Ch. 7 Market StructuresPOPE- 2015

What is a Market?• “An environment in which buyers and sellers

interact to exchange goods and services for money”

Remember the Product Market?

What Markets Exist?• Markets are classified by 4 structures (environments)

1. Pure (perfect) Competition (PC)

2. Monopolistic Competition (MC)

3. Oligopoly

4. Monopoly

How do we describe them? (5)1. Market Power: ability for firm to raise price

without losing sales. (control of price)2. Number of Firms in the market3. Barriers of Entry: is it easy to enter or exit the

market?4. Types of Products/Goods: similar or different?5. Level of Competition: how much competition is

there?

1. Perfect Competition (PC)1. Infinite number of very small firms.

No single seller owns a large % of the market.

2. Buyers and sellers deal in identical products.No product differences. (Ex: salt, flour, wheat, corn)

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

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: they have no market share.

Perfect Competition • Consider the market for salt

• Firms in a perfectly competitive market are price takers. (They take the price they are given; they can’t change the price) Fixed

Prices• No one single producer controls the market

• Just many small firms. They have no market power.

• If you want salt… you get salt no matter the brand. • A $4 pound is the same as the $3.50 one, so there is no reason to spend that extra money.

MARKET POWER = “the ability to set one’s OWN prices”

The AGRICULTURAL MARKET is the best example of a perfectly competitive market.

Monopolistic Competition (MC)1. Large number of large companies (fewer than perfect competition)

Sellers can influence the price through creating a product identity

2. Products are NOT exactly identical, but very similar.

3. Heavy competition: firms must remain aware of their competitor's actions, but they each have some ability to control their own price.

4. Low Barriers to Entry: easier than Oligopoly and Monopoly to get started because of the less amount of competition.

5. Monopolistic competition takes its name and its structure from elements of monopoly and perfect competition.

Monopolistic Competition• The key idea to understand monopolistic competition is that

firms sell products that are similar, but not exactly alike.

• 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, songs, product support, and especially advertising.

EXAMPLE: Hand Soap

Monopolistic CompetitionProduct Differentiation (Brand Identity)• The real or imagined differences between competing

products in the same industry.• Differentiation may be color, packaging, store location,

store design, store decorations, delivery, service….

Anything to make it stand out?

Monopolistic CompetitionNon-price Competition:• Non-Price Competition involves the advertising of a product’s

appearance, quality, or design, rather than its price.

• Advertising to help the consumer believe that this product is different and worth more money.

VS

Notice these commercials never

mention price.

Monopolistic Competition ExamplesAuto, Gas, Fast Food, Airlines, etc.

Monopolistic CompetitionWhat happens when companies in a

M.C. Market Fail?

They don’t close their doors, but rather merge with larger companies.

This is called a Merger!

Mergers of Monopolistic Companies• 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.

Three Types of Mergers: 1. Horizontal

2. Vertical

3. Conglomerate

Three Types of Mergers1. Horizontal: involve firms in the same market, such as between two

telecom companies.

2. Vertical: involve one firm buying a resource provider• Example: automaker buys a steel company

3. Conglomerate: a company buys a business in a unrelated industry.

Reason: takeover the market

Reason: Cheaper Resources

Reason: Diversification

Three Types of Mergers• Other examples of Horizontal Mergers…

A company buys a competitor in the market

Reason: ownership of the market

Three Types of Mergers• Other examples of Conglomerates…

A company buys a business in a unrelated market.Reason: Diversification

Oligopoly• A market in which a few large sellers control most of the production of a good or service

and they work together on setting prices.

1. 3-4 Firms that control the entire market by setting prices.

2. Products are generally identical (standardized)

3. High Barriers to Entry: Hard to enter the market because the competitors work together to control all the resources & prices. Plus it is very expensive to make the product.

4. The actions of one affects all the producers.

5. Collusion/Collude= (Price Fixing) an agreement to act together or behave in a cooperative manner

Oligopoly • What will happen when Oligopoly goes bad, a Price 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.

• When price wars start, oligopolists would rather like to be independent price setters.

