Competition and Market Structures

Perfect Competition

Market Structure

Characterized by the degree of competition among business in the same industry

Types of Competition: Pure Competition Monopolistic Competition Oligopoly Monopoly

Perfect (Pure) Competition

When a large number of buyers and sellers exchange identical products under five conditions

1) There should be a large number of buyers and sellers

2) The products should be identical

3) Buyers and sellers should act independently

4) Buyers and sellers should be well-informed

5) Buyers and sellers should be free to enter, conduct, or get out of business

Perfect Competition

Under a Perfect Competition Supply and demand set the

equilibrium price Each firms sets a level of output that

will maximize its profits at that price

Imperfect Competition Refers to market structures that lack

one or more of the five conditions

Monopolistic Competition

Meets all conditions of perfect competition except for identical products

Use product differentiation Real or imagined differences between

competing products in the same industry Use non-price competition

Advertising, giveaways, promotional campaigns

Sell within a narrow price range to try to raise the price = profit maximization

Oligopoly

A few large businesses dominate an industry

When one business makes a move, the others usually follow Ex: a price war…cuts in airline ticket

Sometimes results in collusion or price-fixing which is illegal Collusion: formal agreement to set prices Price-Fixing: charge the same

Monopoly

One seller of a product that has no close substitutes

Natural Monopoly

Geographic Monopoly

Technological Monopoly

Government Monopoly

Natural Monopoly

More efficient for only one business to produce the goods Ex: Marta, Water co.

Government gives permission

Geographic Monopoly

No other business chooses to compete in that area Ex: small town drugstore

Professional sports teams

Technological Monopoly

Results from new discoveries and inventions.

The government grants these monopolies through the issue of patents and copyrights Patents: inventions

Copyrights: publish

Government Monopoly

Involves products people need that private industry might not adequately provide

Vocabulary

1. Perfect competition

2. Non-price competition

3. Oligopoly

4. Collusion

5. Economies of scale

A. Market structure in which a few very large sellers dominate the industry

B. Market situation in which a large number of well-informed and independent buyers and sellers exchange identical products

C. The use of advertising, giveaways, and other promotional campaigns to convince buyers one product is better than another

D. A situation in which the average cost of production fails as the firm gets larger

E. A formal agreement to set prices or to otherwise behave in a cooperative manner

Market Failures

Market Failures

► Four conditions needed ► Adequate competition must exist

► Buyers and sellers must be well-informed; opportunities in the market

► Resources must be free to move from one industry to another

► Prices must reasonably reflect the cost of production, including rewards

► Failure occurs when these are altered

Inadequate Competition

Decrease of mergers and acquisitions Inefficient resource allocation = no

incentive to use resources carefully Reduced output = monopoly can retain

high prices by limiting supply Large business can exert its economic

power over politics

Inadequate Competition

Failures on the Demand side are harder to correct than failures on the Supply side

Supply side: No competition exists if a monopolist

dominates

Demand Side Buyers can be found but….how many want

hydroelectric dams, space shuttles, etc…

Inadequate Information

Consumers, businesspeople, and government officials must have adequate information about market conditions

Information Easy to find in want ads, sale prices in

newspaper

If difficult to find = market failure

Resource Immobility

Occurs when land, capital, labor, and entrepreneurs stay with in a market Returns are slow

Remain unemployed

Resources will not or cannot move to a better market The existing market does not always

function efficiently

Externalities

Unintended side effects Negative

Harm, cost, or inconveniences suffered by a third party

Positive Benefits received by someone who had

nothing to do with the activity that created the benefit

Market failures Market prices that buyers and sellers pay do

not reflect the cost and/or benefits of the action

Public Goods

Products that everyone consumes Use by one individual does not diminish the

satisfaction or value to others Uncrowded highways, flood control measures,

national defense, police and fire protection

Market is successful in satisfying individual wants and needs; fails to satisfy them on a collective basis

Government usually has to supply them

Vocabulary Review

1. Market failure

2. Externality

3. Negative externality

4. Positive externality

5. Public goods

A. An unintended side effect that either benefits or harms an uninvolved third party

B. An unwanted harm, cost, or inconvenience suffered by a third party because of actions by others

C. Products that are collectively consumed by everyone

D. A benefit received by third party that had nothing to do with the activity that generated the benefit

E. Occurs when any one of the four conditions necessary for a competitive free enterprise economy is significantly altered

The Role of Government

Antitrust Legislation

Trust: legally formed combinations of corporations or companies

Antitrust laws prevent or break up monopolies, preventing failures due to inadequate competition

Federal Trade Commission

Competition in the market is protected by the government through antitrust legislation and the creation of the Federal Trade Commission.

Federal Trade Commission: has the authority to stop any unfair business practices that reduce or limit competition

Antitrust Legislation

1890: Sherman Antitrust Act:1st law against monopolies

1914: Clayton Antitrust Act: outlawed price discrimination

1914: The Federal Trade Commission: empowered to issues cease and desist orders, requiring companies to stop unfair business practices

1936: Robinson-Patman Act: outlawed special discounts to some customers

Government Regulation

Goal is to set the same level price and service that would exist if a monopolistic business existed under competition

Use: tax system to regulate businesses with negative externalities Prevents market failures

Public Disclosure

Requires businesses to reveal information about Products

Services to Public: Banks, corporations, lending institutions

Provides information to prevent market failures “Truth in Advertising” laws (false claims)

Indirect Disclosure

Government support of the internet Availability of Gov’t documents Businesses post information

Modified Free Enterprise

Government intervention to encourage competition,

Prevent monopolies

Regulate industry

Fulfill the need for public goods

Modified Free Enterprise

Today’s US Economy Mixed of different market structures

Different business organization

Varying degrees of government regulation

Vocabulary Review

1. Trust

2. Clayton Antitrust Act

3. Price Discrimination

4. Robinson-Patman

Act

5. Cease and desist order

A. Strengthened previous legislation regarding price discrimination

B. Built on Sherman Antitrust Act by extending government powers against monopolies

C. An FTC ruling requiring a company to stop an unfair business practice

D. Legally formed combinations of corporations or companies

E. Practice of charging customers different prices for the same product