imperfectly competitive markets. oligopolies – market structure in which a few large sellers...
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Imperfectly Competitive Markets
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Oligopolies – market structure in which a few large sellers control most of the production of a good or service
3 Conditions • Only a few large sellers
• Similar or identical products
• Other sellers can’t enter/exit the market easily
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Oligopolies at Work
Non-Price Competition: differentiation
Price Leadership
Price War
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Interdependent Pricing
Auto companies often look to competitors before pricing new models
• Why price my model lower than the competition?
• Relying on brand name loyalty
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Price Leadership
One seller decides:
• Production costs are eating into profits
• Must raise prices!
• Other sellers sometimes follow suit
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Price War
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Collusion
• Did baseball owners secretly agree to hold down player salaries?
Powerful members of an oligopoly agree to limit competition and control the market
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Cartels
Powerful members of an oligopoly openly agree to limit competition and control production/prices, etc.
Organization of Petroleum Exporting Countries
OPEC
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Monopolies
• Market structure where one seller dominates the market
• No competition exists
3 Conditions:
• There is a single seller
• No close substitute goods
• Other sellers can’t enter market easily
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Consequences of Monopolies:
• Consumers have limited choices
• Prices tend to be high
• No incentive for producer to be efficient
Limitations on Monopolies
Consumer Demand:
• If prices too high, demand will be zero!
Potential Competition:
• If profits high enough, other sellers will compete
Government Regulation:
• Ensure competition, protect consumers and other producers
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Types of Monopolies
Natural Monopoly
• Competition is inconvenient or impractical
• Often due to economies of scale
• Not common!
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Geographic Monopoly
• Exists when a market’s potential profits are limited by it’s geographic location
• Not enough demand to support more than one seller
• Not common: communications, mobility of society, etc
• Example: mom and pop grocery store out in the country
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Technical Monopoly
When a producer develops a new technology that changes the way an existing product is made or allows for the creation of a new product.
Government grants a patent
• Protects company’s investment in research and development – 17 years
• 17 year monopoly!
• No other company can manufacture or sell the product
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Government Monopoly
Exists when government allows cities, counties, etc to monopolize products and services.