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Market Structures Ms. Flora Economics Four Market Structures • Perfect Competition • Monopoly • Oligopoly • Monopolistic Competition Perfect Competition • Many buyers and sellers participate in the market. • Sellers offer identical products. • Individual sellers have no control over the price of the product. • Sellers are able to enter and exit the market freely 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 products. 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 product. Few Barriers to Entry • Because there are few barriers to entry, it is relatively easy for firms to enter and exit the market. 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. Monopoly • 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 service. 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 Patents, Franchises, Copyrights 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 power 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). Oligopolies • Market dominated by a few large, profitable firms. – 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 market • 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 market. • 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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