competition & market structures. i.competition a.four basic levels or degrees of competition...
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Competition Competition & &
Market StructuresMarket Structures
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I.I. CompetitionCompetitionA.A. Four basic levels or degrees of Four basic levels or degrees of
competitioncompetitionB.B. There are costs and benefits to There are costs and benefits to
eacheachC.C. Consumers benefit most from Consumers benefit most from
vigorous competition vigorous competition 1.1. What are the effects of competition?What are the effects of competition?
D.D. Govt. oversees markets to ensure Govt. oversees markets to ensure adequate levels (FTC)adequate levels (FTC)
Lower pricesImproved qualityIncreased variety and innovationMore efficient use of resources
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Levels of Competition Continuum
Most Competitive Least Competitive <---l---------------l----------------l--------------l-------->
Perfect Monopolistic Oligopoly Monopoly (or pure) Competition Competition
Each market structure has a series Each market structure has a series of differentiating characteristics of differentiating characteristics
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Questions:Questions:
1.1. What is the least competitive What is the least competitive market?market?
2.2. What is the most competitive What is the most competitive market?market?
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II.II. Perfect CompetitionPerfect CompetitionA.A. Theoretically most competitive market Theoretically most competitive market
typetypeB.B. Conditions:Conditions:
1.1. Large number of small businessesLarge number of small businesses2.2. Identical productsIdentical products3.3. Independent, well-informed buyers & sellersIndependent, well-informed buyers & sellers4.4. Free entry to and exit from the marketFree entry to and exit from the market5.5. No advertisingNo advertising6.6. Low profits, closely related to costsLow profits, closely related to costs
C.C. Model (theoretical extreme) used to Model (theoretical extreme) used to evaluate other marketsevaluate other markets
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D.D. Examples:Examples:1.1. Nothing exactly Nothing exactly
reflects perfectly reflects perfectly competitive competitive markets – close:markets – close:a.a. Local fruit and Local fruit and
vegetable farmingvegetable farming
b.b. Local truckingLocal trucking
c.c. Computer chipsComputer chips
d.d. Industrial nuts and Industrial nuts and boltsbolts
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III.III. Monopolistic CompetitionMonopolistic CompetitionA.A. Has all the Has all the
conditions of pure conditions of pure competition, except competition, except identical productsidentical products
B.B. Second most Second most competitive market competitive market structurestructure
C.C. Conditions:Conditions:1.1. Many firmsMany firms2.2. Product differentiationProduct differentiation3.3. Non-price competition Non-price competition
a.a. Heavy advertisingHeavy advertising4.4. Market (S&D) largely Market (S&D) largely
sets pricesets price5.5. Entry into the market Entry into the market
is easy is easy b.b. relatively low start-relatively low start-
up costsup costs
Exception is brand name.
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D.D. Examples:Examples:
1.1. Women’s apparelWomen’s apparel
2.2. ShoesShoes
3.3. RestaurantsRestaurants
4.4. Law officesLaw offices
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Questions:Questions:
3.3. What is the biggest difference What is the biggest difference between perfect and monopolistic between perfect and monopolistic competition?competition?
4.4. What are the conditions or What are the conditions or characteristics of monopolistic characteristics of monopolistic competition?competition?
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IV.IV. OligopolyOligopolyA.A. Market structure in Market structure in
which a few large which a few large sellers dominate the sellers dominate the industryindustry
B.B. Conditions:Conditions:1.1. Few large firmsFew large firms2.2. Product differentiationProduct differentiation
a.a. Differentiated Differentiated OligopolyOligopolyi.i. Fair amount of Fair amount of
differentiationdifferentiation
b.b. Pure OligopolyPure Oligopoly
i.i. Homogenous Homogenous productproduct
3.3. Some advertisingSome advertising4.4. Entry into market is Entry into market is
difficult (high costs)difficult (high costs)
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C.C. ExamplesExamples
1.1. Auto IndustryAuto Industry
2.2. Airline IndustryAirline Industry
3.3. Iron ore IndustryIron ore Industry
4.4. Coal IndustryCoal Industry
Differentiated Oligopolies
Pure Oligopolies
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A.A. When one oligopolist lowers prices, others follow When one oligopolist lowers prices, others follow B.B. Collusion: when firms engage in formal Collusion: when firms engage in formal
agreements to set prices or supply agreements to set prices or supply 1.1. Cartels (OPEC)Cartels (OPEC)
C.C. Price-setting: a particular type of collusionPrice-setting: a particular type of collusionD.D. Both are illegal Both are illegal
1.1. limits effects of competition, hurts consumerlimits effects of competition, hurts consumer
V.V. Competition in oligopolistic Competition in oligopolistic marketsmarkets
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Questions:Questions:5.5. Why is entry into an oligopolistic Why is entry into an oligopolistic
market difficult?market difficult?6.6. Why is it easier to collude in Why is it easier to collude in
oligopolies than monopolistically oligopolies than monopolistically competitive markets?competitive markets?
