Download - CHAPTER # 7 Market & Market Structure
CHAPTER # 7 Market & Market Structure
MonopolyOligopoly
Technological MonopolyTechnological Monopoly“Patent”
Ex: Rubik’s Cube
Government MonopolyGovernment MonopolyOwned & operated by G
Ex: U.S. Mail State Highways
Natural MonopolyNatural MonopolyCompetition would be
chaotic. It is naturalto give it to one co.
Ex: Utilities
Geographic MonopolyGeographic MonopolyOnly seller in a specific area
Example: Remote Store
Greyhound
Forney HighForney High
Basic Cable RateBasic Cable Rate
Cable TVCable TV
Waste Waste ManagementManagement
TXUTXU
U.S. MailU.S. Mail
Rubik’s Rubik’s CubeCube
MonopolyMonopoly[mono(1) poly (seller)]
Control over price: TotalProduct: unique
Ex: Comcast Cable TV
Monopolistic CMonopolistic Competitionompetition[Element of monopoly with
“product differentiation”]
Many [25-75] sellersControl over price: Some
Ex: Blue Jeans
““Price MakersPrice Makers””
MarketMarket[buyer & seller]StructuresStructures
[How many sellers] OligopolyOligopolyOliogo (few) poly (seller)
[A few control 70% of market
Differentiated ODifferentiated O ligopolyligopolyDifferentiated Products
Autos & Sneakers
Pure OligopolyPure OligopolyIdentical Products
(steel)
Control over price: Fair AmountDifferentiated or Identical
Perfect CompetitionPerfect CompetitionVery many [100s] of sellers
Control over price: NoneProducts: Identical
(Agricultural & fishery)
PerfectCompetition
MonopolisticCompetitionOligopoly
Pure MonopolyControl over PriceControl over Price
Most CompetitiveMost Competitive
MonMonopolistic opolistic CompetitionCompetitionPerfect CompetitionPerfect Competition
DARTDART
Price TakerPrice Taker
Blue JeansBlue Jeans
Barber ShopsBarber ShopsBeauty ShopsBeauty Shops
ReebokReebok[undifferentiated]
DuopolyDuopoly
Definition of Market
• Market is an area where buyer and seller meet with each other for the purpose of exchange of goods and services for money.
Types of advertising
• Competitive Advertising: Your product is better than the substitutes available
• Informative Advertising: To give information on price, quality, special features about product.
CLASSIFICATION OF MARKET
1 Perfect Competition.
2 Imperfect Competition.
Perfect CPerfect Competitionompetition – has a very large number of sellers (hundreds or thousands) of the same product (any agriculture or fishery product). They are all selling the same undifferentiated productsundifferentiated products (oranges).
Four Four Market ConditionsMarket Conditions Necessary For Perfect Competition Necessary For Perfect Competition
1. Very largelarge number of sellers (hundreds or thousands). Each seller will have only a small share of the market.
2. Similar or identicalidentical products (sweet corn/brocolli/eggs) which means there is no reason for non-price competition.
C C 3. EasyEasy entry and exit into the market.
4. AbsenceAbsence of price controls (too many sellers & consumers). Firm is price taker.
MonopolisticMonopolistic CompetitionCompetition – fairly large number (25-7525-75) of sellers competing to sell slightly differentiated products. Product differentiationdifferentiation (real or imaginaryreal or imaginary) is vital.This is the most common market structuremost common market structure.
Sellers try to decrease competitiondecrease competition by making their products different from the others. Since each firmattempts to make its product unique,product unique,uniqueunique, there is an “element of monopoly”,“element of monopoly”, thus monopolistic competitionmonopolistic competition. Product Product differentiationdifferentiation, when it is successful, enablesa firm to “establish a kind of monopoly”“establish a kind of monopoly” so that loyal customers will prefer it rather than buy from the competition. [They try to monopolize monopolize a smalla small portion portion of the marketof the market.].]
Even virtually identical products may be differentiateddifferentiated by brand name, packaging,by brand name, packaging, or designdesign but they are still similarsimilar. They have all the conditions of perfect competition except for product “differentiation.”“differentiation.”
