Competition Competition & &

Market StructuresMarket Structures

I.I. CompetitionCompetitionA.A. Four basic levels or degrees of Four basic levels or degrees of

competitioncompetitionB.B. There are costs and benefits to There are costs and benefits to

eacheachC.C. Consumers benefit most from Consumers benefit most from

vigorous competition vigorous competition 1.1. What are the effects of competition?What are the effects of competition?

D.D. Govt. oversees markets to ensure Govt. oversees markets to ensure adequate levels (FTC)adequate levels (FTC)

Lower pricesImproved qualityIncreased variety and innovationMore efficient use of resources

Levels of Competition Continuum

Most Competitive Least Competitive <---l---------------l----------------l--------------l-------->

Perfect Monopolistic Oligopoly Monopoly (or pure) Competition Competition

Each market structure has a series Each market structure has a series of differentiating characteristics of differentiating characteristics

Questions:Questions:

1.1. What is the least competitive What is the least competitive market?market?

2.2. What is the most competitive What is the most competitive market?market?

II.II. Perfect CompetitionPerfect CompetitionA.A. Theoretically most competitive market Theoretically most competitive market

typetypeB.B. Conditions:Conditions:

1.1. Large number of small businessesLarge number of small businesses2.2. Identical productsIdentical products3.3. Independent, well-informed buyers & sellersIndependent, well-informed buyers & sellers4.4. Free entry to and exit from the marketFree entry to and exit from the market5.5. No advertisingNo advertising6.6. Low profits, closely related to costsLow profits, closely related to costs

C.C. Model (theoretical extreme) used to Model (theoretical extreme) used to evaluate other marketsevaluate other markets

D.D. Examples:Examples:1.1. Nothing exactly Nothing exactly

reflects perfectly reflects perfectly competitive competitive markets – close:markets – close:a.a. Local fruit and Local fruit and

vegetable farmingvegetable farming

b.b. Local truckingLocal trucking

c.c. Computer chipsComputer chips

d.d. Industrial nuts and Industrial nuts and boltsbolts

III.III. Monopolistic CompetitionMonopolistic CompetitionA.A. Has all the Has all the

conditions of pure conditions of pure competition, except competition, except identical productsidentical products

B.B. Second most Second most competitive market competitive market structurestructure

C.C. Conditions:Conditions:1.1. Many firmsMany firms2.2. Product differentiationProduct differentiation3.3. Non-price competition Non-price competition

a.a. Heavy advertisingHeavy advertising4.4. Market (S&D) largely Market (S&D) largely

sets pricesets price5.5. Entry into the market Entry into the market

is easy is easy b.b. relatively low start-relatively low start-

up costsup costs

Exception is brand name.

D.D. Examples:Examples:

1.1. Women’s apparelWomen’s apparel

2.2. ShoesShoes

3.3. RestaurantsRestaurants

4.4. Law officesLaw offices

Questions:Questions:

3.3. What is the biggest difference What is the biggest difference between perfect and monopolistic between perfect and monopolistic competition?competition?

4.4. What are the conditions or What are the conditions or characteristics of monopolistic characteristics of monopolistic competition?competition?

IV.IV. OligopolyOligopolyA.A. Market structure in Market structure in

which a few large which a few large sellers dominate the sellers dominate the industryindustry

B.B. Conditions:Conditions:1.1. Few large firmsFew large firms2.2. Product differentiationProduct differentiation

a.a. Differentiated Differentiated OligopolyOligopolyi.i. Fair amount of Fair amount of

differentiationdifferentiation

b.b. Pure OligopolyPure Oligopoly

i.i. Homogenous Homogenous productproduct

3.3. Some advertisingSome advertising4.4. Entry into market is Entry into market is

difficult (high costs)difficult (high costs)

C.C. ExamplesExamples

1.1. Auto IndustryAuto Industry

2.2. Airline IndustryAirline Industry

3.3. Iron ore IndustryIron ore Industry

4.4. Coal IndustryCoal Industry

Differentiated Oligopolies

Pure Oligopolies

A.A. When one oligopolist lowers prices, others follow When one oligopolist lowers prices, others follow B.B. Collusion: when firms engage in formal Collusion: when firms engage in formal

agreements to set prices or supply agreements to set prices or supply 1.1. Cartels (OPEC)Cartels (OPEC)

