four FOUR four FOUR four FOUR four FOUR four FOUR four FOUR four FOUR four FOUR four FOUR four FOUR four FOUR four FOUR four FOUR four FOUR four FOUR four FOUR four FOUR four FOUR four FOUR four FOUR four FOUR four FOUR fou NINE nine NINE nine NINE nine NINE nine NINE nine nine NINE nine NINE nine NINE nine NINE nine NINE nine NINE nine NINE nine NINE nine NINE nine nine NINE nine NINE nine NINE nine NINE nine NINE nintwo TWO two TWO two TWO two TWO two TWO two TWO two TWO two TWO two TWO two TWO two TWO two TWO two TWO two TWO two TWO two TWO two TWO two TWO two TWO two TWO two TWO two TWO two TWO two TWO two TWO two TWO two TWO

LESSONChapter

Section

page

152

In this section we’ll be looking at advertising’s major role in 2 types of

market structures.

Perfect Competition

is a ______ structure

It has many______________ , & no single __________can affect prices.

market

buyers & sellersbuyer/seller

In the U.S.Most industries represent some form of

IMPERFECT COMPETITION

3 types of IMPERFECT MKT STRUCTURESMonopoly / Oligopoly / Monopolistic Competition

The most extreme form of IMPERFECT COMPETITION

A Pure Monopoly

One seller controls the supply of the good/service & thus determines the price.

EX: ?

Some local utility companiesFew such

markets exist in the world

So a monopolyis a market situation in which a single supplier

makes up an entire industry for a good/service with no close substitutes.

NEXT: characteristics of a monopoly

1 A SINGLE SELLER

2 NO SUBSTITUTES

3 NO ENTRY

4 Almost Complete MKT Price Control

Characteristics of a Monopoly

3. NO ENTRY

Monopolist is protected by obstacles to competi ti on preventi ng others from

entering the market.

4. Almost Complete MKT Price Control

By controlling the available supply, the monopolist can

control the market price.

BARRIERS TO ENTRYIF a monopoly is

making all the profits in a particular industry, why don’t others jump

in to get a share?

OBSTACLES to COMPETITION that prevent others from entering a market

BARRIERS TO ENTRY

LEGAL EXAMPLE: Some state laws prevent a competing electric, gas or water company from

operating somewhere where a public utility company already

provides service.

FEAR of WASTEFUL DUPLICATION

E X A M P L E :3 water companies trying to lay water mains along streets

Another BARRIER of ENTRYCOST OF GETTING STARTEDOR Excessive Money Capital Costs

E X A M P L E : CAR & STEEL INDUSTRIES

BIG inital investment – cost of equipment= HUGE startup costs keep companies

from entering some industries.Owning essential raw materials is also a barrier of entry. EXAMPLE: The DeBeers Company

4 Ty p e s o f P u re M o n o p o l i e s

Distinction is why they exist

1.Natural 2.Geographic 3.Technological 4.Government

IN THE PAST, they thought having 1 company providing a public good or service was + efficient, or natural.

SOGov. granted exclusive rights toNATURAL MONOPOLIES

= providers of such things as utilities,

AND ???

Bus service, & cable TV.

The size, or scale. of most natural monopolies gave them

ECONOMIES OF SCALE

BIG

ECONOMIES OF SCALE

L O W P R O D U C T I O N C O S T S

Large Output

GEOGRAPHIC MONOPOLY

EXAMPLE: Store in remote Alaskan Vil lage

NOBODY interested

MAIL-ORDER, INTERNET & CATALOGUESPutting a dent in the number of Geographic Monopolies

INVENTIONSTECHNOLOGICAL MONOPOLY

PATENT

TO MAKE, USE, or SELL an invention for a set number of years

Exclusive Right

Exclusive RightTo SELL, PUBLISH, or

REPRODUCE creative works for a set number of years

GOVERNMENT MONOPOLYSIMILAR TO Natural, Geographic, or Technological Monopoly? S I M I L A R T O N a t u r a l , M o n o p o l y

The difference is that the government itself holds the monopoly

EXAMPLES?

CONSTRUCTION & MAINTENANCE

Bridges

ROADSBy LOCAL, STATE & NATIONAL GOVERNMENTS

BUTjust how important are monopolies TODAY?

MORE or LESS than in the PAST?

Monopolies are FAR LESS important

today!

B U T w hy i s t h a t ?

GEOGRAPHIC MONOPOLIES are losing out to

Mail-order businesses &E-commerce

NATURAL MONOPOLIES

are being broken up

by

Technology & Government Deregulation

TECHNOLOGICAL MONOPOLIES RARELY last longer than the PATENTIF even that long.

