7.1 COMPETITION & MARKET STRUCTURES

Four Types of Structures

I. Perfect Competitiona. large # of buyers & sellers exchange identical products.

5 conditions:

1. large # of buyers and sellers

2. Identical products

3. buyers & sellers act independently

4. they are well informed

5. are free to enter, conduct or get out

of business

b. Supply & Demand set equilibrium price.

c. Each firm sets level of output to maximize its profits

d. Imperfect competition= market structure that lacks one or more of the above

II. Monopolistic Competition

a. Meets all the previous conditions EXCEPT identical products

b. Uses product differentiation (real or imagined differences)

c. Uses non-price competition:

use of advertising

giveaways

or promotional campaigns to differentiate products

d. Try to sell w/in narrow price range,

but try to raise price (w/in range) to maximize profits.

III. Oligopolya. very few sellers dominate market

b. act interdependently by lowering & raising prices

c. May formally agree to set prices, called COLLUSION, (illegal in US)

1. price fixing- agree to a charge above

the market price

2. dividing up market for guaranteed sales

3. agree to create shortage to raise prices

EX: OPEC cut production in 1970s- gas prices rose dramatically

d. can engage in price wars, for short period

e. final prices are likely higher than monopolistic & perfect

competition

IV. Monopolya. only one seller of a product

b. US has few b/c: 1. capitalism discourages2. new tech. competes w/

monopoliesc. Types:

1. Natural monopoly- nature of good or service dictates

EX: FPL

2. geographic monopoly- absence of sellers in

area.

ex: Podunk town has one gas station

3. Technological monopoly- based on ownership of method, process or

advancement.

ex: Microsoft in 1990s.

-Microsoft was accused of acting as a monopoly b/c it made it difficult for other software firms to put products on PCs running on Windows.

why? Violate of US Anti-Trust laws

Settlement: Microsoft agreed to provide competitors w/ info that allowed them to make products work on existing WindowsSystems

4. Government monopoly- can provide public services that private industry cannot

ex: Post Office (kind of)

d. Monopolies are “price makers” rather than “price takers”