Perfect Competition

MonopolisticCompetition

Oligopoly Monopoly

More Competitive

Less Competitive

4 Market Structures

Home

MonopolisticCompetition

Oligopoly Monopoly

More Competitive

Less Competitive

4 Market Structures

Perfect Competition

Many Producers

Identical products

Easy Entry

No control over Prices

Home

Examples:Very few examplesSome stock and commodities Commodity – exactly the same, no matter who makes itAuctionsFish and fruits vendors selling at the same marketCommercial fishing and wood pulp and paper industry

Perfect Competition

Demand is perfectly elasticSupply and Demand determine PriceSuppliers are Price takers

Perfect Competition

MonopolisticCompetition

Oligopoly Monopoly

More Competitive

Less Competitive

4 Market Structures

Monopolistic Competition

Many Producers

Differentiated products

Few Barriers Entry

Some control over Prices

Home

Examples: Most common form and extremely common in service industry- A lot of non-price competition- physical/style, service, location, status symbolShoes, clothing, gas, restaurants

Called Monopolistic because brands seem to be unique- brand loyalty Company “monopolizes” its brand

Imperfect Competition

Producers have some control over priceProducers have market power

Perfect Competition

MonopolisticCompetition

Oligopoly Monopoly

More Competitive

Less Competitive

4 Market Structures

Oligopoly

Few Producers

Similar products

High Barriers of Entry

Some control over Prices

Home

Examples: Arise due to economies of scale rule of thumb (4 top producers supply 60% of outputs)

Bigger producers take advantage of smaller

Soda (Coke, Pepsi, Cadbury Schweppes) Light bulbs Airlines (Boeing and Airbus) Tennis Balls- Wilson, Penn, Dunlop, SpaldingAutomobiles

Imperfect Competition

Producers have some control over priceProducers have market power

Cooperative Pricing:

Price LeadershipCollusionCartel Formation- illegal in US but not in world - OPEC

Price wars

Preventing lower prices

Perfect Competition

MonopolisticCompetition

Oligopoly Monopoly

More Competitive

Less Competitive

4 Market Structures

Monopoly

One Producer

Unique products

High Barriers of Entry

Substantial control over

Prices

Home

Examples: The Firm is the Industry, Famous – Standard Oil, Microsoft, Major League Baseball

There Anti Trust laws but there are also Legal MonopoliesResource monopolies- controlling one resourcesGovernment created monopolies (copyrights and patents, public franchise, Licenses)- not intended to protect competitors- hair braiding? Preventing lower prices?Natural Monopolies- when a firm can supply a good or service more efficiently and at a lower cost- gas, water, electricity, and cable TV- they can take advantage of economies of scale.

Imperfect Competition

Producers have some control over priceProducers have market powerPrice Setters

Market Structure Number of Firms

Control over Price

Types of Goods

Barriers to Entry

Perfect Competition

Monopolistic Competition

Oligopoly

Monopoly

4 Market Structures

4 market structure activity

1. Divide class into the 4 market structuresa. Perfect competition- +15 students – all get a small piece of candy to sell to teacher- smarties, candy corn etc.b. Monopolistic competition- 4- 6 students (can vary)- each get a similar but slightly different piece of candy- jolly rangers, blow popsc. Oligopoly- 3 students- receive similar candy- tootsie roll, mm bagd. Monopoly- 1 student who receives a unique piece of candy- candy bar

2. Explain to students that they are sellers and that you will buy the candy for a price a 5 cents to 25 cents and that you will buy from one seller in each group. To encourage sale and competition offer 1 bonus point for a sale

3. Instruct students to write price down and hide it from others4. Round 1 – perfct comp and mon comp cannot speak with each other, oligopoly may consult5. Buy candy – perfect comp price takers, monopoly price setters6. Repeat round- allow for discussion amongst perfect comp.7. Three rounds- debrief as yoy continue through and at end8. When finished- fill in chart

Oligopoly Game (real life prisoner’s dilemma)

Lowes

Lower prices Maintain prices

Lower prices 120 120 200 100

Home Depot

maintain prices 100 200 150 150

Payoff represents total profits

What is Home Depot’s dominate strategy? Why?

Does Lowes have a Dominate Strategy? What will they do? Why?

Lower prices is a Nash Equilibrium

Nash Equilibrium- The best response to knowing what the other the other firm is going to do, it doesn’t benefit to defect.

Oligopoly Game

Lowes

Lower prices Maintain prices

Lower prices 100 150 120 130

Home Depot

maintain prices 110 120 150 140

Payoff represents total profits

What is Home Depot’s dominate strategy? Why?

Does Lowes have a Dominate Strategy? What will they do? Why?

Lower prices is a Nash Equilibrium

Nash Equilibrium- The best response to knowing what the other the other firm is going to do, it doesn’t benefit to defect.