Topic 7

Competition, Market Structures, & the Role of

Government

Market structure:

The type & degree of competition that exists among companies in a certain industry

Pure Competition

•Freedom• Large numbers of buyers and sellers•Buyers and sellers act independently•Well informed•Identical Products

No brand namesSame qualityNo need to advertise

NO influence over price: Supply and

Demand

A LOT of competition between firms

Major Points:

•Keeps prices low

• Very few industries•Buyers are informed & sellers Buyers are informed & sellers sell exactly the same productsell exactly the same product

Examples….

Imperfect Competition

If one of the 4 conditions (of perfect competition) is not met you have…Monopolistic, monopoly, oligopoly

•Limited price influence; Narrow price differences

•A LOT of competition between firms

Major Points:

• Monopolizing a Small part of the market

• Same elements as Pure Comp. EXCEPT type of product

•Product Differentiation leads to NON-PRICE competition (Location, advertising, packaging)

Non-Price Competition

AdvertisingCatchy slogansLocation

                                             

Reebok Advertisement- Terry Tate & Super Bowl

http://www.mcdonalds.com/usa/ronald/happy.html

                        

Product DifferentiationProduct Differentiation

•Some influence on Price: decision mainly based on output

•A LOT of competition between firms

Major Points:

•Standardized Oligopoly: identical goods produced

•Differentiated Oligopoly: products are differentiated

•Generally Higher Prices

•Can Lead To: Price leadership; Price wars; Collusion; Cartel

Key Terms

Cartel: group of firms that gets together to make output & price decisions Firms join to increase their market power

Collusion: an agreement among members to set prices & production levelsPrice War: competitors cut their prices very low to win businessPrice fixing: agreement among firms to sell at the same or very similar prices

Price WarsHess vs. USA gas in Ballston Spa (Spring of last year)Monday Hess $2.29 USA $ 2.30

Tuesday Hess $2.29 USA $ 2.29

Wednesday Hess $2.29 USA $ 2.27

No Competition:

No other firms!

Major Points:

• High Prices

• Four Types of Monopolies:

Natural

Geographic

Technological

Government

Extensive Control in the market

Natural Monopolies

A monopoly that occurs naturallyEx. Public utilities, franchise, regulation, economies of scale Telephone Public transportation

Geographic Monopoly

Occurs because of isolation or abundance of a natural resource

Government Monopoly

Involves products that private industry may not adequately provide Ex. Gov’t monopoly on research

marijuana; FAA bills that protect gov’t workers from competition; postal system; schools

Technological Monopoly

• New invention or technique – no competitors yet OR patents or copyrights

                        

Dangers of Monopolies

Can cause artificial shortagesHigh pricesDenies benefit of competitionNot dependent on the marketCan gain political power