Chapter 6 Lecture
Market Structures
• Two basic types of markets
• (1) Highly competitive markets
– Example is the jeans market
– A large selection of producers & high demand
• (2) Imperfectly competitive markets
– Example is cable TV market
– A few suppliers, fewer products, & usually higher prices
Highly Competitive Market
• Two types of highly competitive markets • (1) Those with perfect competition
Perfect Competition
• Description of perfect competition
– Consumers & Producers compete directly under---Supply & Demands laws
• Guidelines to tell if perfect competition
• (1) Many buyers & sellers act independently • (2) Sellers offer identical products
• (3) Buyers are well informed about products • (4) Sellers can enter or exit the market easily
Perfect Competition
• #1 Criterion--Buyers & Sellers Act Independently
• With many buyers & sellers no one has control of the market
Perfect Competition
• #2 Criterion—Identical Products • Sellers offer identical products
Perfect Competition
• #3 Criterion—Informed Buyers
• Buyers are knowledgeable shoppers • Here are some astute buyers
Yes, I am astute!
Buy everything
Perfect Competition
• #4 Criterion—Easy Entry & Exit Perfect Competition
• Sellers must be able to enter a profitable market
• Sellers must be able to exit unprofitable markets easily
• Factors of business controlling this
– Start up costs
– Technical knowledge needed
Perfect Competition As A Model
• Perfect Competition Only Exists As a Model • Closest Market is the Agricultural Market
– Thousands of Farmers Acting Independently
– They offer Identical Products (corn, beans, wheat) – Buyers are well informed—i.e.. grocery shopping – Easy entry & exit—plant different crops each year
Market Structure is Determined by Amount
of Competition
Monopolistic Competition
• Monopolistic Competition Differs From Perfect Competition
– Sellers Offer Different Rather Than Identical Products
• Each firm tries to build a monopoly with its product
Product Differentiation
• Sellers Try to Point out Differences in Their Product
Monopolistic Competition
Non-price Competition
• Sellers Differentiate Through Non-Price Competition – Compete on Basis Other Than Price
– Create Brand Name Through Advertising – Air Jordan & Adidas Air
Monopolistic Competition
• Sellers Differentiate Product & Create Niche
• This niche creates a monopoly that dominates the market
Profits & Product Differentiation
• The purpose of product differentiation is to increase demand
– Thereby increasing price – Thereby increasing profit
Jordan Six Rings Boot - Men's
Imperfect Competitive Markets
• Imperfectly competitive markets mean the markets are dominated or owned by a few sellers
• Most common form of noncompetitive market is an oligopoly
Oligopoly
• Oligopoly: a market structure in which a few sellers control most of the production of a good or service
Oligopoly
• Oligopoly exits when:
• There are only a few large sellers
• Sellers offer identical or similar products
Oligopoly
• Interdependent Pricing:
• The practice of setting prices in a manner responsive to –or dependent on—one’s competitors
• Airfare Example: Tucson to Chicago
– Southwest $428.00 – Northwest $464.00 – Dleta $464.00
Price Leadership
• In “price leadership” one of the largest sellers takes the lead and sets the price
• The leader hopes that all the other companies will follow
• If the other competitors follow the leader has effectively controlled the price
Price War
• Sellers begin to undercut each other in order to get market share
• Price wars may eliminate some competitors • Once the competitors are eliminated, the
remaining companies raise their prices • Airline carries have been forced out of
Collusion
• Collusion
– Sellers secretly agree to set production levels or prices for their products
– This is an illegal practice by governmental law
• Example:
Cartels
• Cartel:
– A group of companies openly organize a system of price setting & market sharing
• De Beer diamonds
– Openly controls the sale of rough diamonds
– Keeps the diamonds scare thereby keeping prices high
Monopolies
• Monopoly:
– A single seller controls the market
• Three conditions exit for a monopoly
– There is a single seller
– No close substitute goods are available
– Other seller cannot enter the market easily
• Examples:
– Cable companies
Types of Monopolies
• Technological monopoly
– Exits when a company produces a new technology that no one else has
– Either new products are created or old production becomes obsolete
– Example: Raytheon & some of its missile systems – Raytheon Common Tri-mode Seeker
Patent & Copyrights
• Patent gives a company or individual the right to produce, use, rent, and sell an invention or discovery for 17 years
– Example: Prince tennis racquets
• Copyright protects written works and works of art
– Protects authors, musicians, & artist – Controversy over Beatles & IPod
Types of Monopolies
• Government Monopoly
– Any market in which the
government is the sole seller of a product
– Sweden all public utilities
• Examples in the United States
Three Factors Limiting Monopolies Power
over Pricing
• Consumer demand
– If the monopoly charges too much demand could cease
– Cable TV at $200 per month
• Potential Competition
• Monopolies don’t want competitors in
• If they make too much others will enter the market
• Government Regulation
Market Regulation
• Laissez-fare policy allowed monopolies to exist
– Keep government out of business – Trusts developed
Antitrust Legislation
• Interstate Commerce Act • Sherman Antitrust Act • Clayton Antitrust Act
• Federal Trade Commission Act • The Robinson-Patman Act
Government Regulation of Credit Card
Industry
• Credit Card Act of 2009
– Limited interest rate hikes (can’t be retroactive & 45 day notice for changes)
– Limited universal default (only allowed if 45 day notice is given & not retroactive)
– Limited credit to 21 year olds unless co-signed – More time to pay
– Disclosure of minimum payments – Banks plan for loss of revenue
Sherman Antitrust Act
• Banned agreements & actions in “restraint of trade”
• Set the tone for anti-trust legislation
• Broke up Standard Oil owned by John D. Rockefeller in 1911
– Rockefeller controlled the entire oil industry – Left only one Standard Oil of New Jersey
Interstate Commerce Act
• Designed to break up trusts & regulate big business
– Created Interstate Commerce Commission
• Came in the administrations of Teddy Roosevelt & William Howard Taft
• ICA: regulated freight business of railroads
– Later truck freight
Clayton Antitrust Act
• Government outlawed unfair business practices
• Outlawed price discrimination
– the offering of lower prices to larger companies – who then put others out of business
Federal Trade Commission Act
• Passed in 1914
• Part of the Progressive Era of early 1900’s to 1920’s
• Purpose of the act was to investigate unfair methods of competition
The Robinson- Patman Act
• Passed in 1936
• Strengthened the Clayton Antitrust Act
• Dealt specifically with price discrimination
• List of the antitrust legislation on page 133 of your book
Some effects of deregulation
• Repeal of Glass-Steagall Act
– Let commercial banks become investment banks – Exposed customers to high risk investments
adding to banking meltdown
• Headlines: “U.S. Senators John McCain and Maria Cantwell proposed reinstating the Depression-era
Glass-Steagall Act that split commercial and investment banking to rein in Wall Street firms in response to the financial crisis.”
