Market Structures

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					   CHAPTER 7:
        What Are Markets?
A market is where buyers and sellers:
 –meet to exchange goods and services.
 –are affected by some level of competition.

    The market may be in one specific place
        It does not exist physically at all
             (IT IS JUST A THEORY!!)

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        What Are Markets?
 Markets are classified by 4 structures

    1. Pure (perfect) Competition

    2. Monopolistic Competition

    3. Oligopoly

    4. Monopoly
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  1. Perfect Competition

    This is a theoretical situation.
NO TRUE Perfectly Competitive Market


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The 5 conditions of perfect competition
1)   LARGE number of SMALL firms.
     No single buyer or seller can influence the price.

2)   Buyers and sellers deal in identical products. No product
     differences. (EXAMPLES: Salt, Flour, Commodity, Corn)

3)   Unlimited Competition: so many firms, that suppliers lose
     the ability to set their own price.

4)   No Barriers to Entry. Sellers are free to enter the market,
     conduct business and free to leave the market. (Low
     cost to enter)
5)   Each firm is a PRICE-TAKER (more on this later)
                           SWS MORE APPEALING THAN ANOTHER.
 FROM BECAUSE NO SINGLE GOOD IS2006                       5
The 5 conditions of perfect competition
4)    No Barriers to entry. Sellers are free to enter the market,
      conduct business and free to leave the market.

        Perfect competition is the opposite of monopoly.
     Here, any firm can get into the market at very little cost.

 Suppose there was a market for dandelions.
  Growing dandelions requires little start-up cost.
 All you need are dandelion seeds, soil, water,
  and some sunlight.
 There is no difference between one dandelion
  and another, so the market has a similar
  product. The agricultural market is the best example
                     of a perfectly competitive market.
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             Perfect Competition

 Each individual firm is too small to influence
 Price becomes fixed to everyone in the industry.
 EXAMPLE: the price of a bushel of wheat is set
  only by the interaction of supply and demand.
   Generally speaking, wheat is the
  same per bushel in North Georgia
          as it is in Florida.

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              Perfect Competition
 Firms in a perfectly competitive market are
 price takers. (they take the price they are given, they
 can’t change the price)

 Since they have no control over their own
                    NO MARKET POWER
 prices, they have _______________________.
        MARKET POWER = “the ability to set one’s OWN prices”

 In other words, no one will buy an overpriced
  dandelion. Why should they?
 A 4-cent dandelion is the same as the 3-cent one,
  so there is no reason to spend that extra penny.
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        Monopolistic Competition
 The 5 conditions of Monopolistic Competition
1)   LARGE number of large companies (but fewer than perfect
     Sellers can influence the price through creating a product identity
     (more on this later)

2)   Products are NOT exactly identical, BUT VERY SIMILAR,
     so companies use PRODUCT DIFFERENTIATION
3)   Heavy Competition: Firms must remain aware of their
     competitor’s actions, but they each have some ability to
     control their own prices.

4)   Low Barriers to Entry: harder to get started because of the
     amount of competition.
5)   Monopolistic competition takes its name and its structure
     from elements of monopoly and perfect competition. 9
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    Monopolistic Competitive Market
 The key idea to understanding monopolistic competition is that
 firms sell products that are similar, but not exactly alike.

    EXAMPLE: Hand Soap

   Essentially, all hand soaps are the same. Yet firms
    can create a brand identity that separates their
    hand soap from their competitor’s.
   This brand identity can be formed through
    packaging, product support, and especially
   If effective, consumers will positively identify a
    certain brand and purchase it even if hand soap
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Conditions of Monopolistic Competition
  The point is that firms in Monopolistic Competition must
  use Product Differentiation & Non-price Competition to
  sell their products.

 Product Differentiation:
 The real or imagined differences
  between competing products in the
  same industry.
 Differences may be real or imagined.

 Differentiation may be color, packaging, store
  location, store design, store decorations,
  delivery, service….. anything to make it stand
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Conditions of Monopolistic Competition
  The point is that firms in Monopolistic Competition must
  use Product Differentiation & Non-price Competition to
  sell their products.

 Non-Price Competition:
 Non-Price Competition involves the advertising of a
   product's appearance, quality, or design, rather than its
 Advertising to help the consumer believe that this product
   is different and worth more money.

                         Notice these
                      commercials never
                        mention price.

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Examples of Monopolistic Competition

    Auto, Steel, Gas, Fast Food, Airlines.

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 Sometimes companies fall victim to market failure. However,
  not all businesses close their doors and empty their factories
  and stores.
 Many get “swallowed up” by another company. This “take-
  over” or acquisition of a company is known as a merger.

There are THREE types of mergers: HORIZONTAL, VERTICAL, and
 1.) HORIZONTAL: involve firms in the SAME market, such as between two oil
                      Reason: Diversification

 2.) VERTICAL: involve one firm buying a resource provider.
  EXAMPLE: steel company buys an automaker

 3.) CONGLOMERATE: a company buys a business in a
      UNRELATED industry.
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           What is an Oligopoly?
   A market in which a two-three large sellers control
  most of the production of a good or service and they
            work together on setting prices.
        Conditions of an Oligopoly
1) Very few Sellers that control the entire market.
2) Products may be differentiated or identical (but
   they are usually standardized)
3) Medium barriers to entry: Difficult to Enter the
   market because the competitors work together
   to control all the resources & prices.
4) The actions of one affects all the producers.
5) Collusion = an agreement to act together or
   behave in a cooperative manner.
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              What is an Oligopoly?
     A market in which a two-three large sellers control
    most of the production of a good or service and they
              work together on setting prices.

