Chapter 6: Market Structures

Chapter 6: Market Structures

Section 1: Highly Competitive Markets

Section 1: Highly Competitive Markets

Consumers benefit most from a competitive market

Why? Consumers have wide range of products

Two types of competitive markets: perfect competition and monopolistic competition

Consumers benefit most from a competitive market

Why? Consumers have wide range of products

Two types of competitive markets: perfect competition and monopolistic competition

Perfect CompetitionPerfect Competition

Situation in which no one buyer or seller controls demand, supply, or price

Situation in which no one buyer or seller controls demand, supply, or price

4 conditions present in perfect competition: 1) There are many buyers and sellers,

therefore no one entity controls market

2) Sellers offer identical products and buyers have choice to purchase what they want

3) Buyers must be informed and knowledgeable about products

4) Sellers must be able to easily enter or exit the market (low start-up costs, level of technology needed)

4 conditions present in perfect competition: 1) There are many buyers and sellers,

therefore no one entity controls market

2) Sellers offer identical products and buyers have choice to purchase what they want

3) Buyers must be informed and knowledgeable about products

4) Sellers must be able to easily enter or exit the market (low start-up costs, level of technology needed)

What does perfect competition look like?

What does perfect competition look like?

Some agricultural markets in US Apples - thousands of independent

farmers and growers No one buyer or seller controls prices Buyers make decision based on price alone Buyers are informed (variety of apples,

place of origin, how grown) Farmers can easily enter or exit market (if,

of course, they own the land)

Some agricultural markets in US Apples - thousands of independent

farmers and growers No one buyer or seller controls prices Buyers make decision based on price alone Buyers are informed (variety of apples,

place of origin, how grown) Farmers can easily enter or exit market (if,

of course, they own the land)

Monopolistic CompetitionMonopolistic Competition

One main difference - sellers offer different, rather than identical, products Sellers try to differentiate (point out

differences) between their products and their competitors

Sellers compete on a basis other than price - name brand versus cheap-o jeans; advertising is key

Main goal of product differentiation and competition is to increase profits

One main difference - sellers offer different, rather than identical, products Sellers try to differentiate (point out

differences) between their products and their competitors

Sellers compete on a basis other than price - name brand versus cheap-o jeans; advertising is key

Main goal of product differentiation and competition is to increase profits

Section 2: Imperfectly Competitive Markets

Section 2: Imperfectly Competitive Markets

1 - Oligopolies: a few large sellers control most of the production of a good or service There are only a few large sellers Sellers offer identical or similar products Other sellers cannot enter the market

easily

1 - Oligopolies: a few large sellers control most of the production of a good or service There are only a few large sellers Sellers offer identical or similar products Other sellers cannot enter the market

easily

Examples: Breakfast Cereals - Kellogg’s, General Mills,

and Post account for 80% of sales Companies may set own price (interdependent

pricing) in accordance with demands of buyer Price leadership: one of largest sellers will set the

price for its product…this can lead to a price war - sellers aggressively undercut each other’s prices in an attempt to gain market share - benefits consumers

Examples: Breakfast Cereals - Kellogg’s, General Mills,

and Post account for 80% of sales Companies may set own price (interdependent

pricing) in accordance with demands of buyer Price leadership: one of largest sellers will set the

price for its product…this can lead to a price war - sellers aggressively undercut each other’s prices in an attempt to gain market share - benefits consumers

Collusion and CartelsCollusion and Cartels

In a collusion sellers secretly agree to set production levels or prices for their products - illegal!!! Why might this be illegal?

With a cartel companies openly organize a system of price setting and market sharing. Cartels are also illegal in the United States. South Africa’s De Beers Diamond company is

“successful” cartel

In a collusion sellers secretly agree to set production levels or prices for their products - illegal!!! Why might this be illegal?

With a cartel companies openly organize a system of price setting and market sharing. Cartels are also illegal in the United States. South Africa’s De Beers Diamond company is

“successful” cartel

2 - Monopolies: a single seller controls all production of a good or service There is a single seller No close substitute goods are available Other sellers cannot enter the market easily

Natural monopolies: public and private utilities - electric companies, cable television services

Geographic monopolies: general store in remote area Technological monopolies: general dynamics and

submarines; companies must get patent - which grants a company exclusive right to produce, use, rent, sell an invention for a certain amount of time; copyrights - gives authors, musicians, artists exclusive rights to publish, duplicate, perform, display, sell creative works

Government monopolies: water and sewer services

2 - Monopolies: a single seller controls all production of a good or service There is a single seller No close substitute goods are available Other sellers cannot enter the market easily

Natural monopolies: public and private utilities - electric companies, cable television services

Geographic monopolies: general store in remote area Technological monopolies: general dynamics and

submarines; companies must get patent - which grants a company exclusive right to produce, use, rent, sell an invention for a certain amount of time; copyrights - gives authors, musicians, artists exclusive rights to publish, duplicate, perform, display, sell creative works

Government monopolies: water and sewer services

Examples of monopolies: cable television company

Examples of monopolies: cable television company

Section 3: Market Regulation Section 3: Market Regulation

After the Civil War “big business” or huge monopolies took over the marketplace

At first, US respected “laissez-faire” economic philosophy - government does not and will not interfere

By 1880s that changed b/c people were worried about unfair business practices

After the Civil War “big business” or huge monopolies took over the marketplace

At first, US respected “laissez-faire” economic philosophy - government does not and will not interfere

By 1880s that changed b/c people were worried about unfair business practices

Antitrust Legislation in the US

Antitrust Legislation in the US

Interstate Commerce Act - committee was formed (ICC) to control soaring railroad prices - abolished in 1995 (when railroad system had long been obselete)

Sherman Antitrust Act - banned agreements and actions that restrain trade Standard Oil Company - broken up because of

Sherman Antitrust Act, became “smaller” branch - Standard Oil of New Jersey (controlled by John D. Rockefeller). In 1972 it changed its name to EXXON, and we know the rest…Exxon is one of the largest industrial corporations in the US and the World

Interstate Commerce Act - committee was formed (ICC) to control soaring railroad prices - abolished in 1995 (when railroad system had long been obselete)

Sherman Antitrust Act - banned agreements and actions that restrain trade Standard Oil Company - broken up because of

Sherman Antitrust Act, became “smaller” branch - Standard Oil of New Jersey (controlled by John D. Rockefeller). In 1972 it changed its name to EXXON, and we know the rest…Exxon is one of the largest industrial corporations in the US and the World

Clayton Antitrust Act (1914) - prohibited price setting and price discrimination

Federal Trade Commission Act (1914) - created committee to investigate charges of unfair methods of competition

Robinson-Patman Act (1936) - reinforced laws against price discrimination

Entertainment monopolies today: Clear Channel Communications - huge in entertainment industry - controls over 1,170 radio stations, 19 television stations, 700,000 billboards, also owns and operates 135 live entertainment venues. In 2001 they were sued (by another smaller entertainment company) because of “monopolistic, predatory and anticompetitive business practices”. Now artists must use the company to promote their music. Is this fair?

Clayton Antitrust Act (1914) - prohibited price setting and price discrimination

Federal Trade Commission Act (1914) - created committee to investigate charges of unfair methods of competition

Robinson-Patman Act (1936) - reinforced laws against price discrimination

Entertainment monopolies today: Clear Channel Communications - huge in entertainment industry - controls over 1,170 radio stations, 19 television stations, 700,000 billboards, also owns and operates 135 live entertainment venues. In 2001 they were sued (by another smaller entertainment company) because of “monopolistic, predatory and anticompetitive business practices”. Now artists must use the company to promote their music. Is this fair?