MARKETSMarket Structures (Environments)

COMPETITIONNONE MORE

ENTRY INTO THE MARKET

IMPOSSIBLE EASY

# OF FIRMSONE MANY

DIFFERENTIATED PRODUCTS

IDENTICAL PRODUCTS

MonopolyTap waterTVA

OligopolyAutosCrude oil

Monopolistic CompetitionShoesE-Business

DIVIDED BY TYPE OF PRODUCTS

Perfect CompetitionWheatSalt

MARKET POWERTOTAL NONE

CONSUMER POWERNONE MORE

EFFICIENT OPERATIONSNONE MORE

Monopoly• Monopoly is the exact opposite of Pure Competition

1. There is a single seller

2. No substitute goods are available

3. A price-maker: set their own price

4. Barriers to Entry: impossible

5. Highly wasteful and inefficient

Types of Monopolies1. Natural Monopoly

2. Geographic Monopoly

3. Technological Monopoly

4. Government Monopoly

Natural Monopoly• Natural Monopoly: where costs are minimized by having a single

producer of the product.• Sometimes govt. creates natural Monopolies in the natural gas, water, & electricity

industry by franchising these utilities.

• Franchise- the right to produce or do business in a certain area under the supervision of a larger company or government.

TVA is the largest government-owned power producer in the US. Its power facilities include 11 fossil-powered plants, 29 hydroelectric dams, three nuclear plants, and six combustion turbine plants.

The corporation transmits electricity to 8.7 million consumers.

© SWS 2010

Types of MonopoliesNatural Monopolies

Natural Monopolies • Other times Natural monopolies are created simply

because there is no regulations or one other firms can get into the market because the monopoly owns all resources.

DeBeers is an African company that has (over the century) bought numerous diamond mines across the global. They provide 90% of the world’s diamonds.

When another diamond company reaches the point when they must sell stock to raise capital for operations, DeBeers comes in and buys a majority of the stock.

Natural Monopoly• Why would government do this or what are the benefits of a

natural monopoly?• Economics of Scale: as natural monopolies grow larger, this

reduces its production costs.• Because normally companies become more efficient as the firm

becomes larger over time.

• Example: It is cheaper for the TVA to provide power in the SE than two or three companies.

Geographic Monopolies • Geographic Monopoly: the only business in a geographic region.

• Some of these are decreasing in the U.S. because of mobility of consumers.

EXAMPLE: Only person selling water

in the desert. EXAMPLE: Turner Field

Technological Monopolies • Technological Monopoly: firm has discovered a new process or

product.• Constitution has given government the right to grant technological

monopolies (protect property rights)

• Patent: 20 years exclusive rights to a developed technology.

• Copyright: Life plus 70 years

Government Monopolies • Government Monopoly: operated completely or partially by the

government.• Liquor sales in some GA counties, uranium production, water, etc.• Similar to natural monopolies. • Adam Smith would be extremely mad!

Healthcare in Canada

Uranium in USA

Alcohol Suppliers in Sweden

Government vs. Monopolies• Antitrust Legislation

• Trust: a legally formed combination of companies

• Since the late 1800s the US have passed laws to restrict and regulate trusts.

• Government has the power to maintain competition, regulate monopolies, or to run government-owned monopolies.

Government vs. Monopolies• Antitrust Legislation

• 1890 Sherman Antitrust Act: law against those companies that hindered competition or made competition impossible because of the “restraint of trade” that was created.• Basically outlawing monopolies

• 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 unfair

business practice that reduces or limits competition

MARKETS

Market Structures (Environments)

COMPETITIONNONE MORE

ENTRY INTO THE MARKETIMPOSSIBLE EASY

# OF FIRMSONE MANY

DIFFERENTIATED PRODUCTS

IDENTICAL PRODUCTS

MonopolyTap waterTVA

OligopolyAutosCrude oil

Monopolistic CompetitionShoesE-Business

DIVIDED BY TYPE OF PRODUCTS

Perfect CompetitionWheatSalt

MARKET POWERTOTAL NONE

CONSUMER POWERNONE MORE

EFFICIENT OPERATIONSNONE MORE