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Market Structures


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									Market Structures
 Monopolistic Competition &
 Chapter 7 Section 3
Market Structures
  We have studied the two extremes of the
   range of market structures.
  Perfect Competition and Monopoly
  Very few markets fall into either of these
  Most fall into two additional categories that
   economists call monopolistic competition and
Market Structures
    Monopolistic Competition – a market
     structure in which many companies sell
     products that are similar but not
    Each firm holds a monopoly over its own
     particular product.
    This is a modified version of perfect
Market Structures
    Differences between the two are
       a. Monopolistically competitive firms sell goods that
       are similar enough to be substituted for another but
       not identical. It does not involve identical
       commodities. i.e. jeans – a variety of color, brand
       names, styles, and sizes.

       b. Monopolistic competition is a fact of everyday
       life. i.e. bagel shops, ice cream shops, gas stations,
       and retail shores.
Market Structures
     Four Conditions of Monopolistic Competition:
     a.   Many firms – these firms can start selling goods
          and earning $ after a small initial investment.
     b.   Few artificial barriers to entry – they do not face
          the high barriers to entry. Patents do not protect
          anyone from competition, because most firms sell
          a product that is distinct enough to fall outside the
          patent protection.
Market Structures
   c. Slight control over price – they have some
    freedom to raise or lower price because each firm’s
    goods are little different from everyone else’s.
      Some people are willing to pay more for the
      There is limited control over price, people will
       substitute a rival’s product if the price is too high.
   d. Differentiated products – firms have some
      control over their selling price because they
      can differentiate or distinguish their goods from
      the other products in the market.
Market Structures
    Non-price Competition
      Firms try not to compete on price alone.
      The alternative is non-price competition –
       competition through ways other than lower
Market Structures
    Forms:
        1. Physical characteristics
             -   Simplest way to distinguish its products is to offer a
                 new size, color, shape, texture, or taste.
             -   i.e. running shoes, pens, cars, and toothpaste
             -   People will use a pen as a writing tool
             -   They will pay extra $ for a pen that writes differently or
                 looks different from other pens.
Market Structures
    Forms:
        2. Location
           Real Estate agents say the three most important
            factors when buying property is location,
            location, location.
           Gas stations, movie theaters, and grocery stores
            succeed or fail based on their location.
           i.e. Motel 6, Days Inn, Super 8, and etc. don’t
            have people that do “R & D” – research and
            development. They build next to a Holiday Inn
            and do a great business.
Market Structures
    Firms:
        3. Service level
           Some sellers can charge a higher price because
            they offer their customers a high level of service.
           i.e. Conventional restaurants provide servers to
            bring your food to your table. Fast-Food
            restaurants offer a more barebones, do-it-
            yourself atmosphere. Both sell the same types of
           Fast-food restaurants sell their meals for less.
Market Structures
    Firms:
        4. Advertising, image, or status
           Some firms try to create an apparent difference
            between their own products and other
            companies’ products.
           i.e. A designer can apply his name to a t-shirt
            and charge a lot more money for that t-shirt.
            Tommy Hilfiger. Customers are willing to pay
            extra for a designer t-shirt because of the image
            or status that go with the designer’s name.
Market Structures
  Economists find a lot of similarity
   between monopolistic competition and
   perfect competition just by looking at
   price, output, and profits.
  Prices
        Will be higher under Mon. Comp. than
         under Perfect Comp. because firms have
         some power to raise prices.
Market Structures
    Output
         total output falls somewhere between that
         of a monopoly and that of a perfect
Market Structures
    Profit
      Monopolistic Competitive firms earn just
       enough to cover all of their costs, including
       salaries for the workers.
      If they make too much money, fierce
       competition would encourage rivals to think
       of new ways to differentiate their products
       and try to lure customers.
      Secondly new firms would enter the market.
Market Structures
    Oligopoly
      A market structure in which a few large
       firms dominate a market.
      These firms may set prices higher and
       output lower than in a perfectly competitive
      i.e. air travel, breakfast cereals, and
       household appliances.
Market Structures
    Barrier to Entry
      These firms try to keep new companies
       from entering the market to compete with
       existing firms.
      High start-up costs can scare firms away
       from the market.
       The biggest airlines compound the problem
       because they often own the most desirable
       gates at the airport, and already enjoy name
       recognition and the trust of the consumer.
Market Structures
  Many firms will cooperate with each
   other limit the number of firms in the
  Price leaders can set prices and output
   for the entire industry as long as member
   firms go along with the leader’s policy.
  Disagreement leads to price wars –
   when competitors cut their prices very
   low to win business.
Market Structures
  Collusion – an agreement among firms
   to divide the market, set prices, or limit
  One outcome of collusion is price fixing –
   an agreement among firms to charge
   one price for the same good.
Market Structures
  Cartel – a formal organization of
   producers that agree to coordinate prices
   and production.
  i.e. OPEC
  Cartels only survive when all producers
   keep working together for the benefit of
   the group.

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