Post on 16-Jan-2016
The Four Types of Market Structure
• Tap water• Electricity
Monopoly
• Novels• Movies
MonopolisticCompetition
• Tennis balls• Crude oil
Oligopoly
Number of Firms?
Perfect
• Wheat• Milk
Competition
Type of Products?
Identicalproducts
Differentiatedproducts
Onefirm
Fewfirms
Manyfirms
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Types of Markets
• MonopolyMonopoly• Only one firm with one product
• Monopolistic CompetitionMonopolistic Competition• Many firms selling products that are similar but not
identical.
• OligopolyOligopoly• Only a few sellers, each offering a similar or identical
product to the others.
• Perfect CompetitionPerfect Competition• Unlimited firms selling products that are identical.
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MONOPOLYMONOPOLY
• A monopoly firm is a price maker
• A firm is considered a monopoly if . . .• it is the sole seller of its product.• its product does not have close substitutes.
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WHY MONOPOLIES ARISE
• The fundamental cause of monopoly is barriers to entry.
• Barriers to entry have three sources:• Ownership of a key resource.
• The government gives a single firm the exclusive right to produce some good.
• Costs of production make a single producer more efficient than a large number of producers.
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Government-Created Monopolies
• Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets.
• Patent and copyright laws are two important examples of how government creates a monopoly to serve the public interest.
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Increasing Competition with Antitrust Laws
• Two Important Antitrust Laws• Sherman Antitrust Act (1890)
• Reduced the market power of the large and powerful “trusts” of that time period.
• Clayton Act (1914)• Strengthened the government’s powers and authorized
private lawsuits.
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Monopolistic CompetitionMonopolistic Competition
• Markets that have some features of competition and some features of monopoly.
• Attributes of Monopolistic Competition• Many sellers• Product differentiation• Free entry and exit
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Monopolistic Competition
• Many Sellers• There are many firms
competing for the same group of customers.• Product examples
include books, CDs, movies, computer games, restaurants,
fast food, cookies, furniture, etc.
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Monopolistic Competition
Easy Entry or Exit
• Firms can enter or exit the market without restriction.
Product Differentiation• Each firm produces a product that is at least slightly
different from those of other firms.• Rather than being a price taker, each firm faces a
downward-sloping demand curve.
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ADVERTISING
• When firms sell differentiated products, each firm has an incentive to advertise in order to attract more buyers to its particular product.
• Overall, about 2 percent of total revenue, or over $200 billion a year, is spent on advertising.
• Critics of advertising argue that firms advertise in order to manipulate people’s tastes.
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OLIGOPOLY OLIGOPOLY
Characteristics of an Oligopoly Market• Few sellers offering similar or identical products• Interdependent firms
Collusion• An agreement among firms in a market about
quantities to produce or prices to charge.
Cartel• A group of firms acting in unison.
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INTERDEPENDENCE
• Because the number of firms in an oligopolistic market is small, each firm must act strategically.
• Each firm knows that its profit depends not only on how much it produces but also on how much the other firms produce.
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Jack and Jill Oligopoly Game
Jack’s Decision
Sell 40Gallons
Sell 40 Gallons
Jack gets$1,600 profit
Jill gets$1,600 profit
Jill gets$2,000 profit
Jack gets$1,500 profit
Jill gets$1,500 profit
Jack gets$2,000 profit
Jill gets$1,800 profit
Jack gets$1,800 profit
Sell 30 Gallons
Sell 30Gallons
Jill’sDecision
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Perfect CompetitionPerfect Competition
• A perfectly competitive market has the following characteristics:
• There are many buyers and sellers in the market.• The goods offered by the various sellers are largely
the same.• Firms can freely enter or exit the market.
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WHAT IS A COMPETITIVE MARKET?
• A competitive market has many buyers and sellers trading identical products so that each buyer and seller is a price taker.
• Buyers and sellers must accept the price determined by the market.
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