C.C. Price-setting: a particular type of collusionPrice-setting: a particular type of collusionD.D. Both are illegal Both are illegal

1.1. limits effects of competition, hurts consumerlimits effects of competition, hurts consumer

V.V. Competition in oligopolistic Competition in oligopolistic marketsmarkets

Questions:Questions:5.5. Why is entry into an oligopolistic Why is entry into an oligopolistic

market difficult?market difficult?6.6. Why is it easier to collude in Why is it easier to collude in

oligopolies than monopolistically oligopolies than monopolistically competitive markets?competitive markets?

7.7. Why is there less competition in an Why is there less competition in an oligopoly than perfectly or oligopoly than perfectly or monopolistically competitive monopolistically competitive markets?markets?

VI.VI. MonopolyMonopoly

A.A. Market structure with one seller Market structure with one seller dominating the marketdominating the market

B.B. Least competitive marketLeast competitive market

C.C. Conditions:Conditions:1.1. Extensive influence over priceExtensive influence over price

2.2. No differentiationNo differentiation

3.3. Some advertising (mostly image)Some advertising (mostly image)

4.4. Entry blockedEntry blocked

VII.VII. TypesTypesA.A. Natural MonopolyNatural Monopoly

1.1. Wasteful, Wasteful, inefficient to inefficient to allow duplication; allow duplication; cheaper due to cheaper due to economies of economies of scale of a larger scale of a larger firm (economies of firm (economies of scale)scale)a.a. Gas and electric Gas and electric

companiescompanies

B.B. Geographic MonopolyGeographic Monopoly1.1. One seller — market won’t support two One seller — market won’t support two

due to geographic isolationdue to geographic isolationa.a. One drug store or bank in a small townOne drug store or bank in a small town

b.b. One gas station on a lonely stretch of a One gas station on a lonely stretch of a desert highwaydesert highway

C.C. Technological MonopolyTechnological Monopoly1.1. Patent/copyrightPatent/copyright

2.2. 20 years20 years

3.3. To encourage innovationTo encourage innovationa.a. Can be abused (Xerox’s 100s of patents)Can be abused (Xerox’s 100s of patents)

Strange PatentsStrange Patents

D.D. Government MonopolyGovernment Monopoly1.1. Government owns and operates the Government owns and operates the

monopolymonopoly

Question:Question:

8.8. How or why is California Edison a How or why is California Edison a natural monopoly?natural monopoly?

VIII.VIII. Other limits to competitionOther limits to competitionA.A. MergersMergersB.B. Acts of collusionActs of collusionC.C. Requiring licensing Requiring licensing

1.1. Beauticians/taxi driversBeauticians/taxi driversa.a. lobbyinglobbying

D.D. Trade barriersTrade barriers1.1. Tariffs: tax on imports (domestic Tariffs: tax on imports (domestic

protectionism)protectionism)2.2. Quotas: set number of imports (domestic Quotas: set number of imports (domestic

protectionism)protectionism)3.3. Embargos: refusing to trade with a country Embargos: refusing to trade with a country

(political coercion)(political coercion)4.4. Blockade: physically blocking trade (political Blockade: physically blocking trade (political

coercion)coercion)

QuestionsQuestions1.1. What’s a perfectly competitive market What’s a perfectly competitive market

like?like?2.2. What is the difference between perfect What is the difference between perfect

competition and monopolistic competition and monopolistic competition?competition?

3.3. What’s an oligopoly?What’s an oligopoly?4.4. What is collusion?What is collusion?5.5. Provide two examples of each market Provide two examples of each market

structurestructure6.6. How do trade barriers limit competition?How do trade barriers limit competition?

ActivityActivity

Create a diagram or picture chart Create a diagram or picture chart indicating the unique characteristics indicating the unique characteristics of each market structure on a sheet of each market structure on a sheet of white paper folded into fourthsof white paper folded into fourths