Chapter 7: Market Structure

Chapter 7: Market Structure
• 1. Perfect Competition
• 2. Monopoly
• 3. Monopolistic Competition and Oligopoly
• 4. Regulation and Deregulation
How How does does Competition
Competition
affect affect your your choices? choices?
Property Management Software. Real-Estate-Google-Monopoly
http://www.trexglobal.com. (accessed October 2, 2010).

1. Perfect Competition
• The simplest market structure in which a large number of
firms all produce the same product an no single seller
controls supply or price
New York Stock
Exchange
Street Vendors
Fishing Market,
Vegetable or fruit
vendors
Free Software

New York Stock Exchange
• A Stock Exchange located at 11 Wall Street Lower Manhattan, NYC
• Largest by market capitalization of its listed companies at $11.92 trillion as of Aug
2010

Four Conditions
• Many Buyers and
Sellers participate in
the market
• Sellers offer identical
products- commodity -a
product that is the
same no matter who
produces or sells it
• Examples notebook
paper, paper clips,
sugar, low grade
gasoline
• Buyers and Sellers are
well informed
• Sellers are able to
enter and exit the
market freely
Informed
Buyers and
Sellers
Free Market
Entry and Exit
Many Buyers
And Sellers
Perfect
Competition
No control
Over Price
Identical
Products

Barriers to Entry
• Any factor that
makes it difficult
for a new firm to
enter a market
• Imperfect
competition - a
market structure
that fails to meet
the conditions of
perfect competition
Perfect
Competition
• Start-Up Costs -
expenses a new
business must pay
before it can begin
to produce and sell
goods
• Technology -need a
lot of preparation
and study
Number of Firms:
Many
Variety of Goods:
None
Barriers to Entry:
None
Control over Prices:
None

Price and Output
• Competition within Perfect Competition market keep both
prices and production costs low
P
r
i
c
e
10
5
Equilibrium
Price
Market Equilibrium in
Perfect Competition
Demand
Equilibrium
Quantity
Supply
What factors
allow a perfectly
competitive
market to reach
equilibrium?
What prevents
any on firm from
raising its
prices?
0
5
Quantity (Output)
10

2. Monopoly
• A market in which a single seller dominates
• Economies of Scale -factors that cause a producer’s average
cost per unit to fall as output rises
• Natural monopolies -a market that runs most efficiently
when one large firm provides all of the output
• Technology and Change – can ruin monopolies (example AT&T
to cell phones)
To prevent resources
from being wasted,
public water is a natural
monopoly.
Nivangune, Geetai, A
Clean Desk=A Healthier
You, Medimanage.com
(accessed October 2,
2010

Effects on Economies Of Scale
• Average Total Cost Curve
Without Economies of
Scale
• Average Total Cost Curve
With Economies of Scale
C
o
s
t
Average
Costs Rises
when output
exceeds a
certain level.
C
o
s
t
Average Costs
of production
falls when firms
produce more
Output
Output
Why do production costs fall as output increases? Describe the cost
curve for a firm without economies of scale.

Perfect Competition vs.
Monopoly
How are monopolies similar to perfect competition?
Different?
Perfect
Competition
Monopoly
Number of Firms:
Many
Variety of Goods:
None
Barriers to Entry:
None
Control over Prices:
None
Number of Firms:
One
Variety of Goods:
None
Barriers to Entry:
Complete
Control over Prices:
Complete

Government Monopolies
• A Monopoly created by the government
• A Patent - license giving inventor exclusive right for a specific
period of time
• Franchise -a contract that gives a single firm the right to sell its
goods within an exclusive market
• License -gov’t issued right to operate a business
• Industrial Organizations -Major League Baseball

Output Decisions
• Monopolies face limited
choice –either output or
price
• Monopolistic Dilemma -if
a company produces
more, the price will fall,
if it produces less, the
price will rise
• Falling Marginal Revenueif
company decrease
price, demand will
increase, but marginal
revenue will decrease
• Setting a Price -
Marginal revenue is
slightly higher than the
price
Price
Demand Schedule for a Product
Week
Demand
Total
Revenue
Change
in Rev
$12 8,000 $96,000 --- ---
$11 9,000 $99,000 $3,000 $3
$10 10,000 $100,000 $1,000 $1
$9 11,000 $99,000 $-1,000
$-1
$8 12,000 $96,000 -3,000$
$-3
Marginal
Revenue

Why does revenue fall production increases from 10,000 to 11,000?
How does producing fewer goods benefit a monopolist?
Output Decisions
• When 8,000 doses are made, the
market price is 12.
Price
Demand Schedule for a Product
Week
Demand
Total
Revenue
Change
in Rev
Marginal
Revenue
P
r
i
c
e
s
12
10
8
$12 8,000 $96,000 --- ---
$11 9,000 $99,000 $3,000 $3
$10 10,000 $100,000 $1,000 $1
$9 11,000 $99,000 $-1,000
$-1
0
8 10 12
Output
•As production rises to 11,000
doses, the price falls to $9.
$8 12,000 $96,000 -
3,000$
$-3

Price Discrimination
• The division of consumers into groups based on how much they will pay for
a good
• Market Power -ability to control prices and total market output
• Targeted Discounts -discounted airline fares, Manufacturers’ Rebates,
Senior citizen discounts, children . . . free
P
r
i
c
e
$11
$3
Market
Price
b
a
Demand
Marginal Cost
Marginal Revenue
c
Setting a
Price in a
Monopoly
How does
Point C show
the benefits
to consumers
in a perfectly
competitive
market?
0 9,000
Output

Limits of Price Discrimination
• Market must meet three conditions
• Some market Power -must have some control
• Distinct Customer Groups – seniors v. citizens
• Difficult resale-

3. Monopolistic Competition and
Oligopoly
• A market structure
in which many
companies sell
products that are
similar but not
identical
• Different from
perfect competition
because products
are not similar
• Examples – Jeans,
bagel shops, ice
cream stands, gas
stations, retail
store
Like, NO,Tyler, I would
never go out with you!
•Jeans are an example
of monopolistic
competition because
jeans can vary size,
color, style, and
designer
•“Are those bugle boy
jeans you are
wearing.”

