Economic

Unit 6

Market Structures

“These documents are being distributed for educational discussion purposes only. They do not reflect any attempt by the North

East Independent School District, its trustees, administrators, or teachers, to promote any particular viewpoints or opinions

expressed in the documents over any others, nor do the viewpoints or opinions expressed in the documents necessarily reflect

those of the NEISD, its trustees, administrators or teachers.”

Sect 1: Highly Competitive

Markets

• Consumers benefit most from competitive

markets

• Competitive markets provide consumers

with a range of products that are….

• …Lower priced

• …Better reflect the cost of production

• …Offered by multiple sellers

Competition v. Monopoly

• The forces of supply and demand promote

competition by encouraging producers to

supply consumers with a wide selection of

goods and services

• Two types of highly competitive markets

are….

• …Perfect competition

• …Monopolistic competition

Perfect Competition

• Buyers and sellers compete directly under

the laws of Supply and Demand

• No one buyer or seller controls demand,

supply, or prices

• Nothing prevents competition among

buyers and sellers

4 Conditions of Perfect Competition

• Many buyers and sellers act independently

• Sellers offer identical products

• Buyers are well informed about products

• Sellers can enter and exit the market

easily

Many Buyers and Sellers

• Because there are many buyers and

sellers in the market, each one has a very

small share in overall purchases and sales

• No single buyer has enough power to

control demand, supply, or price

• Each buyer or seller acts independently

• This promotes competition

Identical Products

• Under perfect competition products would

be identical

• The only distinguishing thing would be

price

• Is this possible?

Informed Buyers

• Under perfect competition buyers would

be knowledgeable about products

• Sellers can compete perfectly only when

buyers can make informed decisions

Easy Market Entry & Exit

• For sellers to compete perfectly in a

market they must be free to enter a

profitable market and leave an unprofitable

market

• Ease of entry or exit depends on…

• …start-up costs

• …level of technical knowledge needed

• …amount of control held by those already

in the market

Perfect Competition As A Model

• No market is

perfectly

competitive

• This illustration

helps economists

analyze markets

and determine

how competitive

they are

Close to Perfect…

• Agricultural products come close…

• …Thousands of independent growers

• …Products are near identical (apples to

apples)

• …Buyers are generally well informed

• …Sellers can enter and exit the market

freely (cotton farmer can grow soybeans)

Monopolistic Competition

• In Monopolistic Competition, sellers offer

different rather than identical products

• Each seller tries to get monopoly like

power by selling a unique product

• Since product variation is much more

common than selling identical products,

monopolistic competition is the more

common

• Must still compete based on supply and

demand

Product Differentiation

• Sellers in monopolistic competition try to

differentiate, or point out differences

between their products and those of their

competitors

• Whether products are really different or

just seem different, sellers use product

differentiation to set their product apart

Non-Price Competition

• Non-Price competition is when sellers

compete on a basis other than price

• Emphasizing their brand name (designer

v’ non-designer)

• …Relies heavily on advertising

• …Creates a “sense of style”

• …Snob appeal

Profits

• The main goal of product differentiation

and non-price competition is to increase

profits

• This practice allows sellers to raise the

price of their product

• They attempt to increase demand for their

product and shift the market price upward

Graphing a Shift in Demand

• Companies attempt

to shift the demand

curve by using

strategies like a new

advertising campaign

• They attempt to gain

some monopoly like

control over the price

Sect. 2: Imperfectly Competitive

Markets

• Not all markets are highly competitive

• When competition is low it usually means

fewer products and less choice is available

for consumers

• An imperfectly competitive structure also

usually results in higher prices

Oligopolies

• An oligopoly is a market structure in which

a few large sellers control most of the

production of a good or service

• 3 conditions present in an oligopoly…

• …there are only a few large sellers

• …sellers offer identical or similar products

• …other sellers cannot enter the market

easily

Few Large Sellers

• A market is considered an oligopoly when

the largest three or four sellers produce

most of a markets total output (70+%)

Identical or Similar Products

• Because an oligopoly is dominated by a

few large sellers they…

• …have a lot at stake

• …are less likely to take risks

• …are not quick to offer new products

Difficult Market Entry

• The few sellers in market can maintain

their control only if other sellers cannot

easily enter the market due to…

• …high start up costs

• …government regulations

• …consumer loyalty to their products

Oligopolies at Work

• The lower number of sellers that are in a

market means that each seller has a larger

control over prices in their market

• Most use legal means to control prices

• Sometimes they might use illegal

strategies to control price

Non-Price Competition

• Advertising is used as an attempt to

develop brand loyalty

• The market for breakfast cereal is an

oligopoly where 3 companies dominate

80% of the market…

• …Kellogg’s

• …General Mills

• …Post

Interdependent Pricing

• Sellers in an oligopoly are price sensitive to prices their competition maintains

• Interdependent pricing is being very responsive to and dependent on prices of their competitions products

• They are reluctant to risk their market share by increasing their prices too far from their competition

• Thus their similar products seem to be offered at similar prices (air fares)

Price Leadership

• When one of the largest sellers in a market

takes the lead by setting a price for its

product they are exerting price leadership

• If others follow their price, the market leader

has in effect controlled the price of all

products

• If other sellers don’t follow their price they

may be forced to change their price again to

remain competitive

Price Wars

• A price war is when sellers aggressively undercut each other’s prices in an attempt to gain market share

