Market StructuresMarket Structuresin a Free Market Economyin a Free Market Economy

ReviewReview

Economic Systems

CommandMarketTraditional

In a free market economy, In a free market economy, markets for different markets for different

products and services may products and services may vary from one another vary from one another based on the level of based on the level of

competition in each market.competition in each market.

Discussion:Discussion:

What is competition? (What defines What is competition? (What defines “competition”?)“competition”?)

What makes one situation more What makes one situation more competitive or less competitive than competitive or less competitive than another? (Think about situations other another? (Think about situations other than economics – sports for example.)than economics – sports for example.)

Free MarketFree Market

Level of Competition

More Less

Pure Competition

Monopolistic Competition

Oligopoly Monopoly

Pure CompetitionPure Competition

CharacteristicsCharacteristics::

Large number of buyers and sellersLarge number of buyers and sellers

Identical productsIdentical products

Buyers and sellers act independentlyBuyers and sellers act independently

Buyers and sellers are well informedBuyers and sellers are well informed

Ease of entry into the market and exit out of the Ease of entry into the market and exit out of the marketmarket

Note: ALL FIVE of the above are needed to have Note: ALL FIVE of the above are needed to have pure competition.pure competition.

Pure Competition, cont.Pure Competition, cont.

ResultsResults::

No single buyer/seller can affect price.No single buyer/seller can affect price.

No preferred brands, since all are identicalNo preferred brands, since all are identical

No single sellers would raise prices, No single sellers would raise prices, because most/all consumers would go because most/all consumers would go elsewhere.elsewhere.– Prices therefore tend to be stable.Prices therefore tend to be stable.

Pure Competition, cont.Pure Competition, cont.

ExamplesExamples::

NoneNone

In practically all markets, at least one of In practically all markets, at least one of the characteristics for pure competition is the characteristics for pure competition is lacking.lacking.

Group Activity:Group Activity:

In groups, discuss and write answers to the In groups, discuss and write answers to the following:following:

Imagine the AHS cafeteria as a situation Imagine the AHS cafeteria as a situation where pure competition exists. where pure competition exists. – What, specifically, might you see?What, specifically, might you see?– List as many answers as possible.List as many answers as possible.

Monopolistic CompetitionMonopolistic Competition

CharacteristicsCharacteristics::

Large number of buyers and sellersLarge number of buyers and sellers

Product differentiationProduct differentiation– Products are not identical.Products are not identical.– Either real or perceived differencesEither real or perceived differences

Non-price competitionNon-price competition– Use of advertising or other promotionsUse of advertising or other promotions

Monopolistic Competition, cont.Monopolistic Competition, cont.

ResultsResults::

By making its product different, each competitor By making its product different, each competitor tries to attract more customers and monopolize tries to attract more customers and monopolize a small portion of the market.a small portion of the market.

Similar products sell within a narrow price range Similar products sell within a narrow price range without greatly affecting a seller’s total sales or a without greatly affecting a seller’s total sales or a competitors’.competitors’.

Charging a higher price depends on convincing Charging a higher price depends on convincing consumers that the product is better than others.consumers that the product is better than others.

Monopolistic Competition, cont.Monopolistic Competition, cont.

ExamplesExamples::

Athletic footwearAthletic footwear– Differences: shock-absorbing soles, lighter Differences: shock-absorbing soles, lighter

weight, additional ankle support, etc.weight, additional ankle support, etc.

AspirinAspirin– Differences are largely imaginary.Differences are largely imaginary.

Group Activity:Group Activity:

In groups, discuss and write answers to the In groups, discuss and write answers to the following:following:

Imagine the AHS cafeteria as a situation Imagine the AHS cafeteria as a situation where monopolistic competition exists. where monopolistic competition exists. – What, specifically, might you see?What, specifically, might you see?– List as many answers as possible.List as many answers as possible.

OligopolyOligopoly

CharacteristicsCharacteristics::

Market dominated by small number of Market dominated by small number of large sellerslarge sellers

One firm can cause change in output, One firm can cause change in output, sales and prices of entire industrysales and prices of entire industry

Product may be differentiated or Product may be differentiated or standardizedstandardized

Oligopoly, cont.Oligopoly, cont.

ResultsResults::Still competitive, but further from pure Still competitive, but further from pure competition than monopolistic competitioncompetition than monopolistic competitionInterdependent behavior: when one firm does Interdependent behavior: when one firm does something, others usually follow.something, others usually follow.Price wars – higher prices discouragedPrice wars – higher prices discouragedPrice leadership – occurs when one firm initiates Price leadership – occurs when one firm initiates most of the price changesmost of the price changesNon-price competition preferredNon-price competition preferred– May result in collusion (formal cooperation) such as May result in collusion (formal cooperation) such as

price fixingprice fixing

Oligopoly, cont.Oligopoly, cont.

ExamplesExamples::Auto industryAuto industrySteel industrySteel industryAirline industryAirline industrySome industries are becoming Some industries are becoming oligopolistic:oligopolistic:– Soft drinks (Coke, Pepsi)Soft drinks (Coke, Pepsi)– Fast food (McDonald’s, Burger King, Fast food (McDonald’s, Burger King,

Wendy’s)Wendy’s)

Group Activity:Group Activity:

In groups, discuss and write answers to the In groups, discuss and write answers to the following:following:

Imagine the AHS cafeteria as a situation Imagine the AHS cafeteria as a situation where an oligopoly exists. where an oligopoly exists. – What, specifically, might you see?What, specifically, might you see?– List as many answers as possible.List as many answers as possible.

MonopolyMonopoly

CharacteristicsCharacteristics::

Exact opposite of pure competitionExact opposite of pure competition

One seller of a product with no close One seller of a product with no close substitutessubstitutes

Pure monopolies almost never exist.Pure monopolies almost never exist.– Most qualify as near monopolies.Most qualify as near monopolies.

Monopoly, cont.Monopoly, cont.

TypesTypes::Natural monopolyNatural monopoly– Costs minimized by having a single firm produce the Costs minimized by having a single firm produce the

productproduct– Firm usually more efficient when largerFirm usually more efficient when larger– Examples: telephone, electricity, waterExamples: telephone, electricity, water

Geographic monopolyGeographic monopoly– Exists because of locationExists because of location– Competition may eventually existCompetition may eventually exist– Examples: drugstore in small town, gas station at a Examples: drugstore in small town, gas station at a

lonely highway exitlonely highway exit

Monopoly, cont.Monopoly, cont.

Technological monopolyTechnological monopoly– Exists when a firm invents a new productExists when a firm invents a new product– Often protected temporarily by a patentOften protected temporarily by a patent– Example: MicrosoftExample: Microsoft

Government monopolyGovernment monopoly– Govt.-owned business without competitionGovt.-owned business without competition– Usually involve products not adequately provided by Usually involve products not adequately provided by

private industryprivate industry– Examples: US Postal Service, water service in some Examples: US Postal Service, water service in some

townstowns

Group Activity:Group Activity:

In groups, discuss and write answers to the In groups, discuss and write answers to the following:following:

Imagine the AHS cafeteria as a situation Imagine the AHS cafeteria as a situation where a pure monopoly exists. where a pure monopoly exists. – What conditions would be necessary for the What conditions would be necessary for the

cafeteria to become a pure monopoly?cafeteria to become a pure monopoly?– What, specifically, might you see?What, specifically, might you see?– List as many answers as possible.List as many answers as possible.