CHAPTER 7MARKET STRUCTURE

7.1 Perfect Competition and Monopoly

Objectives- Distinguish the features of perfect competition.

Describe the barriers to entry that can create a monopoly.

Compare the market structures of monopoly and perfect competition in terms of efficiency.

Perfect Competition Market Structure- Important features of a

market, including the number of buyers and sellers product uniformity across sellers, ease of entering the market, and forms of competition.

Market Features 1. Number of buyers- Are there many,

only a few or just one?

2. Products Uniformity- Do firms in the market supply identical products, or are products differentiated across firms.

Market Structure 3. Ease of buyers into the market- Can

new firms enter easily or do natural or artificial barriers block them?

4. Forms of competition among firms- Do firms compete based only on prices, or are advertising and product differences also important?

Perfect Competition Perfect Competition- A market structure

with many fully informed buyers and sellers of an identical product and ease of entry.

Commodity- A product that is identical across sellers, such as a bushel of wheat.

EX- There is no “shopping” around for a cheaper bushel of a commodity. Works like a stock with price changes up and down.

Monopoly

Monopoly- A sole supplier of a product with no close substitutes. Monopoly is a Greek word meaning “one seller”.

EX- If Coke was the only cola on the market, then they could charge any price they wanted for Cola.

Monopoly Market Power- The ability of a firm to

raise its prices without losing all sales to rivals.

Barriers to Entry- Restrictions on the entry of new firms into an industry.

There are 3 types of entry barriers: Legal restrictions, economies of scale and essential resources.

Barriers of Entry Legal Restrictions- Companies that do

not have patents, licenses and other legal restrictions can’t enter in the market.

EX- A T-shirt company just can’t put a UGA logo on a shirt and sell it. It has to buy the rights and get permission to use the logo in order to enter the market of college t-shirts.

Barriers of Entry Economies of Scale- When one business

satisfies the market with lower than average cost per unit.

EX- Cherokee County Water- It is the only one in the county, but its prices are set and regulated by the county government. This is also called a natural monopoly. Also, an example of a natural monopoly is a grocery store out in the middle of the country.

Barriers of Entry Control of Essential Resources-

Sometimes the source of monopoly power is a firm’s control over some resources critical to production.

China is the main supplier of Pandas. China is the only country to have Pandas so they control all the panda distribution of the world.

Monopolies Can a monopoly go broke? Yes- Pet Rock,

the were the only ones to make it and have a patent on it. But, demand was there and the Pet Rock business went out of business due to lack of demand.

Are TRUE monopolies rare? Yes. There is always someone making a substitute close to the original product.

EX- Coke and Pepsi

Monopoly vs. Perfect Competition Competition forces business to be

efficient. If a company is not, then the other company will get all the business because they are doing a better job with the services.

EX- Some people like Home Depot vs. Lowes because Home Depot has better in-store customer service.

Is a Monopoly that bad? Power or Water Company- Makes it easy

to pick a company because they are the only ones offered.

Government Regulation- Government does not allow the power company to gouge anyone because the prices per unit are controlled by the government.

Companies will keep prices low to stop government regulation so the company will get all the money from the area it is servicing.

7.2 Monopolist Competition and Oligopoly

Objectives

Identify the features of Monopolistic competition.

Identify the features of Oligopoly and analyze firm behavior when these firms cooperate and when they compete.

Monopolistic Competition Monopolistic Competition- A market

structure with low entry barriers and many firms selling products differentiated enough that each firm’s demand curve slopes downward.

Honda vs. Toyota- Cars are very similar, but differ enough that each company can control its prices and not go out of business.

Product Differences Physical Difference- The way they look.

Some people like the look of a Civic over a Corolla.

Location- You can stay at a hotel anywhere, but would you rather stay at a hotel on the beach or a hotel in the middle of Kennesaw?

Services- Some restaurants deliver, some don’t.

Product Image- Celebrity influences. You may want to buy something because you heard it in a rap song.

Oligopoly Oligopoly- A market structure with a

small number of firms whose behavior is interdependent.

Oligopoly is a Greek word meaning “few sellers”

Dell, Apple, Acer and E-Machine are examples of Oligopolies of computer companies. There are not many who produce computers.

When Oligopolies Collude Collude- Is when two companies try and

set the same price in order for both companies to make money.

Cartel- A group of firms who act as one. EX- OPEC is a group of oil companies

who work together to set prices so all that are a member of OPEC make money. They do not try and eliminate competition.

7.3 Antitrust, Economic Regulation and Competition

Objectives:

Explain the goal of U.S. Antitrust Laws. Distinguish between the two views of

government regulation. Discuss why U.S. markets have grown

more competitive in recent decades.

Antitrust Antitrust Activity- Government efforts to

prevent monopolies. Antitrust Activities:

Promote the market structure that will lead to greater competition.Reduce anticompetitive behavior.

Merger and Antitrust Merger- The combination of two or more

firms to form a single firm.

Southwest airlines is merging with AirTran. Why?

Deregulation- A reduction on government control over prices. Because the government allowed more airlines to exist, prices dropped and more people began to fly more often.