• Price wars help consumers initially

• If the price wars continue, some sellers might be forced out of business because they lose so much money

• Usually when price wars end prices go up to former levels or even higher because some competition has been eliminated

• …gasoline

Collusion

• Collusion is when sellers secretly agree to

set production levels or prices for their

products

• This practice is illegal and carries heavy

penalties such as fines and even prison

sentences for those involved

Cartels

• Cartels are groups of producers who ban

together and openly organize a system of

price setting and market sharing…

• …Oil (OPEC)

• …DeBeers’ Diamond Cartel

• …Cartels are illegal in the United States

Monopolies

• A monopoly is a market structure where a

single seller controls all production of a

good or service

• A monopoly generally exists when…

• …there is a single seller

• …no close substitute goods are available

• …other sellers cannot enter the market

easily

Single Seller

• In San Antonio monopolies exists under

licensing agreements…

• …SAWS

• …City Public Service

Difficult Market Entry

• High start up costs

• High level of technical knowledge

• Expensive to maintain

• Government restrictions

Types of Monopolies

• Natural monopolies feature a single large

seller that produces a good or service more

efficiently

• Economies of scale allow these large sellers

to use their human, capital and other

resources to provide a particular good or

service more efficiently than if performed by

several smaller sellers

• Ex. Utilities (electricity, water, etc.)

• Closely regulated by governments

Maybe a good reason for

Monopolies

• What might our city look like if it was served

by multiple electric companies?

Geographic Monopolies

• Geographic monopolies offer limited

potential profits for multiple providers

because of their remote location

• Ex. a general store in a remote area

• In our times geographic monopolies have

competition from mail order, delivery

services, and the internet

Technological Monopolies

(Patents)• A patent grants a company or an individual

the exclusive right to produce, use, rent,

and sell an invention or discovery

• Patents are granted for a term of 20 years

and give the patent holder a 20 year

monopoly to produce the product, profit

from the product

• Ex. medicines

Technological Monopolies

(Copyrights)• A copyright grants authors, musicians &

writers, the exclusive rights to publish,

duplicate, perform, and display their

creative works

• Copyrights today are granted for lifetime +

70 years from their time of publication

Government Monopolies

• Government monopolies are any market in which a government is the sole seller of a product

• The product is usually a basic necessity that cannot be provided through the normal price system…

• …Water, sewer, roads, bridges

• These types of monopolies provide goods and services that serve the general welfare of citizens and usually have public support

How Monopolies Set Prices

• High or low, consumer demand sometimes

determines the service price

• Excessively high prices might make others

enter the market even though start up

costs are high

• Government also regulate rates…

• …electricity, cable TV, water

Comparing Market Structures

Sect. 3: Market Regulation

• The US government has enacted several

pieces of legislation designed to protect

the public from actions taken by

monopolies

• Huge monopolies called trusts dominated

US industries in the late 1800’s

• Oil, steel, sugar, tobacco, meatpacking

and railroads

Laissez-Faire

• Most believe that businesses prosper

when the government does not interfere in

the marketplace

• Laissez-fare is a French term meaning “let

the people do as they will”

• Many believed that businesses were

getting too powerful and the government

responded with anti-trust legislation

Antitrust Legislation

• Antitrust Legislation was designed to…

• …monitor and regulate big business

• …prevent monopolies from forming

• …dismantle existing monopolies

• Presidents Theodore Roosevelt and

William Howard Taft made “trust-busting”

a priority of their administrations

Interstate Commerce Act

• Created the Interstate Commerce

Commission (ICC) which oversaw the

railroad freight business

• Rates charged for shipping had soared

causing farmers and merchants difficulty in

getting their products to market

• Abolished in 1995

Sherman Antitrust Act

• Banned agreements and actions that were “in

the restraint of trade”

• Language of law was vague and resulted in

numerous court actions

• John D. Rockefeller and his company,

Standard Oil Company, controlled almost all

of the US oil industry

• Using this law, the Supreme Court broke up

Standard Oil Company in 1911

• The remaining company today is Exxon/Mobil

Clayton Antitrust Act

• Enacted in 1914, this law prohibited price

discrimination-the practice of offering

different prices to different customers

under the same circumstances

Federal Trade Commission Act

• This 1914 act created the Federal Trade

Commission (FTC) to investigate unfair

methods of competition and commerce

• Still in force today

• Bernie Madoff

Robinson-Patman Act

• This 1936 law strengthened the Clayton

Antitrust Act dealing with price

discrimination

• The government continues today to enact

antitrust legislation as the need arises

US Antitrust Legislation Laws

More Recent Antitrust Breakups

• In 1982 the government broke AT&T into

several smaller units

• Ed Whitaker

• Two of the units Pacific Telesis and SBC

Communications reunited in 1996 and

reclaimed the name AT&T which is much

smaller than the original

• AT&T was headquartered in San Antonio

for several years, but moved to Dallas

recently

References

• Economics: Texas Edition: 2016. McGraw Hill Education

• Holt Economics; Texas Edition: 2003, Holt, Rinehart and

Winston