They use ““nonpricenonprice”” methods of competition such as advertisingadvertising and improved serviceimproved service to increase sales. ReputationReputation is important [builds loyalty]. Most manufactured goods are made by only a few producers.
4 Market Conditions FMarket Conditions For or MonopolisticMonopolistic Competition Competition1.1. Farily large number ofFarily large number of sellers must exist.
2. The products are similarsimilar but they emphasize productproduct differentiationdifferentiation (differences among products). This is the one thing that separates monopolistic competition from perfectseparates monopolistic competition from perfect competitioncompetition.The differences may be realdifferences may be real or imaginary imaginary (a refrigerator withplastic or metal trays). AspirinAspirin, by federal law, has to havecertain chemicals but people believe highly advertised aspirinis better. RevlonRevlon offers 157 shades of lipstick157 shades of lipstick – 4141 are pinkpink.
3. Buyers must be well informed about differencesBuyers must be well informed about differences in products.Monopolistic competitors rely on informative and competitiveinformative and competitiveadvertising.advertising.
4. Easy to enter or exitEasy to enter or exit the industry. Few restrictions exist.
Monopolistic CompetitionMonopolistic Competition[element of monopoly [differentiation uniqueness] so calledmonopolistic competition]
This is the most common market structure – over 99% of all firms.
Examples of Monopolistic CompetitionExamples of Monopolistic CompetitionBlue Jeans Grocery Stores Candy BarsDry Cleaners Rock Concerts PizzaShoe Stores Cassette players ChickenToothpaste Book Stores Soaps and detergentsRestaurants Vacuum Cleaners Furniture StoresBarbershops Beauty Parlors Econ Textbook Co’s
“Econ,Econ”“Econ”
2OligopolyOligopoly – “the chosen few”“the chosen few” (3 or 4) firms control 70% of the market.
MonopolyMonopoly – 1 firm industry (Cable TV)
DuopolyDuopoly – 2 firm industry. (Coke & Pepsi)[P&G (47%) & Kim-Clark (30%) in diapers]
““Oligo”Oligo” – few in an industry. (“Big 3 or 4” or even “Big 5 or 6”)
Two Types of OligopoliesTwo Types of OligopoliesPurePure (Undifferentiated) Oligopoly – 3 or 4 producers dominate the production of an identical productidentical product (steel, zinc, copper, aluminum, lead, cement, etc)DifferentiatedDifferentiated Oligopoly – 3 or 4 producers dominate theproduction of differentiated (similar) productsdifferentiated (similar) products. [typewriters, tires, soap, cigarettes, refrigerators, cereals, TVs & autos]
Oligopoly ExamplesOligopoly Examples
Athletic ShoesAthletic Shoes–“Big 4”–Nike, Reebok, New Balance, Adidas,
CerealsCereals – “Big 3” – Quaker Oats, General Mills, & KelloggsTV NetworksTV Networks – “Big 4” – NBC, CBS, ABC & Fox
There are also oligopolies in chewing gum, light bulbs, typewriters, photocopiers, and sewing machines.
Four Market Conditions For OligopoliesFour Market Conditions For Oligopolies1. A few sellers few sellers control overcontrol over 70% 70% of market.
2. Firms offer identical or differentiatedidentical or differentiated products (real or imaginary). AdvertisingAdvertising important.
3. Product informationProduct information must be easily availableeasily available. They use informative advertisementinformative advertisement (price, quality, and special features) to introduce new products.
4. There are huge barriers to entryhuge barriers to entry into the industry. The three major barriersthree major barriers are technological technological knowledge, money, & brand name loyalty knowledge, money, & brand name loyalty. EntryEntry is difficultdifficult because many have patentspatents or own essential raw materials. This makes it difficult for new firms to try to compete.
Monopoly – the “power of one”Monopoly – the “power of one”
MonopolyMonopoly[mono(1) poly (seller)]
Control over price: TotalProduct: unique
Ex: Comcast Cable TV
TTechnologicalechnological M Monopolyonopoly“Patent”
Ex: Rubik’s Cube
Government MonopolyGovernment MonopolyOwned & operated by G
Ex: U.S. Mail State Highways
Natural MonopolyNatural MonopolyCompetition would be
chaotic. It is naturalto give it to one co.
