Quick Evaluation• Lectures• Videos• Focus Note Guides• Books • In-class problems/case studies

I think _____ is helping me the most in learning.

I could learn better if ________________

MARKET STRUCTUREHow many firms are there and why do we care?

What do we want from firms?

• New ideas, products and services

• Lowest possible price and highest possible quantity

• Efficient use of resources

• Safe products

• Honest selling

Industry types

• Perfect Competition

• Monopolistic Competition

• Oligopoly

• Monopoly

• Natural Monopoly

Perfect CompetitionConditions:

•Identical Product

•Many Buyers and Sellers

•All buyers and sellers have perfect information

•No barriers to entry/exit

Perfect Competition - Examples

AgricultureCommodities

CoalTimberCotton

Identical Product

• No need for single firm to advertise• May be industry-wide advertising

• Buyers choose just on price• Push all firms to a single price

Many Buyers and Sellers

• No one firm or buyer has any market power

• Market power is the ability to influence price by restricting or increasing quantity supplied or quantity demanded.

• Buyers and sellers are PRICE TAKERS BOTH AS SELLERS AND AS BUYERS OF LABOR AND MATERIALS

Tendency to normal profits

• Firms will seek profits by looking for ways to

1.Lower costs2.Stifle competition3.Or differentiate product/service

• Can lead to innovation and invention• OR a race to the bottom through cost-cutting

No entry or exit barriers

• New firms will enter in response to positive economic profits.

• Pushing market price down and economic profits to zero

Perfect Competition

Conditions

Identical Product

Many Buyers & Sellers

Perfect Information

Easy Entry/Exit

Implications

• No need for firm advertising• Customers choose on price• Individuals & firms price

takers. Maximum quantity• Rely on oversight from

trade association or government

• Zero economic profit

Pros of Perfect Competition

• Innovation and invention in search of profit advantage

• Ease of entry and exit will lead the industry to zero profits

• Costs in each firm will be minimized and production quantity maximized

Cons of Competition

• Needs to be enforced

• Race to the bottom by minimizing costs

When examining a market, ask:• How many firms are there?

• What barriers to entry exist?

• How differentiated is the product?• Similar or not?• Differences real or perception-driven?

• What is the effect of above on prices and profits?

Most industries are not PC • Concentration ratios different industries

Perfect Monopolistic Oligopoly MonopolyCompetition Competition

MonopolyConditions:

•One seller

•No close substitutes

•Very high barriers to entry

High barriers to entry• Structural

• Economies of Scale• Commodity Control• Brand Loyalty

• Strategic• Predatory Pricing• Product differentiation

• Legal• Patents, Copyrights,Trademarks• Licenses• Natural Monopolies

Monopoly Examples

Monopoly

Conditions:

• One seller

• No close substitutes

• High Barriers to Entry

Implications:

• Firm = Market• Price Searcher –

Restricted Quantity

• Motivation to invest in R&D

• Positive LR Economic Profits

Monopoly

Pros

• Promote exploration and innovation with the promise of large profits

Cons

• Deadweight loss from restricted quantity and higher price

• Can stifle competition and innovation

Monopolistic Competition

• Many sellers & buyers

• Slightly differentiated product

• Style/type, location, or quality

• Perfect information

• Easy entry and exit

Monopolistic Competition - Examples

Monopolistic Competition

Conditions

• Many Buyers/Sellers

• Differentiated Product

• Perfect Information

• Easy Entry/Exit

Implications

• Mostly price takers

• Firm-specific advertising• Assortment• Low price• Highlight perceived difference

– branding

• Zero economic profit in Long Run

• Innovation Incentives

Pros/Cons of Monopolistic Competition

PROS

• Lots of choice and locations

• For the firm some market power – can raise P

• Easy entry pushes profit to zero

CONS

• Lots of Choice means EXCESS CAPACITY

• Are marketing dollars productive?

Product differentiated? NO YES

OneNumber of Firms? Few

Many Perfect

CompetitionMonopolistic Competition

Oligopoly

• Few sellers and many buyers

• Products can be differentiated, like cars

OR homogeneous, like oil

• Significant barriers to entry• Economies of scale

• Distribution channel

• Advertising

Oligopoly - Examples

High Barriers to Entry• Types:

• Fixed Costs or scale is large• Market Dominance is an advantage• Distribution channels controlled

• What does that mean: High Profits

Few Sellers• Price Searchers –

• Interdependent – what one firm does impacts the other firms

• Always consider competition when making P & Q decisions

• High risk of collusion

• Collusion – secret or illegal cooperation

Oligopoly summary

Conditions

• Few sellers• Just two = Duopoly

• Homogeneous or• Differentiated

• Significant Barriers to Entry

Implications

• Price Searcher• Firms interdependent• Restrict quantity and thus

control price

• Positive LR Profits

What do we want from firms?

• New ideas, products and services

• Lowest possible price and highest possible quantity

• Efficient use of resources

• Safe products

• Honest selling

Which industry type is best?

• It depends!

• (Fair) Competition results in:• Highest quantity• Lowest price• Motivation to innovate & invent• Efficient allocation of resources

• But, what if patents didn’t exist? What if we provided the lowest cost possible education or prisons (does quality matter more than lowest cost)?