chapter 7 market structures aww, snap! market structure ► market structure refers to the ways that...

Chapter 7Chapter 7Market StructuresMarket Structures

Aww, Snap!

Market StructureMarket Structure

►Market structure refers to the ways Market structure refers to the ways that competition occurs, based on the that competition occurs, based on the number of firms, the similarity of the number of firms, the similarity of the products being sold and the ease of products being sold and the ease of entry for new firms or exit for existing entry for new firms or exit for existing firms.firms.

►Four Basic StructuresFour Basic Structures*Perfect Competition*Perfect Competition *Monopoly*Monopoly

*Monopolistic *Monopolistic *Oligopoly*Oligopoly

Barriers to EntryBarriers to Entry

►BarriersBarriers – factors that make it – factors that make it difficult for new firms to enter difficult for new firms to enter a marketa market

►Barriers lead to imperfect Barriers lead to imperfect competitioncompetition

Examples of BarriersExamples of Barriers

►Start-Up CostsStart-Up Costs – The expenses – The expenses a new business must pay a new business must pay before it can enter the marketbefore it can enter the market

►High Start-Up Costs prevent High Start-Up Costs prevent new firms from enteringnew firms from entering

Examples of BarriersExamples of Barriers

►TechnologyTechnology – how much – how much training does it take to enter training does it take to enter the market?the market?

Examples of BarriersExamples of Barriers

►GovernmentGovernment – may require – may require licensing, certification, licensing, certification, approval, etc.approval, etc.

Perfect CompetitionPerfect Competition

►Perfect CompetitionPerfect Competition – a market – a market where a large number of firms where a large number of firms are all producing essentially are all producing essentially the same productthe same product

ConditionsConditions Perfect Perfect CompetitionCompetition

►Many buyers and sellers Many buyers and sellers participateparticipate

►Sellers offer identical Sellers offer identical productsproducts

►Products that are the Products that are the same no matter who same no matter who makes or sells them are makes or sells them are commoditiescommodities

Perfect CompetitionPerfect Competition

Buyers and sellers are well Buyers and sellers are well informed about productsinformed about products

Sellers are able to enter Sellers are able to enter and exit the market freelyand exit the market freely

Price and OutputPrice and Output

►A perfectly competitive market A perfectly competitive market produces the lowest produces the lowest sustainable prices possiblesustainable prices possible

►With many firms competing, With many firms competing, each firm lowers its prices to each firm lowers its prices to the point of just covering their the point of just covering their costscosts

MonopolyMonopoly

►MonopolyMonopoly – Barriers prevent – Barriers prevent firms from entering a market firms from entering a market that has a single supplierthat has a single supplier

Factors that Create a Factors that Create a MonopolyMonopoly

►1. 1. Economies of ScaleEconomies of Scale – – average cost of production average cost of production always drops, never increasesalways drops, never increases

►2. 2. Natural MonopolyNatural Monopoly – market – market runs most effectively when one runs most effectively when one large firm provides all outputlarge firm provides all output

Factors that Create a Factors that Create a MonopolyMonopoly

►Natural Monopolies are usually Natural Monopolies are usually given special status by the given special status by the government, but the government, but the government is allowed to government is allowed to control their pricescontrol their prices

►New technologies can destroy New technologies can destroy a natural monopolya natural monopoly

Government MonopoliesGovernment Monopolies

►Government MonopolyGovernment Monopoly – a – a monopoly created by the monopoly created by the governmentgovernment

Typical High School Boy Typical High School Boy Questions?Questions?

Wait… what’s a

government monopoly?

