Chapter 6

Market Structures

– Perfect Competition• Characteristics

– Many small firms

– Easy Entry and exit

– Identical product

– No nonprice competition

– Price taker: P = MR

• Profit Maximization– MR = MC

– Profits invite entry, Firms enter, Supply increases, Price falls

– Breakeven in the long run

– Losses cause firms to exit, Supply increases Price rises

• Monopoly– Characteristics

• 1 Seller (Firm and industry are the same)• No close substitutes• Price Maker• Non-price competition (goodwill advertising)• Barriers to Entry

– Economies of scale (natural monopoly)– Legal Barriers

» Government sanctioned - MLB» Patents and Licenses» Inventions » Innovations» Copyright – literary, music or artistic work

– Control of a essential (strategic) resource

– Potential to always make a profit– MR = MC– Price Discrimination – charging different customers different

prices for the same product• Conditions• Must have monopoly power• Market segmentation - Can divide the market

» Location» Time of Use» Age» Gender» Income» Type of customer

• Market Sealing - Buyers can't resell• Inelastic demand

Turns loss into a profit

– Monopolistic Competition• Characteristics

– Many firms

– Easy entry and exit

– Similar products

» Product differentiation

» Physical

» Quality

» Services and conditions

» Location

» Advertising, Image, Brand name and packaging

» Developing and improving the product– Product Variety

– Non-price competition (local radio, newspaper, and TV)» Advertising (local radio, newspaper, and TV)» Types» Informational» Persuasive – increases the demand» Direct Marketing – telephone, post, e-mail» Mass Marketing – TV, newspaper, radio,

magazines» Interactive Marketing – internet, sales booth» Consumer follow up» Brand names and Trademarks

– Price Searcher– Examples: stores in the mall and shopping centers

• Model: MR = MC– Profits in the short run, firms enter with a slightly

different product– Long run – breakeven– Demand saturation – satisfying the total demand for a

product in an area– Explains the turnover rate among firms

– Oligopoly• Characteristics

– Few dominant large firms– Difficult entry and exit

» Barriers to entry» Large capital costs» Economies of scale» Large advertising budget» Brand loyalty

– Much non-price competition (national TV and Magazines)– Firms are mutually interdependent– Differentiated product

» New and improved» New models for cars

– Concentration ratio =sales of top 4/sales of the industry

• Models– Cartels and collusion

» Firms agree to set prices and/or market share– Price Leadership - One firm sets the price and others

follow– Kinked Demand Curve - firms follow price decrease but

not an increase– Game theory – shows interdependence among firms

• Antitrust Laws– Deal with market power and monopolies– Laws

• Sherman Act (1890) - Antimonopoly– Contracts in restraint of trade– Price fixing– Monopolies

» Collusion• Clayton Act (1914) – unfair business practices

– Price discrimination– Tying contracts – buy one, must buy the other– Acquisition of stock of competing firms– Interlocking directorates– Exclusive dealing or territories– Predatory pricing – selling below costs to drive out competition

» Price Wars

• Celler-Kefauver Act (1950)– Anti-merger act – merger by stock acquisition– Types of Mergers

» Vertical – firm and supplier» Horizontal – competitors» Conglomerate - unrelated

– Exemptions• Labor Unions• Exporting Firms• Regulated industries

– Public utilities

• Professional Baseball

• Technological Advance - New and better goods and ways of producing them

– Invention - the discovery of a new product or production process

– Innovation • Product innovation - new and improved commercial use

of products• Process innovation - new and improved commercial use

of production methods

– Diffusion - copying or imitating an innovation

• Industrial Organization of Sports: Sports Market Outcomes

– Market Power in sports – teams have exclusive territory (geographical markets)

• Multiple Teams– Cities can support more than one team– Parts of cities are different

– Price Discrimination• This is not, different prices for different seat

locations

– Why Leagues? Making Play and Profits• Goals

– Restrict entry and assign territory» One seller per region» Leagues block entry and exit

– Teams differentiate product to ensure loyalty» Some teams earn economic profits

• Single-Entity Cooperation: Making League Play Happen– Scheduling

» Each team wants to draw the most fans» Wants to play the most sought after teams

– Setting the rules» Each must play under the same rules» Altering rules changes the pattern of winning» Time of the game» More action» Rule interpretation?

– Cooperation and Championship» Ultimate fan demand» Playoffs» Extend the season and fan interest» Increases revenues without increasing talent costs» Must determine the proper number of games

• Joint Venture Cooperation: Economics of League Behavior– Owners control leagues

» If leagues don’t make owners better off than without leagues they will leave

» Exclusive Territories: Territory definition and protection

» Market Power» Expressed the Franchise Agreement» Rights to name, logo and properties» Must have leagues permission to move

– Economic Impacts» Quantity restriction» Season length» Exclusive territory: limit the number of teams» League announces expansion long lines form» No substitute» New leagues are discouraged» Monopoly power – high prices and reduced output » Create revenue, competitive and payroll imbalance

» Expansion and Relocation» Based on » Financial value» Risk of leaving a city open for a new league» Dominant league always prevails» Will the economy support the team» Result: less sport, fewer locations, higher prices» League-level negotiations with TV, players, unions

and host cities

» Remedies for imbalances» Gate and National TV Revenue Sharing» home and visiting team split» by agreed percentages» has no effect» Local Revenue Sharing» adds concessions, parking and local TV» works» Player drafts» Reverse order of finish» no effect» Luxury Taxes» Progressive tax above a maximum» works» Salary Caps – Caps on spending» no effect

• Leagues act as cartels• Economic Competition

– Game theory» Both leagues spend high and become major» First league has established location and player

talent» Rival league has fewer resources

• Antitrust– MLB is a legal monopoly and is exempt– Curt Flood Act of 1998

• MLB players can sue the league• Removed MLB exemption

– Sports Broadcasting Act of 1961 - league wide TV contracts are exempted from Antitrust laws

• Sports leagues can act as cartels when bargaining with TV networks

• Blackout laws

– Merger facilitation between leagues by Congress

• Market Structure in Music– Oligopoly

• Obtained by mergers– Horizontal merger: Sony and EMI– Vertical merger: Sony and Columbia records

– Artists differentiate their product– Difficult entry and exit– Few dominate interdependent firms

• Artists• Record companies• Distributors

– Universal 29.7%– Warner 16.3%– BMG 15.2%– Sony 14.6%– EMI 10.9%

– High concentration Ratio: 75.8%– Pricing

• Price leadership• Kinked Demand curve

– Technological advance• Records• 8-track• Cassettes• CD’s• DVD• MP3

• Industrial Organization in Movies– Market Structure: Oligopoly

• Major forces in film– Patents and copy rights: Intellectual property– Technology

» Cable» Home video» Television

– Capital: large amounts needed for marketing, production, and distribution

– 1948 separation of distribution and exhibition – The emergence of large multiplex theater chains in suburban

areas» Economies of scale

– Growth of independent production and distribution organizations

• Exhibition leaders: make money on concessions– Regal entertainment Group (United Artists)– Loews Cineplex– AMC Entertainment

• Distribution leaders– Walt Disney– Sony– Paramount– 20th Century Fox– Warner Brothers– Universal– MGM

– Antitrust: 1948 case• U.S. vs. Paramount Pictures, et al

– Price Discrimination• Age• Time of use

• Fashion Laws– Laws

• Textile and Wool Acts: label requirements• Trade and Development Act (2000): child labor• Unions

– UNITE: Garment workers union

• Piracy: illegal copies of a product– Counterfeit: exact copies

– Structure• High fashion: oligopoly• Others: monopolistic competition