             Conditions of Oligopoly
5) Collusion = an agreement to act together or
   behave in a cooperative manner.
    Collusion Agreements: usually illegal, among
   producers to fix prices, limit output, or divide markets.
   (hard to prove that a group of companies is doing this)
    It is also called Price Fixing: setting the same
      prices across the industry.
         Basically, the companies are acting a one large monopoly.

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         Price Behavior in Oligopoly
 Now, sometimes businesses do not agree with each other about the price,
                 and if that happens, a WAR will result.

Price Wars: Series of price cuts that competitors must
follow or lose business.
 it is a fierce price competition between sellers, sometimes
   the price is lower than the cost of production.
    Why is that bad???

 Oligopolists would like to be Independent Price setters:
   a firm sets prices based on demand, cost of input
     and other factors (not based on other companies prices).
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2 Types of Price Behavior in an Oligopoly

 Price Leader: independent pricing decisions made by
   a dominate firm on a regular basis that results in
   generally uniform industry-wide prices.
   ADVANTAGE: you are the company leading the price.

 Independent Pricing: policy by a competitor that
   ignores other producer’s prices.

   DISADVANTAGE: other firms shut you down by
     agreeing to set lower prices than yours.
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        Conditions of Monopoly
 Exact Opposite of Pure Competition.
   A price maker. (set their own price, without regard to
     supply and demand)

 There is a single seller

 No close substitute goods are available

 High Barriers to Entry: Other sellers
 cannot enter the Market.

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                   Types of Monopolies
                4 Distinct Types of Monopolies:
1)   Natural Monopoly: Where costs are minimized by
     having a single producer of the product.
     Gas, water, electricity: government creates Natural
      Monopolies by Franchising some utilities.
           Franchise - the right to produce or do business in a certain
            area without competition.
           Government franchises come with government regulation.
            Georgia PSC (Public Service Commission)


Economies of Scale: As natural monopolies grow larger, this reduces its
    production costs (economies of scale).
     Because normally companies become more efficient as
      the firm becomes larger.
           Example: It is cheaper for the Tennessee Valley Authority
            (TVA) to provide power in Georgia than two or three
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               Types of Monopolies

2)   Geographic Monopoly: The only business in
     a location due to size of market.
      Decreasing in the U.S. because of mobility.

                                      EXAMPLE: Only
                                       person selling
                                        water in the

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                   Types of Monopolies

3)   Technological Monopoly: Firm has
     discovered a new process or product.
         Constitution gave government the right to grant
           technological monopolies.
        Patent: 17 years exclusive rights to a developed
        Copyright: (Artists and writers) Life plus 50 years.

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              Types of Monopolies

4)   Government Monopoly: Retained by the
      Liquor sales in some counties, uranium
       production, water, etc.

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3 Conditions of Efficient & Successful
Markets work best when four conditions are met:
  1) Adequate competition must exist in all
  2) Buyers and sellers are reasonably well-
     informed about conditions and
  3) Resources must be free to move from one
     industry to another.

 Market Failure occurs when any of the 3
       conditions alter significantly.
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       Types & Causes for Market Failure
1)     Inadequate Competition: Dangers to monopolies
          Monopolies may waste and misallocate scarce
           resources because there is no competition.
2) Inadequate Information: A free enterprise economy
     requires information.
          It is difficult to employ resources for the fullest benefit of
           society without adequate information.
3) Resource Immobility: The efficient allocation or resources
     require that land, labor, capital and entrepreneurs be free to move
     to markets where returns are the highest
4) Externalities / Side Effects: A side effect that benefits or harms
     a third party that was not directly involved in the activity.
           Negative Externality: People are harmed or inconvenienced
            by an economic decision.
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         The Role of Government

Government has the power to maintain competition,
 regulate monopolies, or to run government-owned
  Since the late 1800s the US have passed laws to
   restrict and regulate monopolies and trusts.

     Trust: a legally formed combination of

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         The Role of Government

               Antitrust Legislation
 Interstate Commerce Act: Passed by Congress
   in 1887. It was aimed at the railroads.
   Charges of unfair pricing prompted Congress
   to act.

1887                                     PRESENT

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          The Role of Government

1890 - Sherman Antitrust Act - law against
  monopolies that hindered competition or made
  competition impossible because of the “restraint
  of trade” that is created by a monopoly.

1887                                        PRESENT

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           The Role of Government

 1914 - Clayton Antitrust Act - outlawed price
  discrimination - charging different customers different
  prices for the same product. Further defined Sherman.
  (preferred pricing)

1887                                              PRESENT

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                 The Role of Government

 1914 - Federal Trade Commission Act - passed
       to enforce the Clayton Antitrust Act. It gave the
       authority to issue Cease and Desist order.
       Cease and Desist Order: FTC ruling requiring a company to stop an
       unfair business practice that reduces or limits competition.

1887                                                                       PRESENT

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