Market Structures Chapter Six. Highly Competitive Markets Consumers benefit greatly from highly...
-
Upload
irma-pearson -
Category
Documents
-
view
225 -
download
7
Transcript of Market Structures Chapter Six. Highly Competitive Markets Consumers benefit greatly from highly...
Highly Competitive MarketsHighly Competitive Markets
Consumers benefit greatly from highly Consumers benefit greatly from highly competitive marketscompetitive markets
Two types: Two types: Perfect CompetitionPerfect Competition Monopolistic CompetitionMonopolistic Competition
Perfect CompetitionPerfect Competition
Definition: Buyers (consumers) and Definition: Buyers (consumers) and sellers (producers) compete directly and sellers (producers) compete directly and fully under the laws of supply and fully under the laws of supply and demand.demand.
No one seller controls supply, demand, No one seller controls supply, demand, or pricesor prices
Also called pure competitionAlso called pure competition
Four Conditions of Perfect Four Conditions of Perfect CompetitionCompetition
1.1. Many buyers and sellersMany buyers and sellers
2.2. Identical ProductsIdentical Products
3.3. Informed BuyersInformed Buyers
4.4. Easy Market Entry and ExitEasy Market Entry and Exit
No market is perfectly competitiveNo market is perfectly competitive
Example: Example: Agriculture Market in the Agriculture Market in the United StatesUnited States
Meeting the four conditions…Meeting the four conditions…1.1. Independent buyers and sellers—farmersIndependent buyers and sellers—farmers
2.2. Similar products—corn grown by a farmer in Similar products—corn grown by a farmer in GA is similar to corn grown in TNGA is similar to corn grown in TN
3.3. Informed buyers—labels on produceInformed buyers—labels on produce
4.4. Easy Exit/Entry—suppliers can easily Easy Exit/Entry—suppliers can easily change specialization in the marketchange specialization in the market
Monopolistic CompetitionMonopolistic Competition
Definition: market in which many Definition: market in which many producers offer a similar, but not identical, producers offer a similar, but not identical, good or servicegood or service
Similar to perfect competition in that it is Similar to perfect competition in that it is under supply and demandunder supply and demand
Much more common than perfect Much more common than perfect competitioncompetition
Product Differentiation in Product Differentiation in Monopolistic CompetitionMonopolistic Competition
Sellers try to point out differences between Sellers try to point out differences between their products and those of their their products and those of their competitorscompetitors
Product differentiationProduct differentiation used to set used to set products apartproducts apart
Non-price Competition in Non-price Competition in Monopolistic CompetitionMonopolistic Competition
Competition through advertising, not priceCompetition through advertising, not price
Example: Blue jean marketExample: Blue jean market ““No-name” vs. designerNo-name” vs. designer
ProfitsProfits
By setting a product apart from its By setting a product apart from its competitor, the seller can raise the price competitor, the seller can raise the price above the competitive priceabove the competitive price
Done by: advertising, brand-name loyaltyDone by: advertising, brand-name loyalty
Ex. Godiva ChocolateEx. Godiva Chocolate
Imperfectly Competitive Markets
Dominated by 1-4 sellersDominated by 1-4 sellers
Two types –Two types – OligopolyOligopoly MonopolyMonopoly
Oligopolies (Oligopoly)Oligopolies (Oligopoly)
Most common noncompetitive market in Most common noncompetitive market in the USthe US
Definition: market in which a few large Definition: market in which a few large sellers control most of the production of a sellers control most of the production of a good or servicegood or service
3 Conditions of an Oligopoly3 Conditions of an Oligopoly
1.1. Few Large SellersFew Large SellersLargest 3 or 4 sellers control 70% or more of Largest 3 or 4 sellers control 70% or more of the marketthe market
2.2. Identical or Similar ProductsIdentical or Similar Products
3.3. Difficult Market EntryDifficult Market Entry
Oligopolies at WorkOligopolies at Work
Non-price competition:Non-price competition: sellers attempt to sellers attempt to differentiate their products through differentiate their products through advertising and name-brand loyaltyadvertising and name-brand loyalty
Interdependent Pricing:Interdependent Pricing: Responding to the Responding to the prices of competitorsprices of competitors
Pricing War:Pricing War: Sellers aggressively undercut Sellers aggressively undercut each other’s prices in an attempt to gain each other’s prices in an attempt to gain the market sharethe market share
Oligopolies at Work, ContinuedOligopolies at Work, Continued
Cartels: Cartels: Companies openly organizing a Companies openly organizing a system of price setting and market sharingsystem of price setting and market sharing International carters: diamonds, oilInternational carters: diamonds, oil Often unstable and short-livedOften unstable and short-lived
Collusion: Collusion: Sellers secretly agree to set Sellers secretly agree to set production levels or pricesproduction levels or prices Illegal!!Illegal!!
MonopoliesMonopolies
Conditions opposite from perfect Conditions opposite from perfect competitioncompetition
Conditions:Conditions:1.1. Single SellerSingle Seller
2.2. No close substitutesNo close substitutes
3.3. Difficult Market EntryDifficult Market Entry
4 Types of Monopolies4 Types of Monopolies
1.1. Natural MonopoliesNatural MonopoliesDefinition: Single seller that produces a good/service most Definition: Single seller that produces a good/service most efficientlyefficientlyExample: public and private utilitiesExample: public and private utilities
2.2. Geographic MonopoliesGeographic MonopoliesLimited by geographic locationLimited by geographic locationExample: general store in a rural areaExample: general store in a rural area
3.3. Technological MonopoliesTechnological MonopoliesDevelop when a producer develops a new technologyDevelop when a producer develops a new technologyExample: trident submarinesExample: trident submarinesPatents and copyrightsPatents and copyrights
4.4. Government MonopoliesGovernment MonopoliesAny market in which the government is the sole sellerAny market in which the government is the sole sellerExample: water, sewage, roads, bridges, canalsExample: water, sewage, roads, bridges, canals