CHAPTER 7

Market Structures

Characteristics of Monopolistic Competition

Most real markets fall between perfect competition and monopoly

Monopolistic Competition-many sellers offer similar products one of the most common market structures Product differentiation- sellers try to distinguish their

products from similar ones Nonprice competition- use factors other than price to

attract customers

Characteristics of Monopolistic Competition

1: Many Sellers and Many Buyers Many Options Producers choose products,

amount, and price 2: Similar but

Differentiated Products Consumer Loyalty with

unique products Use market research Sophisticated techniques

Focus groups-moderated discussions with small groups of consumers

Survey large number of consumers

3:Limited Control of Prices Differentiation five producers

limited control of prices Low prices Name brands

Consumers pay extra if they perceive important enough difference Will switch if price is too high

4:Free Entry and Exit No barriers

Competition is difficult for small businesses

Some firms take losses Signal that it is time to exit

the market

Characteristics of an Oligopoly

Oligopoly-market structure with only a few sellers offering similar products

Less competitive than monopolistic competition Each firm has large market share- percent of total

sales in the marketFew firms due to high start-up costs-

expenses of entering the market

Characteristics of an Oligopoly

1: Few Sellers/Many Buyers Few firms dominated market

Industry is oligopoly if four firms control 40% of market

Half manufacturers are Oligopoly Cereals, soft drinks, movies,

industrial products2: Standardized or

Differentiated Products Standardized

Brand name, service, location Differentiated

Marketing strategies Brand-name products

3: Control of Prices Price affects entire

market One lowers prices, most

will follow One raises prices, some

may not follow4: Little Freedom of

Entry/Exit High start-up costs Established firms are

better off High investments in

oligopolies

Promoting Competition

Government regulation- rules of laws that control business behavior

Antitrust Legislation-define monopolies, allow government to control or break them up

Trust-group of firms combined to reduce competition

Merger- joining of firms or purchase of one firm by another

Ensuring a Level Playing Field

Government ensures competitivenessU.S. Laws prohibit most monopoliesPrice fixing- competing businesses collaborate

to set prices Alternatively, they might agree to restrict output to

drive up pricesMarket allocation- businesses divide up

market, control own territoryPredatory pricing-set up prices below cost to

drive out small producers Used by cartels and large producers

Protecting Consumers

Cease and desist order- requires firms to stop unfair business practices Issued when a business’ behavior is unfair to

competitors or consumersPublic disclosure- requires businesses to

reveal product information Enables consumers to make informed buying

decisions

Deregulating Industries

20th Century regulation focused on public service industries

Deregulation- reduces or removes government oversight and control May lead to fewer consumer protections

Usually results in lower prices since markets become more competitive With regulated prices, firms have no incentive to

reduce costs

Vocabulary

Monopolistic Competition

many sellers offer similar products

Product Differentiation When sellers try to distinguish their products from similar ones

Nonprice Competition When businesses use factors other than price to attract customers

Focus Group moderated discussions with small groups of consumers

Oligopoly market structure with only a few sellers offering similar products

Market Share Percent of total sales in the market

Start-up Costs Expenses of entering the market

Anti-trust Legislation define monopolies, allow government to control or break them up

Vocabulary

Trust Group of firms combined to reduce competition

Merger Joining of firms or purchase of one firm by another

Price Fixing Competing businesses collaborate to set prices

Market Allocation Businesses divide up market, control own territory

Predatory Pricing Set up prices below cost to drive out small producers

Cease and Desist Order

Requires firms to stop unfair business practices

Public Disclosure Requires businesses to reveal product information

Deregulation Reduces or removes government oversight and control