Chapter 7 – Market Structures

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					Chapter 7 – Market Structures
   Four Conditions for Perfect Competition
       Perfect Competition – a market structure in
        which a large number of firms all produce the
        same product and no single seller controls supply
        or prices.
Four Conditions of Perfect
Competition Cont’d
   Conditions:
       Many buyers and sellers participate in the market
            No individual can influence the market
       Sellers offer identical products
            Who sells the product doesn’t matter
             Commodity – a product, such as petroleum or milk, that
             is considered the same no matter who produces or sells it
       Buyers and sellers are well informed about products
            Buyers and sellers know enough to find the best deal
       Sellers are able to enter and exit the market freely
            Can enter the market when money is to be made, and leave
             when losing money
Barriers to Entry
 Factors that make it difficult for new firms to
  enter a market
 Imperfect Competition – a market structure
  that fails to meet the conditions of perfect
 Common Barriers
       Start-up Costs – the expenses a new business must
        pay before it can begin to produce and sell goods
       Technology
            Some markets require a high degree of technological know-
Price and Output
 Perfect competition keeps prices low and
  production costs low
 Firms must use all factors of production to
  their best advantage to stay competitive
Chapter 7.1 Questions
   What are two examples of barriers to entry in the magazine market?

   Why must firms use land, labor, and other resources efficiently in perfectly
    competitive markets?

   How many of the following markets come close to perfect competition:
    (explain your choices)
        Televisions
        Bottle Water
        Pizza
        Cars
        White socks
        Baseballs
        Paper clips
Describing Monopoly
   Monopoly – a market in which a single seller
     Barriers to entry prevent firms to enter market
     Typically supply a unique product

     The good/service has no substitute

     Typically take advantage of market and charge high

     U.S. Government has outlawed Monopolies
Forming a Monopoly
   Economies of Scale – factors that cause a
    producer’s average cost per unit to fall as
    output rises
Forming a Monopoly
   Natural Monopoly – a market that runs
    most efficiently when one large firm supplies
    all of the output
       Technology can destroy a natural monopoly
Government Monopolies
 A monopoly created by the government
 Technological Monopolies
     Patent – a license that gives the inventor of a
      new product the exclusive right to sell it for a
      specific period of time (usually 20 yrs)
     Government is guaranteeing that a company can
      profit from its own research
           This encourages research and development
Government Monopolies
 Franchise – a contract that gives a single firm
  the right to sell its goods within an exclusive
 Government can also grant franchises
       Does LVHS stock a certain type of water?
   License – a government issued right to operate
    a business
       Used more when scarce resources are involved
   Industrial Organizations
       Government lets some industries restrict the number
        of firms in a market. Ex. (professional sports)
Output Decisions
   Monopolies face a limited choices, either
    output, or price to maximize profits
       This usually results in lower output with a higher
   Monopolist Dilemma
Output Decisions
   Setting a Price
       Choose level that yields the highest profits
Price Discrimination
   The division of consumers into groups based on how
    much they will pay for a good
       Each customer has a max they will pay for a good
   Market Power – the ability of a company to control
    prices and total market output
   Targeted Discounts – identifies customers not
    willing to pay the regular price and offers those
    customers a discount. Ex.
       Discounted airline fares
       Manufacturers’ rebate offers
       Senior citizens/student discounts
       Children fly or stay free
Price Discrimination
   Limits of Price Discrimination
       Must have three conditions in the market for it to
          Some market power – can control prices
          Distinct customer groups – based on sensitivity to

          Difficult resale – people can’t purchase and resell, ie.

           Admission fees, restaurant meals, etc.
Chapter 7.2 Questions
   What is a natural monopoly? How are natural
    monopolies and government monopolies
    different? How are they similar?

   How does price discrimination benefit
    producers and consumers?

   Do you think price discrimination is fair? Why
    or why not?
Monopolistic Competition
 A market structure in which many companies sell
  products that are similar but not identical
 Firms sell goods that are similar enough to
  substitute for another good, but not identical
 Four conditions for Monopolistic Competition
       Many firms
       Few artificial barriers to entry i.e. patents
       Little control over price
       Differentiated products
            Making a product different from other, similar products
Monopolistic Competition
Nonprice Competition
 A way to attract customers through style, service,
  or location, but not a lower price.
 Physical Characteristics
       New size, color, shape, texture, or taste
   Location
       Gas stations, movie theaters, grocery stores
   Service Levels
       Conventional Restaurant vs. Fast Food Restaurant
   Advertising, image, or status
       Perception or reality???
Prices, Output & Profits in
Monopolistic Competition
 Prices slightly higher than perfect competition
 Output falls between that of monopoly and
  perfect competition
 Profits come in slightly above that needed to
  pay all costs
     Competition keeps profits reasonable
     New firms would enter market if profits were

 A market structure in which a few large firms
  dominate a market
 Industry is an Oligopoly if:
       4 to 5 largest firms produce 70% to 80% of total
   Barriers to Entry
       Typically very high
       Technology and licenses, high start-up costs or economies
        of scale
   Cooperation and Collusion
       Sometimes seem to work together as a monopoly
       Three practice that concern the Government:
            Price War – a series of competitive price cuts that lowers the
             market price below the cost of production
            Collusion – an illegal agreement among firms to divide the
             market, set prices, or limit production
            Price Fixing – an agreement among firms to charge one price for
             the same good
   Cartels – A formal
    organization of producers
    that agree to coordinate
    prices and production
       Only survive if members
        stay on same page
Chapter 7.3 Questions
   What four conditions define monopolistic

   How do economists determine whether or
    not a market is an oligopoly?

   What are the advantages of a monopolistically
    competitive market for consumers? What are
    some of the disadvantages?
Regulation and Deregulation
 Government uses regulation and deregulation
  to promote competition
 Market Power
       Firms try to gain an advantage in the market place
          Merge with other business
          Form Cartels

          Predatory Pricing – selling a product below cost for

           a short period of time to drive competitors out of the
Government and Competition
 Businesses overseen by Federal Trade
  Commission (FTC) and Department of Justice
 Antitrust Laws – laws that encourage
  competition in the marketplace
       Trust – an illegal grouping of companies that
        discourages competition, similar to a cartel
Government and Competition
Government and Competition
   Regulating Business Practices
       Microsoft ex.
   Breaking Up Monopolies
       Government broke up:
            Standard Oil Trust
            American Tobacco Company
            AT&T
   Blocking Mergers
       Merger – when two or more companies join to form a single
       When there are less competitors prices typically rise
   Preserving Incentives
       If a merger will reduce costs and lower prices the government
        will allow it
 The government no longer decides what role
  each company can play in a market and how
  much it can charge its customers
 Gov. has deregulated
       Airline, Trucking, Banking, Railroads, Natural Gas &
        Television Broadcasting
   Forces firms to compete by eliminating price
    controls and barriers to entry
Chapter 7.4 Questions
   Under what conditions will the government
    approve a merger?

   How does predatory pricing affect a
    company’s market power?

   Why does the government intervene in
    markets? Is this consistent with the idea of
    free markets? Why or why not?

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