Government MonopoliesGovernment Monopolies

►Government Monopoly – a Government Monopoly – a monopoly created by the monopoly created by the governmentgovernmentThere are There are 3 types3 types of of government monopolies, government monopolies, each with a different reason each with a different reason for being formedfor being formed

Three Kinds of Government Three Kinds of Government MonopolyMonopoly

►Technological MonopolyTechnological Monopoly – – government issues a patentgovernment issues a patentPatentPatent – exclusive rights to – exclusive rights to sell a good or service for a sell a good or service for a specific period of timespecific period of time

Three Kinds of Government Three Kinds of Government MonopolyMonopoly

►Franchises and LicensesFranchises and LicensesFranchises – government Franchises – government allows company to create an allows company to create an exclusive market for their exclusive market for their brand name and productsbrand name and products

Three Kinds of Government Three Kinds of Government MonopolyMonopoly

►Franchises and LicensesFranchises and LicensesLicenses – government Licenses – government grants a firm the right to grants a firm the right to operate a businessoperate a business

Three Kinds of Government Three Kinds of Government MonopolyMonopoly

►Industrial OrganizationsIndustrial Organizations – – government allows companies government allows companies in an industry to restrict the in an industry to restrict the number of firms in the marketnumber of firms in the market

Output DecisionsOutput Decisions

►Do you emphasize price or Do you emphasize price or output?output?Price-TakersPrice-Takers – in a competitive – in a competitive market, businesses have no market, businesses have no control over their own pricescontrol over their own prices

Price-SettersPrice-Setters – in a non- – in a non-competitive market, business competitive market, business can choose what price to chargecan choose what price to charge

Price DiscriminationPrice Discrimination

►Do you think Do you think monopolies monopolies usually usually charge the charge the same price to same price to all of their all of their customers?customers?

Price DiscriminationPrice Discrimination

Price DiscriminationPrice Discrimination

►Price Price DiscriminationDiscrimination – – dividing dividing consumers into consumers into different groups different groups and charging and charging different prices different prices to each group to each group

Price DiscriminationPrice Discrimination

►Monopolies are Monopolies are not the only not the only companies that do companies that do thisthis

►Any company with Any company with market power, the market power, the ability to control ability to control prices and output, prices and output, can use can use discriminationdiscrimination

Price DiscriminationPrice Discrimination

►The easiest way to maximize The easiest way to maximize profit for a monopoly is to profit for a monopoly is to identify consumers who will identify consumers who will not pay full price, and offer not pay full price, and offer them a “discount”them a “discount”

►These are called targeted These are called targeted discounts – think of airline discounts – think of airline fares, manufacturers rebates, fares, manufacturers rebates, student discountsstudent discounts

Limits to Price DiscriminationLimits to Price Discrimination

►1. Firm must have some 1. Firm must have some market powermarket power

►2. There must be distinct 2. There must be distinct consumer groupsconsumer groups

►3. It must be difficult for 3. It must be difficult for consumers to resell the consumers to resell the productproduct

Monopolistic CompetitionMonopolistic Competition

►Monopolistic CompetitionMonopolistic Competition – – many companies compete in many companies compete in an open market, but sell an open market, but sell products that are products that are slightly slightly differentdifferent from one another from one another

ExampleExample

4 Characteristics4 Characteristics of of Monopolistic CompetitionMonopolistic Competition

►1. Many Firms1. Many Firms►2. Few Artificial Barriers to 2. Few Artificial Barriers to

EntryEntry►3. Slight Control Over Prices3. Slight Control Over Prices►4. Differentiated Products4. Differentiated Products

Other Means of CompetitionOther Means of Competition

►In a Monopolistic Competition, In a Monopolistic Competition, firms firms competecompete in a variety of in a variety of ways other than pricesways other than pricesPhysical CharacteristicsPhysical CharacteristicsLocationLocationService Level/QualityService Level/QualityAdvertising and ImageAdvertising and Image

OligopolyOligopoly

►OligopolyOligopoly – a market – a market dominated by a few large, dominated by a few large, profitable firmsprofitable firms

►If 4 of the largest firms can If 4 of the largest firms can claim 70% or more of the claim 70% or more of the market share, it is an oligopolymarket share, it is an oligopoly