Four Conditions
• Many firms -not
marked by economies
of scale
• Few article barriers to
entry
• Little control over
price -will buy others
if price rises
• Differentiated
products -making a
product different from
others, but similar
Monopolistic
Competition
Number of Firms:
Many
Variety of Goods:
Somed
Barriers to Entry:
Low
Control over Prices:
Limited

Non price Competition
• A way to attract customers through style, service, or location, but not
at a lower price
• Physical characteristics -running shoes, pens, cars, and toothpaste
• Location -will fail or succeed based on location
• Service Level -fast food, dinners
• Advertising, image, or status – designer names
•The designer athletic shoes
are way more expensive than
the sensible sneakers, but
you buy them anyways.
•Status along with designer
shoe is a form of non price
competition
•Wawa is closer to Mr.
Schenk’s house than Giant.
For a late night snack, he
will go to Wawa for peanut
butter cups, even though
they are cheaper at Giant

Prices, Output, and Profits
• Prices – competition curves raising prices
• Output – falls pretty fairly
• Profits – earn just enough to cover costs

Oligopoly
• A market structure in
which a few large
firms dominate a
market
• Markets for air
travel, automobiles,
breakfast cereals,
and household
appliances
• Pepsi, Coke, Coca Cola
Oligopoly
Number of Firms:
A Few
Variety of Goods:
Some
Barriers to Entry:
High
Control over Prices:
Some

Oligarchy
• Barriers to entry -technological or
through government licenses or
patents-high start up costs
• Price Wars -a series of competitive
price cuts that lowers the market
price below the cost of production
• Collision – illegal agreement among
firms to divide the market
• Price fixing- an agreement among
firms to charge one price for the
same good
• Cartel -a formal organization of
producers that agree to coordinate
prices and production
The U.S. government decides to go after an agri-business giant with a price-fixing
accusation, based on the evidence submitted by their star witness, vice president
turned informant Mark Whitacre Mark Whitacre has worked for lysine developing
company ADM for many years and has even found his way into upper management. But
nothing has prepared him for the job he is about to undertake - being a spy for the
FBI. Unwillingly pressured into working as an informant against the illegal price-fixing
activities of his company, Whitacre gradually adopts the idea that he's a true secret
agent. But as his incessant lies keep piling up, his world begins crashing down around
him

The OPEC Cartel
Share of Total Oil
Reserves
Who controls most of
the oil reserves? How
about the least? How
does that affect the
United States?
• The Organization of Petroleum
Exporting Countries (OPEC) is an
international cartel of major oil
producers. OPEC members produce
about 40% of the world’s oil and control
about 75% of the world’s oil reserves.
Members meet regularly to set
production quotas. Most experts agree
that world oil supplies are not
sufficient to meet increased demand.
In 2008, Libya’s OPEC delegation made
a prediction: “The easy, cheap oil is
80over.”
70
60
50
40
30
20
10
0
1st
Qtr
European
Union
OPEC
Non-OPEC
Russia

Powerful trusts in the late 1800’s led Congress to pass antitrust
legislation.

4. Regulation and Deregulation
• Sometimes the government
takes steps to promote
competition because
markets with more
competition have lower
prices.
• Market Power -ability of a
firm to control prices and
total output
• Predatory Pricing -selling a
price below cost for a short
period of time to drive
competition out

Government and Competition
• Sherman Anti Trust – laws that encouraged competition
in the market place
• Government broke up monopolies
• Blocking Mergers -when two or more companies join to
form single firm
Key Events in Federal AntiTrust Policy
Date
Event
1901 Theodore Roosevelt became President and begins
enforcing the 1890’s s Sherman AntiTrust Act, which
outlaws mergers and monopolies that restrain trade
between states.
1911 Supreme Court breaks up Rockefeller’s s Standard Oil
Trust Company
1950 Celler-Kefauver Act allows government to stop
mergers that could hurt competition
1982 AT&T agrees to break up its local phone service into
several companies
2001 Department of Justice settles its lawsuit with
Microsoft.

Deregulation
• The removal of some government controls over a market
• Decided in the late 1970’s, Congress deregulated some of
the market because it was reducing competition.
• Deregulated the airlines, trucking, banking, railroad, natural
gas, and television broadcasting industries
Regulation and Deregulation
Government Passes Antitrust Laws
Laws are used to regulate business
New laws limit unfair business
Deregulation promotes competition

Comparison of Market
Structures
Perfect
Competition
Monopolistic
Competition
Oligopoly
Monopoly
Number of
Firms
Many
Many
A Few
Dominate
One
Variety of
Goods
None
Some
Some
None
Control over
Prices
None
Little
Some
Complete
Barriers to
Entry
None
Low
High
Complete
Examples
Wheat,
Shares of
stock
Jeans, Books
Cars, Movie
Studios,
Soda
Companies
Public Water