Market StructuresMarket Structures

Chapter SixChapter Six

Highly Competitive MarketsHighly Competitive Markets

Consumers benefit greatly from highly Consumers benefit greatly from highly competitive marketscompetitive markets

Two types: Two types: Perfect CompetitionPerfect Competition Monopolistic CompetitionMonopolistic Competition

Perfect CompetitionPerfect Competition

Definition: Buyers (consumers) and Definition: Buyers (consumers) and sellers (producers) compete directly and sellers (producers) compete directly and fully under the laws of supply and fully under the laws of supply and demand.demand.

No one seller controls supply, demand, No one seller controls supply, demand, or pricesor prices

Also called pure competitionAlso called pure competition

Four Conditions of Perfect Four Conditions of Perfect CompetitionCompetition

1.1. Many buyers and sellersMany buyers and sellers

2.2. Identical ProductsIdentical Products

3.3. Informed BuyersInformed Buyers

4.4. Easy Market Entry and ExitEasy Market Entry and Exit

No market is perfectly competitiveNo market is perfectly competitive

Example: Example: Agriculture Market in the Agriculture Market in the United StatesUnited States

Meeting the four conditions…Meeting the four conditions…1.1. Independent buyers and sellers—farmersIndependent buyers and sellers—farmers

2.2. Similar products—corn grown by a farmer in Similar products—corn grown by a farmer in GA is similar to corn grown in TNGA is similar to corn grown in TN

3.3. Informed buyers—labels on produceInformed buyers—labels on produce

4.4. Easy Exit/Entry—suppliers can easily Easy Exit/Entry—suppliers can easily change specialization in the marketchange specialization in the market

Monopolistic CompetitionMonopolistic Competition

Definition: market in which many Definition: market in which many producers offer a similar, but not identical, producers offer a similar, but not identical, good or servicegood or service

Similar to perfect competition in that it is Similar to perfect competition in that it is under supply and demandunder supply and demand

Much more common than perfect Much more common than perfect competitioncompetition

Product Differentiation in Product Differentiation in Monopolistic CompetitionMonopolistic Competition

Sellers try to point out differences between Sellers try to point out differences between their products and those of their their products and those of their competitorscompetitors

Product differentiationProduct differentiation used to set used to set products apartproducts apart

Non-price Competition in Non-price Competition in Monopolistic CompetitionMonopolistic Competition

Competition through advertising, not priceCompetition through advertising, not price

Example: Blue jean marketExample: Blue jean market ““No-name” vs. designerNo-name” vs. designer

ProfitsProfits

By setting a product apart from its By setting a product apart from its competitor, the seller can raise the price competitor, the seller can raise the price above the competitive priceabove the competitive price

Done by: advertising, brand-name loyaltyDone by: advertising, brand-name loyalty

Ex. Godiva ChocolateEx. Godiva Chocolate

Imperfectly Competitive Markets

Dominated by 1-4 sellersDominated by 1-4 sellers

Two types –Two types – OligopolyOligopoly MonopolyMonopoly

Oligopolies (Oligopoly)Oligopolies (Oligopoly)

Most common noncompetitive market in Most common noncompetitive market in the USthe US

Definition: market in which a few large Definition: market in which a few large sellers control most of the production of a sellers control most of the production of a good or servicegood or service

3 Conditions of an Oligopoly3 Conditions of an Oligopoly

1.1. Few Large SellersFew Large SellersLargest 3 or 4 sellers control 70% or more of Largest 3 or 4 sellers control 70% or more of the marketthe market

2.2. Identical or Similar ProductsIdentical or Similar Products

3.3. Difficult Market EntryDifficult Market Entry

Oligopolies at WorkOligopolies at Work

Non-price competition:Non-price competition: sellers attempt to sellers attempt to differentiate their products through differentiate their products through advertising and name-brand loyaltyadvertising and name-brand loyalty

Interdependent Pricing:Interdependent Pricing: Responding to the Responding to the prices of competitorsprices of competitors

Pricing War:Pricing War: Sellers aggressively undercut Sellers aggressively undercut each other’s prices in an attempt to gain each other’s prices in an attempt to gain the market sharethe market share

Oligopolies at Work, ContinuedOligopolies at Work, Continued

Cartels: Cartels: Companies openly organizing a Companies openly organizing a system of price setting and market sharingsystem of price setting and market sharing International carters: diamonds, oilInternational carters: diamonds, oil Often unstable and short-livedOften unstable and short-lived

Collusion: Collusion: Sellers secretly agree to set Sellers secretly agree to set production levels or pricesproduction levels or prices Illegal!!Illegal!!

MonopoliesMonopolies

Conditions opposite from perfect Conditions opposite from perfect competitioncompetition

Conditions:Conditions:1.1. Single SellerSingle Seller

2.2. No close substitutesNo close substitutes

3.3. Difficult Market EntryDifficult Market Entry

4 Types of Monopolies4 Types of Monopolies

1.1. Natural MonopoliesNatural MonopoliesDefinition: Single seller that produces a good/service most Definition: Single seller that produces a good/service most efficientlyefficientlyExample: public and private utilitiesExample: public and private utilities

2.2. Geographic MonopoliesGeographic MonopoliesLimited by geographic locationLimited by geographic locationExample: general store in a rural areaExample: general store in a rural area

3.3. Technological MonopoliesTechnological MonopoliesDevelop when a producer develops a new technologyDevelop when a producer develops a new technologyExample: trident submarinesExample: trident submarinesPatents and copyrightsPatents and copyrights

4.4. Government MonopoliesGovernment MonopoliesAny market in which the government is the sole sellerAny market in which the government is the sole sellerExample: water, sewage, roads, bridges, canalsExample: water, sewage, roads, bridges, canals

Monopolies at WorkMonopolies at Work

3 forces limit seller’s control of prices3 forces limit seller’s control of prices1.1. Consumer demandConsumer demand

2.2. Potential CompetitionPotential Competition

3.3. Government RegulationGovernment Regulation