Warm-Up

1) Name a product that you must always have.

2) Can you name several competing brands that you consider to be poor substitutes?

1) Make a list of as many clothing stores in this area as possible.

2) Describe how each store tries to differentiate its products from the others.

The answers to these questions help determine market structure, or the nature and degree of competition among firms operating in the same industry.

Pure CompetitionIndependent and well-informed buyers and

sellers of exactly the same economic product5 Major conditions:

1. Large # of buyers and sellers exist, no one buyer or sellers is large enough or powerful enough to affect the price of the product

2. Buyers and sellers deal identical products- buyers do not prefer one seller’s merchandise over another’s Ex- Salt

Pure Competition3. Each buyer and seller acts independently-

sellers compete against one another for consumers $. What do buyers want?Keeps prices low

4. Buyers and seller well-informed about items for saleWhy would buyers not be loyal to one seller?

5. Buyers and sellers are free to enter into, conduct, or get out of business. Why would this freedom make it difficult for a

single producer to keep the market just to itself?

Pure CompetitionProfit Maximum- Supply and demand in the

entire industry establishes the equilibrium price.

**A Theoretical Situation- All five conditions for pure competition rarely exist at the same time!**Ex. TomatoesBenchmark to evaluateImperfect competition- lack one of more of the

conditions (Most in the US are this category an are divided into monopolistic competition, oligopoly, and monopoly!)

Monopolistic CompetitionAll conditions present except for identical

products!

What kind of iced tea do you enjoy?

Monopolistic CompetitionProduct differentiation-

products are similar, but not identicalStore location, store

deign, manner of payment, delivery, decorations, service, etc.

What are other examples?

Why is product differentiation a matter of perception than reality?

Monopolistic CompetitionNonprice competition-

convince buyers that product is somehow better than another brand

If the firm can differentiate a product in the mind of a buyer, they can raise the price

Advertising plays a large role

http://www.expotv.com/videos/reviews/11/124/AleveAllDayStrongPainReliever2FFeverRed/229896

Monopolistic CompetitionProfit Maximization

Seller can raise or lower the price enough that consumers forgot minor differences and change brands

This is way we don’t see a single price for shoes, jeans, cosmetics

Many firms, products only slightly different

Oligopoly A few large sellers

dominateCan be in different

industries (auto, steel, etc.)

# of firms not as important as the ability of any single firm to cause a change in output, sales, and prices

Further from pure competition than a monopolistic competition

Oligopoly Interdependent Behavior-

one firm does something, the rest follow (so few firms in general) Collusion: a formal

agreement to set prices Price-fixing: Collusion to

charge the same for a product

**Price tend to be higher than those determined by competition**

**Collusions against the law b/c it usually restrains trade

Oligopoly Pricing Behavior- Others

follow suit with pricesPrice war- price cuts by all

producers that may lead to unusually low prices in the industry

Raising prices is risky- why?

Nonprice basis is best

Independent pricing- setup own price based on demand, cost of inputs, etc.

Price leadership- one firm takes the lead, others follow

OligopolyPrice Maximization-

when marginal cost is equal to marginal revenueWill charge whatever the

market can support

Act conservatively, seldom protest price hikes by their rivals

Price much higher than monopolistic competition and even more higher than pure competition

How does the final price of a product differ in an oligopoly than in a market competition?

Why are oligopolists usually reluctant to raise prices?

Choose an oligopoly in the United States and discuss how it relates to something we just learned!

MonopolyExact opposite of pure

competitionOnly one seller of a

particular economic product that has no close substitutes

Factors that prevent monopolies:American distrustEasy to find substitutesNew technologies compete

**near monopolies**

How does a geographic monopoly differ from a natural monopoly?

Profit Maximum Graph: MonopolyThe monopolist is able to set a price and

quantity of output most profitable to itselfWhat kind of curve is in box A?Why is this important?Why is there no supply curve?How many gadgets will be produced at about

$7?

Market Structures and Characteristics ChartFill out with your group.In which market does nonprice competition

play a major role? Why is this significant?

ClosureDo you think there would be any advantages

to making monopolies or near monopolies break-up into smaller, competing firms? If so, what are they? If not, why would there not be?