Market Structures Market Structures Ms Flora Economics Four Market Structures •

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Market Structures Market Structures Ms Flora Economics Four Market Structures • Powered By Docstoc
					Market Structures

    Ms. Flora
    Four Market Structures
•   Perfect Competition
•   Monopoly
•   Oligopoly
•   Monopolistic Competition
        Perfect Competition
• Many buyers and sellers participate in the
• Sellers offer identical products.
• Individual sellers have no control over the
  price of the product.
• Sellers are able to enter and exit the market
      Many Buyers and Sellers
• Many sellers so that no one seller can “fix
  the prices.”
• No individual can be powerful enough to
  buy or sell enough goods to influence the
  total market quantity or market price.
  Sellers offer identical products
• The sellers are price takers. They cannot
  charge a price above the market price
  because all other goods in the market are
  perfect substitutes.
• Commodity: A product that is considered
  the same regardless of who makes or sells
  it. (Examples: gasoline, notebook paper,
  milk) Sometimes called homogeneous
        Sellers are free to enter
          and exit the market
• Sellers or firms must be able to enter
  markets when they can make money and
  leave them when they can’t earn enough to
  stay in business.
• No barriers to entry.
  – Factors that make it difficult for new firms to
    enter a market are called barriers to entry.
    Examples include start up costs and technology.
    Advantages of Competition
• In a purely competitive market, resources
  are allocated very efficiently.
• Market prices are just high enough to cover
  costs of production. Profit is rare because if
  profit exists, more suppliers will enter the
  market and drive the price down which
  eliminates the profit!
    Monopolistic Competition
• Many firms.
• Few barriers to entry; easy to enter and exit
  the industry
• Slight control over price.
• Differentiated products.
                Many Firms
• Because there are so many firms in the
  industry, it is difficult or impossible for
  firms to collude to set the price of the
        Few Barriers to Entry
• Because there are few barriers to entry, it is
  relatively easy for firms to enter and exit the
    Differentiated Products and
     Slight Control Over Price

• Firms have some control over their selling
  price because they can differentiate, or
  distinguish, their goods from the other
  products in the market.
• The degree of control over price depends on
  the ability to differentiate.
         Non price Competition
• Firms try not to compete on price alone.
  Non price competition takes many forms
  –   Physical characteristics
  –   Location
  –   Service level
  –   Advertising, image, or status
Gourmet Sandwiches?
 Advantages for the Consumer
• Low prices because of fierce competition
  and easy entry and exit.
• Great variety of goods
• Disadvantage: Sometimes creates artificial
  needs for consumers.
• Single supplier
• Barriers to entry prevent entry into market
• Industry has control over the price of the
  product; limited only by the demand curve.
• Type of product: unique
• Examples: hydroelectric plant which
  generates electricity from a dam on a river.
         Geographic Monopoly

A geographic monopoly is created when a store or firm
is the only business in the area that provides a good or
       Government Monopoly
• A government monopoly exists when the
  government is the sole provider of a
  particular good and competition is
  prohibited by law.
  – Finland, Iceland, Norway, Sweden have
    government owned corporations who have
    exclusive rights for selling alcoholic beverages
  – Canada: government is the only provider of
    health care
     Government Monopolies
• Amtrak is a government owned corporation
  and has monopoly status over intercity
  passenger service.
Government Created Monopolies
• A monopoly can be created by the
  government by issuing a patent, trademark,
  copyright or a franchise.
• Patent: gives a company exclusive rights to
  sell a new good or service for a specific
  period of time.
• Franchise: a contract issued by a local
  authority that gives a single firm the right to
  sell its goods within an exclusive market.
Government Created Monopolies

           Natural Monopolies
• A natural monopoly is a market that runs most
  efficiently when one large firm provides all of the
  output. If a second firm enters the market,
  competition will drive down the market price
  charged to customers. One or both of the firms
  will not be able to cover their costs and will go out
  of business.
• Examples: Public water, telephone service (before
  cellular service was available), hydroelectric
         Price Discrimination
• A seller who has price control may choose
  to price discriminate. This involves dividing
  consumers into two or more groups and
  charging a different price to each group
  based on what these consumers are willing
  to pay.
• Examples: discounted airline fares, senior
  citizens or student discounts
 Conditions of Price Discrimination

• Firms that use price discrimination must
  have some market power, customers must
  be divided into distinct groups, and buyers
  must not be in a position in which they can
  easily resell the good or service.
  Advantages for the Consumer?
• In the case of patents, franchises, copyright,
  consumers get the benefit of a variety of
  goods and services that they might not
  otherwise get to enjoy.
• In the case of a natural monopoly, the
  consumer can enjoy lower prices because
  the firm can achieve economies of scale
  (lower costs of production).
• Market dominated by a few large, profitable
  – Companies must consider the response of
    competitors when setting a price
• There are significant barriers to entry
• Sometimes oligopolies work together to set
  prices and bar competing firms from the
• There may be some variety of goods or the
  goods may be identical.
           Barriers to Entry
• Oligopolies form when significant barriers
  to entry keep new companies from entering
  the market to compete with existing firms.
• Barriers to entry can include high startup
  costs, such as expensive machinery or a
  large advertising campaign.
• Examples: airline industry, car industry
    Cooperation and Collusion
• Oligopolies present a challenge to
  government because they often seem to
  work together to set prices for the products
  that they sell.
• Cooperation and collusion is anti-
  competitive in nature
  Advantages for the Consumer?
• As long as the firms don’t collude, the
  market is very similar to a competitive
• If one firm gets too big or collusion occurs,
  competition is limited and the consumer
  pays more
• Choices and variety might be limited.

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