Market Structures

Chapter 7

MARKET STRUCTURES

AND BUSINESS ORGANIZATIONS

Market Structures:• Perfect Competition = pure price competition

Four condition for perfect competition

1. Many buyers and sellers in the market- one company can’t influence the total market; they are price takers - the market determines prices

2. Sellers offer identical products- (commodities) buyers will always choose the supplier with the lowest price

• Buyers/ sellers are well informed- we go out to

find the best deal which means we must have all the information on the product/ the time spent must be worth the amount of money to be saved

• Free market entry or exit into the market- this

means there will be no barriers to entry such as start up costs and technology

Examples: farm products, stocks, low grade gas, milk

• Competition within markets keeps prices low

• How much variety of goods is there in a perfect

• competition

Barriers to Entry

• Factors that would make it difficult for new firms to enter the market are called “barriers to entry”.

• Barriers can lead to what is called imperfect competition.

• Common barriers to entry include start-up cost and technology.

• Start-up cost- expense a new business must pay before the first product reaches the customer

• Technology- know how and equipment to create the product and produce the product.

Price and Output• Perfectly competitive markets are efficient

which is one of their characteristics.• Prices and production costs are low• Inputs like land, labor, organizational skills

machinery and equipment are used to their best potential.

• In a perfectly competitive market prices correctly represent the opportunity cost of each product.

Monopoly = Market is dominated by a single seller

• Monopolies tend to form when barriers to entry exist and then they can charge whatever price they want; supplies are usually lower when there is a monopoly.

Types of monopolies:• Natural- firms can only cover costs with

no competition such as utilities• Government- created by the government Examples- The post office, patent office

• patents- is a license giving the inventor exclusive rights (usually for 17 years); this promotes research and development

• Industrial Organizations= Sports franchises.

• The government allows the team owners and professional sports leagues to restrict the numbers and location of their teams

Monopolistic Competition= can exist under four conditions

• When there are many firms• Few barriers to entry- other firms

can enter market easily and cheaply with few or no restrictions

• Differentiated products-ex: hamburgers

• Slight control over price- can’t make too many changes because of substitutes

• Non-price Competition: Occurs when a firm uses means other than price to compete

• Physical characteristics- new size, color, shape, texture, etc.

• Location- very important factor• Service level- higher levels of

service may allow a company to charge higher prices

• Advertising, image, or status – product differences are often just a matter of perception

Marketing- operates under the four P’s•Price- advertising must make clear

assertions of a product’s value•Place- ads must include directions so

consumers will know where to find it•Product- ads must provide enough

information so consumers will be informed and desire to make purchases

•Promotion- ads must promote a product in a way that catches attention

Oligopoly• Is a Market dominated by few large

firms• Occurs when the largest firms produce

at least 70-80% of the items• Tend to form when there are major

barriers to entry, such as high start up costs or an established reputation to compete against.

• Bad practices include price leadership, collusion, and cartels, but they are very difficult to achieve and maintain

• Examples - cereal, cola, airlines, cars

Government’s Role: Regulation and deregulation

•In a free market society, does the government need to regulate a business.

•Isn’t the point of free enterprise to allow the market to regulate itself?

Arguments for regulation: • A lack of competition will negatively

affect prices and supplies of products through predatory pricing. (remember standard oil and John D. Rockefeller)

• The government passes antitrust laws to out-law monopolies or prevent the forming of them from unfair practices

• Can break up companies who have a monopoly

• Can block mergers that would reduce competition