Ex: Utilities Cable TV
Geographic MonopolyGeographic MonopolyOnly seller in a specific area
Example: Remote Store
PalmTranPalmTran
““Price Makers”Price Makers”
GreyhoundSRCHSSRCHS
Cable TVCable TV
Waste Waste ManagementManagement
TXUTXUU.S.MailU.S.Mail
RRuubbiikk’’ss CCuubbee
Cable TVCable TV
DARTDART
Pure MonopolyPure Monopoly – oneone firmfirm industry [“monopolist”]
Pure Monopoly’s Market ConditionPure Monopoly’s Market Condition 1. One firmOne firm is the only selleronly seller. Advertising promotes image. 2. No close substituteNo close substitute goods are available. 3. ProhibitiveProhibitive barriers to entrybarriers to entry in the industry. High invest-High invest- ment costsment costs and technological expertisetechnological expertise prevent others from entering the market. Legal restrictionsLegal restrictions make entry in government-supported monopolies nearly impossible. 4. Almost complete controlcomplete control of market priceprice.
Four Types of Legal Four Types of Legal MonopoliesMonopolies
1. Natural MonopolyNatural Monopoly – where competition would bechaoticchaotic, it is naturalnatural to give the business to one firm. Imaginethe confusion if 5 different busses5 different busses raced each other to the corner to pick up a passenger. Competition would be impractical, inconvenientimpractical, inconvenient, & unworkableunworkable.
Waste ManagementWaste Management
GreyhoundGreyhound
2 2 GovernmentGovernment MonopolyMonopoly – monopoly ownedand operated by the government.
The difference between natural [privately owned]natural [privately owned]& government monopolies [government ownedgovernment monopolies [government owned] isthat these monopolies are owned operated by anyowned operated by anylevel of government.level of government.Examples would be interstate highway system, interstate highway system, public libraries, public libraries, publicpublic schools,schools, Postal Service, & DART Postal Service, & DART. In most cases, government monopolies deal with economiceconomic products needed for the public welfare products needed for the public welfare but which people would not be provided adequately by private industry. Most tend to provide goods thatprovide goods thatenhance enhance the the general welfare rather than seek profitsgeneral welfare rather than seek profits.
DartDart
Pilot Point HighPilot Point High[Local G][Local G]
State GState G Federal GFederal G
3 Geographic Monopoly3 Geographic Monopoly – when a firm is the only seller of a good in a specific location.
4. Technological MonopolyTechnological Monopoly – results from the inventioninvention of a newnew productproduct (patentpatent) or when technology changes the way a good is produced.
16 A patentpatent gives an individual or firm exclusive right to pro- duce, use or dispose of an invention or discovery for 20 years20 years from the date of filing.
Top 20 Patent RecipientsTop 20 Patent Recipients
1.1. 3,6213,621 IBMIBM 16. 89616. 896 KorninklijkeKorninklijke2.2. 2,4512,451 SamsungSamsung 17. 89017. 890 Infineon TechInfineon Tech3.3. 2,3662,366 CanonCanon 18. 88018. 880 TITI4.4. 2,2292,229 MatsushitaMatsushita 19. 85419. 854 SiemensSiemens5.5. 2,1102,110 Hewlett-PackardHewlett-Packard 20. 778 20. 778 HondaHonda6.6. 1,9591,959 IntelIntel7.7. 1,7711,771 SonySony8.8. 1,7321,732 HitachiHitachi9.9. 1,6721,672 ToshibaToshiba10.10. 1,6101,610 Micron TechMicron Tech11.11. 1,4871,487 FujitsuFujitsu12.12. 1,4631,463 MicrosoftMicrosoft13.13. 1,200 1,200 Seiko Seiko 14.14. 1,0511,051 GEGE15.15. 906906 Fuji PhotoFuji Photo
Patents CompanyCompany Patents CompanyCompany
Competition and the Market Competition and the Market StructureStructure
Price Control and the Market Price Control and the Market StructureStructure
Most control over price
Least control over price
VeryMany
Cable TVWater
Agric. productsFishery
Some
Fair Amount
Fair amount with
differentiatedoligopolies
Extensive
Extensive
A Summary of Market Structures
25
Cartels
• A cartel is an organization of independent firms whose purpose is to control and limit production and maintain or increase prices and profits.
