Chapter 8

Market StructuresDefined by the number of sellers, the

product, how easy or difficult it is to enter the market

4 Types of MarketsPerfectly competitive MonopolisticMonopolistic competitiveOligopolistic

Perfectly Competitive MarketMany buyers and sellersAll firms sell identical goodsBuyers and Sellers have relevant information

about prices, product quality, sources of supply and so on.

Firms have easy entry into and exit out of the market

Example: Wheat

Sellers in a perfectly competitive market are Price Takers

Price takers are sellers that can sell all of their output at the equilibrium price but can sell none of its output at any other price

Profit is a signal in perfectly competitive markets

Characteristics of a Monopolistic MarketThe market consists of one sellerThe single seller sells a product that has no

close substitutesThe barriers to entry are high

Monopolies are price searchersPrice searchers can sell some of its output

at various prices

A Monopoly Seller is not Guaranteed Profits

Barriers to EntryLegal Barriers

A Public FranchiseEx: U.S. Postal Service

Extremely Low Average Total Cost (Low Per-Unit Costs)Natural Monopoly

Exclusive Ownership of a Scarce Resource

Antitrust and MonopolyAntitrust Laws – legislation passed for the

stated purpose of controlling monopoly power and preserving and promoting competitionThe Sherman Antitrust ActThe Clayton ActFederal Trade Commision ActThe Robinson-Patman ActThe Wheeler Lea Act

The Issue of Natural Monopoly

Characteristics of a Monopolistic Competitive MarketThe market includes many buyers and

many sellersFirms produce and sell slightly

differentiated productsFirms have easy entry into and exit out of

the marketThey are price searchers

How much competition does a seller face?Perfectly Competitive Market – a competitive

situationMonopolistic Market– no competitionMonopolistic Competitive Market – some

competition, but not all buyers will leave with a raise in price. Example: IPOD

Characteristics of a Oligopolistic MarketThe market has few sellersFirms produce and sell either identical or

only slightly differentiated productsHigh barriers of entryThey are price searchers

How much competition?Oligopolists face intense competition,

because their goods are either identical (steel) or slightly different (cars)

Identifying Oligopolistic IndustriesIf only a few firms account for a large

percentage of sales then it is oligopolistic.Example: US automobile industry . Ford,

GM and Daimler Chrysler make up 90% of American made cars sold in US.

Cartel agreement - agreements to restrict competition – ILLEGAL

Is it Buyers v Sellers or Sellers v SellersPrice Discrimination – when a seller

charges different prices to different buyersDifferent customers must be willing and able to

pay different pricesSeller requires a way to tell who will pay moreProduct can not be resold, by the person

paying less