market structure how businesses interact with each other determines: - pricing - profitability -...
TRANSCRIPT
MARKET STRUCTURE
HOW BUSINESSES INTERACT WITH EACH OTHER
DETERMINES: - PRICING - PROFITABILITY - LEVEL OF COMPETITION - SERVICE TO BUYERS
PERFECT COMPETITION
MANY BUSINESSES SELLING EXACT SAME PRODUCT
EASY FOR NEW BUSINESSES TO ENTER INDUSTRY AND OTHERS TO LEAVE
NO CONTROL OVER PRICE – “PRICE TAKER” - AND CAN SELL ALL THAT PRODUCE
LOW PROFITS – IF HIGH, NEW COMPETITORS MOVE IN
PERFECT COMPETITION (CON’T)
GOOD EXAMPLE – FARMING
TAKE PRICE AS “GIVEN” AND DECIDE HOW MUCH TO PRODUCE
PRICES FREQUENTLY CHANGE, SO PROFITS UP AND DOWN
PEOPLE CAN MOVE INTO AND OUT OF FARMING
PERFECT COMPETITION (CON’T)
TO MAXIMIZE PROFIT, SIMPLY PRODUCE WHERE PROFITS ARE HIGHEST CORN SELLS FOR $4 PER BUSHEL # BUSHELS GROWN FIXED COST VARIABLE COST 1000 $2000 $1000 2000 $2000 $1700 3000 $2000 $2500 4000 $2000 $7000
PROFIT AT: 1000 BUSHELS ( $4 x 1000) - $3000 = $1000 2000 BUSHELS ( $4 x 2000) - $3700 = $4300 3000 BUSHELS ( $4 x 3000 ) - $4500 = $7500 < 4000 BUSHELS ( $4 x 4000 ) - $9000 = $7000
OPPOSITE SIDE – MONOPOLY
ONE SELLER – NO COMPETITORS
COMPLETE CONTROL OVER PRICE – “PRICE SETTER”
SOME CREATED BY LAW – U.S. POSTAL SERVICE
OTHERS ARE “NATURAL MONOPOLIES” – POWER COMPANIES – WILL BE REGULATED
WILL A MONOPOLY ALWAYS INCREASE PRICE?
NO – THEY STILL FACE THE DEMAND CURVE – PEOPLE BUY LESS WHEN PRICE RISES
WILL SET PRICE AND QUANTITY (AMOUNT SOLD) THAT MAXIMIZES PROFIT
EXAMPLE – ELECTRIC POWER COMPANY
PRICE PER WATT #WATTS SOLD REVENUES TOTAL COST PROFIT
$0.25 100,000 $25,000 $20,000 $5000
$0.50 80,000 $40,000 $17,000 $23,000
$1.00 60,000 $60,000 $15,000 $45,000 <
$2.00 25,000 $50,000 $12,000 $38,000
MONOPOLIES ARE LIMITED
IT IS FEDERAL LAW TO REGULATE OR BREAK-UP MONOPOLIES - MICROSOFT EXAMPLE
TECHNOLOGY CAN ELIMINATE MONOPOLIES – CABLE TV NOW COMPETES WITH SATELLITE TV
OLIGOPOLY
SMALL NUMBER OF PRODUCERS, EACH MAKING AND SELLING THE SAME PRODUCT
CAN COMPETE – THEN LIKE PERFECT COMPETITION
OR CAN COLLUDE
COLLUSIVE OLIGOPOLIES
COOPERATE INSTEAD OF COMPETEAGREE TO COMMON PRICE AND SPECIFIC SELLING TERRITORIESINCREASE PROFIT
PROBLEM – COLLUSIVE OLIGOPOLIES ARE ILLEGAL IN THE U.S.
HOWEVER, SOME INTERNATIONAL COLLUSIVE OLIGOPOLIES EXIST - OPEC
TWO COLLUSIVE OLIGOPOLIES ARE LEGAL IN THE U.S.
PROFESSIONAL SPORTS (SUPREME COURT RULING)
AGRICULTURAL COOPERATIVES
MONOPOLISTIC COMPETITION
MANY BUSINESSES, ALL SELLING THE SAME PRODUCT
HOWEVER, TO AVOID BEING IN “PERFECT COMPETITION”, THEY “TWEAK” THE CHARACTERISTICS OF THEIR PRODUCT SO PEOPLE THINK THEY ARE UNIQUE
GIVES THEM POWER OVER PRICE
“TWEAKING” CAN BE REAL OR JUST “HYPE”
EXAMPLE: AUTO DEALERS
MARKET SEGMENTATION
USED BY ALL BUSINESSES EXCEPT THOSE IN PERFECT COMPETITION
GOAL: DIVIDE BUYERS INTO DIFFERENT GROUPS, CHARGE EACH GROUP A DIFFERENT PRICE, AND INCREASE PROFITS
CAN ONLY WORK IF: - BUYERS CAN’T RESELL THE PRODUCT - BUYERS CAN’T SWITCH GROUPS
MARKET SEGMENTATION (CON’T)
RULE: BUYERS WITH INELASTIC DEMAND CURVES PAY MORE; THOSE WITH ELASTIC DEMAND CURVES PAY LESS
EXAMPLES: AIRLINE TRAVEL: LEISURE VS. BUSINESS BULK BUYING SENIOR CITIZEN DISCOUNTS PEAK VS. OFF-PEAK
WHAT’S THE “BEST” MARKET STRUCTURE?
FOR SOCIETY AS A WHOLE – ECONOMIST ARGUE IT IS “PERFECT COMPETITION”
* LOWEST PRICES FOR BUYERS
* MOST ATTENTION TO NEEDS OF BUYERS
* ALLOWS SUPPY TO EXPAND AND CONTRACT WITH CONDITIONS