Market StructuresMarket Structures

Market Structures

• What is the primary aim/goal of businesses?– To maximize profits

• What is competition?– Striving against others to reach an objective

4 Types of Market Structure4 Types of Market Structure

1.1. Pure/Perfect CompetitionPure/Perfect Competition– Large number of buyers and sellersLarge number of buyers and sellers– IdenticalIdentical product product– Well informed buyers and sellersWell informed buyers and sellers– Price Takers!Price Takers!– Low barriers for entry/exitLow barriers for entry/exit

More Competition Less Competition

Pure/Perfecct CompetitionPure/Perfecct Competition

Many buyer/sellers +

Identical Products

5

4 3

2

1

Perfect Compet

ition

Imperfect CompetitionImperfect Competition

Most USA markets are imperfect Most USA markets are imperfect competitioncompetition

Farming is perfectly competitive.Farming is perfectly competitive. A market is imperfect when it lacks A market is imperfect when it lacks

one or more of the characteristics of one or more of the characteristics of Perfect CompetitionPerfect Competition

Forms of Imperfect Forms of Imperfect CompetitionCompetition

Monopolistic Monopolistic competitioncompetition– Large # of Buyers Large # of Buyers

and sellersand sellers– Product Product

DifferentiationDifferentiation– Non Price Non Price

CompetitionCompetition– Most markets in USA Most markets in USA

are monopolistic are monopolistic competitioncompetition

Monopolistic CompetitionMonopolistic Competition

Meets all condition of perfect competition except Meets all condition of perfect competition except for identical products.for identical products.– Product differentiationProduct differentiation

Monopolistic competitors use nonprice Monopolistic competitors use nonprice competitioncompetition– Advertising, giveaways, or other promotionsAdvertising, giveaways, or other promotions

More Competition Less Competition

What are some examples?What are some examples?

Monopolistic CompetitionMonopolistic Competition

Same as pure competition except for product differentiation

Gap Levis Lucky

ReviewReview

Classify each product as perfect comp Classify each product as perfect comp (pc) or monopolistic comp (mc)(pc) or monopolistic comp (mc)– ToothpasteToothpaste– WheatWheat– CoalCoal– BooksBooks– CDsCDs– Computer softwareComputer software– http://www.youtube.com/watch?v=9Hxy-http://www.youtube.com/watch?v=9Hxy-

TuX9fs&feature=relatedTuX9fs&feature=related

OligopolyOligopoly

A A fewfew very large very large sellers dominate the sellers dominate the industryindustry

Oligopolists act independently by lowering Oligopolists act independently by lowering prices soon after the first seller announces prices soon after the first seller announces the cutthe cut

CollusionCollusion: formally agree to set prices: formally agree to set prices Heterogeneous productsHeterogeneous products Engage in price warsEngage in price wars High barriers to entryHigh barriers to entry

More Competition Less Competition

What are some examples?What are some examples?

OligopolyOligopoly

Few producers control supply and price

Coca-Cola ClassicCoca-Cola Classic

Coca-Cola classicCoca-Cola classic SpriteSprite DasaniDasani Barq'sBarq's DannonDannon NesteaNestea RockstarRockstar EvianEvian

FantaFanta FrescaFresca Minute MaidMinute Maid Mr. PibbMr. Pibb PoweradePowerade Seagrams Ginger Ale & Seagrams Ginger Ale &

MixersMixers TABTAB

Pepsi-coPepsi-co AquafinaAquafina PepsiPepsi Mountain DewMountain Dew Sierra MistSierra Mist SobeSobe Lipton Brisk TeaLipton Brisk Tea

MUG Root BeerMUG Root Beer SliceSlice GatoradeGatorade Dole JuiceDole Juice Tropicana Tropicana

Cadbury SchweppesCadbury Schweppes

7 Up7 Up Canada DryCanada Dry ClamatoClamato Dr PepperDr Pepper Hawaiian Hawaiian

PunchPunch Mott'sMott's OranginaOrangina SnappleSnapple

ToyotaToyota

ToyotaToyota ScionScion LexusLexus

ChryslerChrysler

ChryslerChrysler JeepJeep DodgeDodge

General MotorsGeneral Motors

ChevroletChevrolet BuickBuick PontiacPontiac GMCGMC SaturnSaturn HummerHummer SAABSAAB CadillacCadillac

What is missing?What is missing?

MonopolyMonopoly

OnlyOnly one one seller of a particular seller of a particular productproduct

Few monopoliesFew monopolies

MonopolyMonopoly

More Competition Less Competition

One One seller dominates the market with seller dominates the market with no close substitutesno close substitutes

Sets pricesSets prices High barriersHigh barriers

MonopolyMonopoly

Natural Natural MonopolyMonopoly - - efficient efficient production by a production by a single suppliersingle supplier

MonopolyMonopoly

Geographic Geographic Monopoly - small Monopoly - small towntown

TechnologicalTechnologicalMonopolyMonopoly

In order for the inventor to make money and In order for the inventor to make money and keep new ideas flowingkeep new ideas flowing

– Patients on inventionsPatients on inventions

Government MonopolyGovernment Monopoly

It is a product that the government should It is a product that the government should provide because they are the governmentprovide because they are the government

– National defense, disposal of nuclear materialsNational defense, disposal of nuclear materials

Market FailuresMarket Failures Inadequate CompetitionInadequate Competition

– Lack of competition which causes either buyers or Lack of competition which causes either buyers or sellers to control the marketsellers to control the market

Inadequate InformationInadequate Information– Consumers or producers lack enough information about Consumers or producers lack enough information about

a market to allow it to work properlya market to allow it to work properly ExternalitiesExternalities

– Unintended positive or negative side-effects to a 3Unintended positive or negative side-effects to a 3rdrd party because of a market transactionparty because of a market transaction

What are some examples?What are some examples? http://www.youtube.com/watch?v=DOuBxJNIFkY&feature=relatedhttp://www.youtube.com/watch?v=DOuBxJNIFkY&feature=related

Public GoodsPublic Goods– Goods used by all and directly paid for by noneGoods used by all and directly paid for by none

What are some examples?What are some examples?

Sherman Antitrust Act

1890

Federal Trade Commission

Act 1914

Robinson-Patman Act

1936

Clayton Antitrust Act 1914

Federal Antitrust

Legislation

4 Ways the Government 4 Ways the Government regulates businessesregulates businesses

1- Anti-trusts Laws1- Anti-trusts Laws 2- Non-discrimination laws2- Non-discrimination laws 3-Public Disclosure3-Public Disclosure 4-Federal Agencies p. 1804-Federal Agencies p. 180

3-2-13-2-1

3 things you learned3 things you learned 2 things you want to learn more 2 things you want to learn more

aboutabout 1 question1 question