Equilibrium of a firm in Monopolistic competition
• The firm whether operating under perfect competition or Monopoly, wants to maximize profit. In order to achieve this objective the firms goes on producing a commodity as long as the MR is greater than MC. When MR=MC, it is then in equilibrium and produces the best level of output. If a firm produces less than or more than the MR=MC output, it will then not be making maximum of profits.
Four cases of price and output determination under Perfect Competition
Following are the possible cases in perfect competition.
A firm will earn Super Normal profit ,if the point where MR=MC is greater than ATC
A firm will earn Normal profit ,if the point where MR=MC=ATC
A firm will Incur Loses if MR=MC is below ATC A firm will Shut down if the point where MR=MC is
even above the AVC.
Costs Relevant to a Firm
35.00 4 118.00 14.00 29.50 140.00 22.0035.00 5 130.00 12.00 26.00 175.00 45.0035.00 6 147.00 17.00 24.50 210.00 63.0035.00 7 169.00 22.00 24.14 245.00 76.0035.00 8 199.00 30.00 24.88 280.00 81.0035.00 9 239.00 40.00 26.56 315.00 76.0035.00 10 293.00 54.00 29.30 350.00 57.00
P = MR Output Total Cost
Marginal Cost
Average Total Cost
Total Revenue
ProfitTR-TC
— 0 40.00 — — 0 –40.0035.00 1 68.00 28.00 68.00 35.00 –33.0035.00 2 88.00 20.00 44.00 70.00 –18.0035.00 3 104.00 16.00 34.67 105.00 1.00
(a) Abnormal Profit case
(b) Normal Profit case (c) Loss case
Determining Profits/Loss Graphically
Quantity Quantity Quantity
Price65 60 55 50 45 40 35 30 25 20 15 10
5 0
65 60 55 50 45 40 35 30 25 20 15 10
5 01 2 3 4 5 6 7 8 9 10 12 1 2 3 4 5 6 7 8 9 10 12
D
MC
A P = MR
B ATCProfit
MC
ATC
MC
ATC
Loss
65 60 55 50 45 40 35 30 25 20 15 10 5 0 1 2 3 4 5 6 7 8 910 12
P = MRP = MR
Price Price
Visual 3.4http://apeconomics.ncee.net
Average Fixed, Average Variable andAverage Costs
The Shutdown Point
• The shutdown point is the point at which the firm will be better off, if it shuts down because– it cannot even cover Average Variable Costs.
Visual 3.6http://apeconomics.ncee.net
Profit, Loss and Shutdown
Spot Quiz..
Here is the graph of Rake making company showing abnormal profit. Find the following;
1 MR ?2 Profit per unit?3 Profit maximizing Quantity
Long-Run Competitive Equilibrium
• Zero profit does not mean that the entrepreneur does not get anything for his efforts.
Normal profit – the amount the owners of business would have received in the next-best alternative.
2 Monopolistic competition– Large number of firms in the industry– May have some element of control over price due
to the fact that they are able to differentiate their product in some way from their rivals – products are therefore close, but not perfect, substitutes
– Entry and exit from the industry is relatively easy – few barriers to entry and exit
Price and output determination under Monopolistic competition
• Maximizing Profits Firms produce the quantity where MC =MR and charge the highest price that sells that quantity
Case 1 Abnormal Profit
AR
AC
P
$ 140
Pric
e pe
r Gal
lon
Gallons of Gasoline per Week
12,000
$150
MR
MC
E
C
$180
$100
Show Graphically the level of output where a firm earns Abnormal Profit in monopolistic competition.
Case 2 Losses situation
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