Why?NEW PATENTS for products with SLIGHT VARIATIONS

E X A M P L E : Ea r l y 1 9 8 0 ’s M I C R O C O M P U T E R R E VO LU T I O N . Companies made changes to products & added features to get patents

OLIGOPOLY

MONOPOLY – 1 supplier Several suppliers WITH some CONTROL over PRICE =

Page155

5 CONDITIONS for a MKT structure to be an OLIGOPOLYDomination – Few Sellers

Barriers to EntryIdentical/Slightly Different Products

Non-Price CompetitionInterdependence

Domination by a Few Sellers

Several LARGE firms

to 80% of the market

D o m i n a ti o n b y a F e w S e l l e r s

BARRIERS to ENTRYHIGH

DIFFICULT

Capital Costs

for new companies to enter major markets

I D E N T I C A L / S L I G H T LY D I F F E R E N T

PRODUCTSExamples:

AIRLINE TRAVEL

DOMESTIC CARS

KITCHEN APPLIANCES

NON- PR ICE COMPETIT ION

ADVERTISINGEmphasizes MINOR differences

ANDattempts to build

customer loyalty

INTERDEPENDENCE

Any change on the part of 1 firm will cause a reaction on

the part of other firms in the oligopoly.

FIGURE 38

page155

U.S. IndustriesTOP 4 firms in each

produce over 80% of TOTAL OUTPUT

Domestic Motor Vehicles

90%

87% Breakfast

Cereal

85%

SOFT DRINKS

Tobacco Products82%

Primary Aluminum

74%

Non-Price Competition

O l i g o p o l i s t s e n g a g e i n

EXAMPLE: Some car makers have an oligopoly on the domestic car market. Millions/billions spent on advertising to differentiate their products in the consumer mind.

PRODUCT DIFFERENTIATION

The price you pay for BRAND product isn’t just based on supply/demand.

Manufacturers’ use of minor differences in quality/features to try to differentiate between similar goods & services

INTERDEPENDENT BEHAVIORF E W F I R M S i n o l i g o p o l i e s

SO When 1 airline cuts its airfares to gain MKT share, the others follow suit

PRICE WARLOWER PRICESInitially good for consumers

If prices drop too much, an airline may be forced out of businessFEWER airlines / LESS COMPETITION / PRICES INCREASE in the long run

Competing Firms in an OliogopolySecretly agree to RAISE PRICES / DIVIDE the MKT

ILLEGAL

COLLUSIONHEAVY PENALTIES

FinesPrison Sentences

A n i m p o r t a n t f o r m o f C O L L U S I O N

An arrangement among groups of industrial businesses, often in different countries, to reduce international competition

CONTROL price / production / distribution of goods

MOST COMMONU.S. Market Structure

Monopol i sti c Competi ti on

L A R G E # o f S E L L E R S o ff e r S I M I I L A R ,s l i g h t l y d i ff e r e n t P R O D U C T S

EXAMPLES:?

Monopolistic C

ompetitionToothpaste

Monopolisti c Competi ti on

COSMETICS

DESIGNER CLOTHES

Monopolisti c Competi ti on

Monopol i sti c Competi ti on

MKT situati on LARGE # of SELLERS

O ff e r i n g S I M I L A R p ro d u c t s

EACH has SOME CONTROLover PRICE

MANY SELLERS

No SINGLE SELLER / SMALL GROUP dominates the market

ENTRY into MONOPOLISTIC COMPETITION is easier than in a monopoly / oligopoly

DISADVANTAGEHIGH Cost of ADVERTISING

D I F F E R E N T I AT E D P R O D U C T S

EACH supplier sells a

SLIGHTLY DIFFERENTPRODUCT to ATTRACT BUYERS

N O N - P R I C E COMPETITION

Businesses compete by using PRODUCT DIFFERENTIATION & by ADVERTISING

SOME CONTROL over PRICE

Building CUSTOMER LOYALTY thru PRODUCT DIFFERENTIATION, each firm has SOME CONTROL over the PRICE it charges

MONOPOLISTIC COMPETION & OLIGOPOLY are similar

B I G D I F F E R E N C E / # o f S E L L E R S

OLIGOPOLY – FEW FIRMS dominate an industry. CONTROL over PRICE is interdependent.

MONOPOLISTIC COMPETION has MANY FIRMS, NO real INTERDEPENDENCE / SLIGHT DIFFERENCE among products

ADVERTISINGCompeti ti ve

Even MORE important in MONOPOLISTIC COMPETITION

ADVERTISING leads to PRODUCT DIFFERENTIATION & competition FOR CONSUMER DOLLARS

SHELF SPACE

When advertising works, companies can CHARGE MORE for their products

Nike, The Gap and Procter & Gamble spend millions / year

Table

Page 158

PERFECT CompetitionMANY Sellers

Nearly SIMILAR Products

EASY Entr yControl Over Price: Market

EXAMPLES:

MONOPOLY one seller

Unique product NO c lose substi tute to product / ser v ice

Barriers to Entry V E RY H I G HControl Over Price CONSIDERABLE

EXAMPLES: Water, electricity, 1st class mail delivery

MONOPOLISTIC COMPETITION

MANY SELLERS Differentiated products

Barr iers to Entr y EASYControl Over Price YES. Not as much as monopoly;

Consumer Demand

EXAMPLES: Clothing, Restaurant meals

OLIGOPOLYFEW SELLERS Identi ca l/s l ight ly d iff erenti ated

products

Barriers to Entry Significantly high

XX Control Over Price YES. Not as much as in monopoly; Interdependence in the industry

EXAMPLES:CARS

COMING UP NEXTSection 3

Government Policies Toward Competition