ExampleExample

ExampleExample

CharacteristicsCharacteristics of Oligopoly of Oligopoly

►1. Many Barriers to Entry1. Many Barriers to Entry►2. Cooperation and Collusion2. Cooperation and Collusion

Price LeadershipPrice Leadership – market – market leader raises prices, other leader raises prices, other firms follow suit (can also firms follow suit (can also cause price war, though)cause price war, though)

Characteristics of OligopolyCharacteristics of Oligopoly

►1. Many Barriers to Entry1. Many Barriers to Entry►2. Cooperation and Collusion2. Cooperation and Collusion

CollusionCollusion – an agreement – an agreement among members of an among members of an oligopoly to set prices and oligopoly to set prices and production levelsproduction levels

Characteristics of OligopolyCharacteristics of Oligopoly

►1. Many Barriers to Entry1. Many Barriers to Entry►2. Cooperation and Collusion2. Cooperation and Collusion

CollusionCollusion causes price fixing, causes price fixing, where firms agree to sell at where firms agree to sell at the same or similar pricesthe same or similar prices

It’s It’s illegalillegal, by the way, by the way

CharacteristicsCharacteristics of Oligopoly of Oligopoly

►1. Many Barriers to Entry1. Many Barriers to Entry►2. Cooperation and Collusion2. Cooperation and Collusion

Cartels – an agreement by Cartels – an agreement by producers to coordinate producers to coordinate prices and productionprices and production

Legal in some countries, Legal in some countries, not herenot here

Regulation and DeregulationRegulation and Deregulation

►What might a firm do to What might a firm do to increase its market power?increase its market power?Form a cartelForm a cartelMerge with competitorsMerge with competitorsPredatory PricingPredatory Pricing - - Temporarily lower prices to Temporarily lower prices to put others out of businessput others out of business

Regulation and DeregulationRegulation and Deregulation

►Government has Antitrust Government has Antitrust Laws in place to prevent such Laws in place to prevent such practicespractices

►Trust – a business combination Trust – a business combination similar to a cartelsimilar to a cartel

►Began with Sherman Antitrust Began with Sherman Antitrust Act in 1890Act in 1890

Fair or Unfair?Fair or Unfair?

►Nike is one of the world’s Nike is one of the world’s largest and most popular largest and most popular shoe manufacturersshoe manufacturers

►Once Nike introduced Once Nike introduced clothing, it forced companies clothing, it forced companies that wanted to buy its shoes that wanted to buy its shoes to buy its clothes as wellto buy its clothes as well

Fair or Unfair?Fair or Unfair?

►Disney, ABC, AOL, and Time-Disney, ABC, AOL, and Time-Warner have merged togetherWarner have merged together

►They now control the Disney They now control the Disney Channel, Cartoon Network, Channel, Cartoon Network, and the WB, which is a basic and the WB, which is a basic monopoly on children's monopoly on children's programmingprogramming

Regulation and DeregulationRegulation and Deregulation

►Government can step in and Government can step in and break up monopolies based on break up monopolies based on the Sherman Antitrust Actthe Sherman Antitrust Act

►Famous examples: John D. Famous examples: John D. Rockefeller’s Standard Oil Rockefeller’s Standard Oil (1911), AT&T (1982)(1911), AT&T (1982)

Regulation and DeregulationRegulation and Deregulation

►Government can also block Government can also block mergers from happeningmergers from happening

►MergerMerger – when one company – when one company joins with anotherjoins with another

►Government uses research to Government uses research to see whether the merger will see whether the merger will help or hurt consumershelp or hurt consumers

Regulation and DeregulationRegulation and Deregulation

►The Republican Party has The Republican Party has typically supported typically supported deregulationderegulation – when the government stops – when the government stops making decisions about what making decisions about what businesses can and cannot dobusinesses can and cannot do

►Government uses regulation and Government uses regulation and deregulation for the same deregulation for the same purpose – to promote competitionpurpose – to promote competition