7.7. Why is there less competition in an Why is there less competition in an oligopoly than perfectly or oligopoly than perfectly or monopolistically competitive monopolistically competitive markets?markets?
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VI.VI. MonopolyMonopoly
A.A. Market structure with one seller Market structure with one seller dominating the marketdominating the market
B.B. Least competitive marketLeast competitive market
C.C. Conditions:Conditions:1.1. Extensive influence over priceExtensive influence over price
2.2. No differentiationNo differentiation
3.3. Some advertising (mostly image)Some advertising (mostly image)
4.4. Entry blockedEntry blocked
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VII.VII. TypesTypesA.A. Natural MonopolyNatural Monopoly
1.1. Wasteful, Wasteful, inefficient to inefficient to allow duplication; allow duplication; cheaper due to cheaper due to economies of economies of scale of a larger scale of a larger firm (economies of firm (economies of scale)scale)a.a. Gas and electric Gas and electric
companiescompanies
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B.B. Geographic MonopolyGeographic Monopoly1.1. One seller — market won’t support two One seller — market won’t support two
due to geographic isolationdue to geographic isolationa.a. One drug store or bank in a small townOne drug store or bank in a small town
b.b. One gas station on a lonely stretch of a One gas station on a lonely stretch of a desert highwaydesert highway
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C.C. Technological MonopolyTechnological Monopoly1.1. Patent/copyrightPatent/copyright
2.2. 20 years20 years
3.3. To encourage innovationTo encourage innovationa.a. Can be abused (Xerox’s 100s of patents)Can be abused (Xerox’s 100s of patents)
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Strange PatentsStrange Patents
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D.D. Government MonopolyGovernment Monopoly1.1. Government owns and operates the Government owns and operates the
monopolymonopoly
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Question:Question:
8.8. How or why is California Edison a How or why is California Edison a natural monopoly?natural monopoly?
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VIII.VIII. Other limits to competitionOther limits to competitionA.A. MergersMergersB.B. Acts of collusionActs of collusionC.C. Requiring licensing Requiring licensing
1.1. Beauticians/taxi driversBeauticians/taxi driversa.a. lobbyinglobbying
D.D. Trade barriersTrade barriers1.1. Tariffs: tax on imports (domestic Tariffs: tax on imports (domestic
protectionism)protectionism)2.2. Quotas: set number of imports (domestic Quotas: set number of imports (domestic
protectionism)protectionism)3.3. Embargos: refusing to trade with a country Embargos: refusing to trade with a country
(political coercion)(political coercion)4.4. Blockade: physically blocking trade (political Blockade: physically blocking trade (political
coercion)coercion)
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QuestionsQuestions1.1. What’s a perfectly competitive market What’s a perfectly competitive market
like?like?2.2. What is the difference between perfect What is the difference between perfect
competition and monopolistic competition and monopolistic competition?competition?
3.3. What’s an oligopoly?What’s an oligopoly?4.4. What is collusion?What is collusion?5.5. Provide two examples of each market Provide two examples of each market
structurestructure6.6. How do trade barriers limit competition?How do trade barriers limit competition?
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ActivityActivity
Create a diagram or picture chart Create a diagram or picture chart indicating the unique characteristics indicating the unique characteristics of each market structure on a sheet of each market structure on a sheet of white paper folded into fourthsof white paper folded into fourths