7-3: OTHER MARKET STRUCTURES. CHARACTERISTICS OF MONOPOLISTIC COMPETITION Monopolistic competition:...
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Transcript of 7-3: OTHER MARKET STRUCTURES. CHARACTERISTICS OF MONOPOLISTIC COMPETITION Monopolistic competition:...
7-3: OTHER MARKET STRUCTURES
CHARACTERISTICS OF MONOPOLISTIC COMPETITION
Monopolistic competition: when many sellers offer similar, but not standardized products
CHARACTERISTICS OF MONOPOLISTIC COMPETITION (CONTINUED)
2 features of monopolistic competition are product differentiation and nonprice competitionProduct differentiation: attempt to
distinguish a product from similar products
CHARACTERISTICS OF MONOPOLISTIC COMPETITION (CONTINUED)
Nonprice competition: using factors other than low price, such as style, service, advertising, or giveaways to convince consumers to buy their products
4 CHARACTERISTICS OF MONOPOLISTIC COMPETITION
1. Many sellers and many buyersMeaningful competition existsExample: there are many
restaurants where you can buy a hamburger
4 CHARACTERISTICS OF MONOPOLISTIC COMPETITION (CONTINUED)
2. Similar but differentiated productsSellers try to
convince consumers that their product is different from that of the competition
4 CHARACTERISTICS OF MONOPOLISTIC COMPETITION (CONTINUED)
3. Limited control of pricesProduct differentiation gives
producers limited control over price
Consumers will buy substitute goods if the price goes too high
4 CHARACTERISTICS OF MONOPOLISTIC COMPETITION (CONTINUED)
4. Freedom to enter or exit the marketNo huge barriers to enter a
monopolistically competitive market
When firms make a profit, other firms enter the market and increase competition
EXAMPLES OF MONOPOLISTIC COMPETITION
Banks Sporting GoodsRadio Stations Fish and SeafoodClothing JewelryComputers Health SpasFrozen Foods Apparel StoresCanned Goods Convenience Stores
OLIGOPOLYDefinition: market
structure in which only a few sellers offer a similar productFew large firms
have a large market share: percent of total sales in a market
OLIGOPOLY (CONTINUED)
There are few firms in an oligopoly due to high start-up costs—the expenses that a new business faces when it enters a market
4 CHARACTERISTICS OF OLIGOPOLIES 1. Few sellers and
many buyersGenerally where
the 4 largest firms control 40% of the market
Example: breakfast cereal industry
4 CHARACTERISTICS OF OLIGOPOLIES (CONTINUED)2. Standardized or differentiated products
Products can be standard such as steelThey try to differentiate themselves based on brand name, service, or location
Or, products can be differentiated such as cereal and soft drinksThey use marketing strategies to separate them from competitors
4 CHARACTERISTICS OF OLIGOPOLIES (CONTINUED)
3. More control of pricesEach firm had a large enough
share of the market that its decisions about price and supply affect one another
4 CHARACTERISTICS OF OLIGOPOLIES (CONTINUED)
4. Little freedom to enter or exit marketSet-up costs are highFirms have established brands,
making it hard for new firms to enter the market successfully
OLIGOPOLY EXAMPLES
Soft drinks/Sodas: Coca-Cola (44%) – Coke, Sprite, Barq, Fanta, Mello
Yello, etc.
Pepsi (32%) – Pepsi, Mountain Dew, Mug, Slice, etc.
Cadbury Schweppes (16%) – Seven-Up, Dr. Pepper, Schweppes, A & W, Canada Dry, Sunkist, Squirt, etc.
OLIGOPOLY EXAMPLES
CPU chips – Duopoly (an industry with only two firms): Intel and AMD
Beer: Anheuser-Busch, Coors, Miller
Automobiles (GM, Chrysler, Toyota, etc.)
7-4: REGULATION AND DEREGULATION TODAY
REGULATION
Definition: set of rules or laws designed to control business behavior to promote competition and protect consumers
ANTITRUST LEGISLATION
Definition: laws that define monopolies and give government the power to control them and break them up
TRUST Trust: when a group of firms are
combined to reduce competition in an industry
Example: Standard Oil Company
MERGER
Merger: when 2 firms join together to become 1If a merger will eliminate
competition it will be denied by the government
ENFORCING ANTITRUST LEGISLATION
The FTC and the Department of Justice are responsible for enforcing antitrust laws
DEREGULATION
Definition: reducing or removing government control of a businessResults in lower prices for
consumers and more competition
Example: airline industry was deregulated in 1978
QUESTIONS1. In 2005, a major U.s. automaker announced a
new discount plan for its cars for the month of June. It offered consumers the same price that its employees paid for new cars. When the automaker announced in early July that it was extending the plan for another month, the other 2 major U.S. automakers announced similar plans. What market structure is exhibited in this story and what specific characteristics of that market structure does it demonstrate?
2. Why do manufacturers of athletic shoes spend money to sign up professional athletes to wear and promote their shoes rather than differentiating their products strictly on the basis of physical characteristics such as design and comfort?
3. The Telecommunications Act of 1996 included provisions to deregulate the cable industry. In 2003, consumers complained that cable rates had increased by 45% since the law was passed. Only 5% of American homes had a choice of more than 1 cable provider in 2003. Those homes paid about 17% less than those with no choice of cable provider. How effective had deregulation been in the cable industry by 2003? Explain your reasoning.