costs are minimized by Where costs are minimized by having a single producer of the product.having a single producer of the product.

Other times Other times NaturalNatural MonopoliesMonopolies are created simply are created simply because there is no regulations or one other firms can get because there is no regulations or one other firms can get into the market because the monopoly owns all resources.into the market because the monopoly owns all resources.


DeBeers is an African company that has (over the century) DeBeers is an African company that has (over the century) bought numerous diamond mines across the global. They bought numerous diamond mines across the global. They provide 90% of the world’s diamonds.provide 90% of the world’s diamonds.

When another diamond company reaches the point when When another diamond company reaches the point when they must sell stock to raise capital for operations, DeBeers they must sell stock to raise capital for operations, DeBeers comes in and buys a majority of the stock.comes in and buys a majority of the stock.

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Types of Monopolies

1)1) Natural MonopolyNatural Monopoly

WHY WOULD GOVERNMENT DO THIS WHY WOULD GOVERNMENT DO THIS OR WHAT ARE THE BENEFITS OF A NATURAL MONOPOLY?OR WHAT ARE THE BENEFITS OF A NATURAL MONOPOLY?

• Economies of Scale:Economies of Scale: As natural monopolies grow larger, As natural monopolies grow larger, this reduces its production costs.this reduces its production costs.

• Because normally companies become more efficient as the Because normally companies become more efficient as the firm becomes larger over time.firm becomes larger over time.

• Example:Example: It is cheaper for the It is cheaper for the Tennessee Valley Tennessee Valley AuthorityAuthority (TVA)(TVA) to provide power in the southeast than to provide power in the southeast than two or three companies.two or three companies.


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Types of Monopolies

2)2) Geographic Monopoly:Geographic Monopoly: The only business in a The only business in a geographic region.geographic region.

Some of these are Some of these are decreasingdecreasing in the U.S. because of in the U.S. because of mobility of consumers.mobility of consumers.

EXAMPLE:EXAMPLE: Only Only person selling water person selling water

in the desert.in the desert.

EXAMPLE:EXAMPLE: Turner Field Turner Field

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3)3) Technological Monopoly:Technological Monopoly: Firm has Firm has discovered a new process or product.discovered a new process or product.

Constitution has given government the right to grant Constitution has given government the right to grant technological monopolies technological monopolies (protect property rights)(protect property rights)

Patent:Patent: 20 years exclusive rights to a developed 20 years exclusive rights to a developed technology.technology.

Copyright:Copyright: Life plus 70 years. Life plus 70 years. (Artists and writers) (Artists and writers)

Types of Monopolies

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4)4) Government Monopoly:Government Monopoly: operated completely or partially operated completely or partially by the government. by the government.

Liquor sales in some GA counties, uranium production, water, etc.Liquor sales in some GA counties, uranium production, water, etc. Similar to Similar to natural monopolies.natural monopolies. Adam Smith would be pissed.Adam Smith would be pissed.

Types of Monopolies

Healthcare in Healthcare in CanadaCanada

Uranium in Uranium in USAUSA

Alcohol Suppliers Alcohol Suppliers in Swedenin Sweden

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Government vs. Monopolies

TrustTrust:: a a legallylegally formed combination of companies. formed combination of companies.

Since the late 1800s the US have passed laws to Since the late 1800s the US have passed laws to restrict and regulate restrict and regulate truststrusts..

Government has the power to Government has the power to maintain competitionmaintain competition, , regulate monopolies, or to run government-owned regulate monopolies, or to run government-owned monopolies.monopolies.

AntiAntitrusttrust Legislation Legislation

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The Role of Government

1890 - Sherman Antitrust Act:1890 - Sherman Antitrust Act: law against those law against those companies that hindered competition or made companies that hindered competition or made competition impossible because of the competition impossible because of the “restraint of “restraint of trade”trade” that was created. that was created.

Basically outlawing monopolies.Basically outlawing monopolies.

1887: Interstate Commerce Act

1887 PRESENT

1890: Sherman Antitrust Act

Antitrust LegislationAntitrust Legislation

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The Role of Government

1914 - Federal Trade Commission Act:1914 - Federal Trade Commission Act: passed to enforce the Clayton Antitrust Act. It gave passed to enforce the Clayton Antitrust Act. It gave the authority to issue the authority to issue Cease and Desist Order.Cease and Desist Order.

1887: Interstate Commerce Act

1887 PRESENT



Cease and Desist Order:Cease and Desist Order: FTC ruling requiring a company FTC ruling requiring a company to stop an unfair business practice that reduces or limits to stop an unfair business practice that reduces or limits competition.competition.

1914: Federal Trade Commission Act

1914: Federal Trade Commission Act

MARKETSMARKETSMarket Structures Market Structures (Environments)(Environments)

COMPETITIONCOMPETITIONNONENONE MOREMORE

ENTRY INTO THE MARKETENTRY INTO THE MARKETIMPOSSIBLEIMPOSSIBLE EASYEASY

# OF FIRMS# OF FIRMSONEONE MANYMANY

DIFFERENTIATED DIFFERENTIATED PRODUCTSPRODUCTS

IDENTICAL IDENTICAL PRODUCTSPRODUCTS

MonopolyMonopoly

Tap waterTap waterTVATVA

OligopolyOligopoly

AutosAutosCrude oilCrude oil

Monopolistic Monopolistic CompetitionCompetition

ShoesShoesE-BusinessE-Business

DIVIDED BY TYPE DIVIDED BY TYPE OF PRODUCTSOF PRODUCTS

Perfect Perfect CompetitionCompetition

WheatWheatSaltSalt

MARKET POWERMARKET POWERTOTALTOTAL NONENONE

CONSUMER POWERCONSUMER POWERNONENONE MOREMORE

EFFICIENT OPERATIONSEFFICIENT OPERATIONSNONENONE MOREMORE

CHAPTER 7: DIFFERENT TYPES OF MARKET STRUCTURES WHAT IS A MARKET? An environment in which buyers and...

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