MARKET STRUCTURE

HOW BUSINESSES INTERACT WITH EACH OTHER

DETERMINES: - PRICING - PROFITABILITY - LEVEL OF COMPETITION - SERVICE TO BUYERS

FOUR TYPES OF MARKET STRUCTURE

PERFECT COMPETITION

MONOPOLISTIC COMPETITION

OLIGOPOLY

MONOPOLY

PERFECT COMPETITION

MANY BUSINESSES SELLING EXACT SAME PRODUCT

EASY FOR NEW BUSINESSES TO ENTER INDUSTRY AND OTHERS TO LEAVE

NO CONTROL OVER PRICE – “PRICE TAKER” - AND CAN SELL ALL THAT PRODUCE

LOW PROFITS – IF HIGH, NEW COMPETITORS MOVE IN

PERFECT COMPETITION (CON’T)

GOOD EXAMPLE – FARMING

TAKE PRICE AS “GIVEN” AND DECIDE HOW MUCH TO PRODUCE

PRICES FREQUENTLY CHANGE, SO PROFITS UP AND DOWN

PEOPLE CAN MOVE INTO AND OUT OF FARMING

PERFECT COMPETITION (CON’T)

TO MAXIMIZE PROFIT, SIMPLY PRODUCE WHERE PROFITS ARE HIGHEST CORN SELLS FOR $4 PER BUSHEL # BUSHELS GROWN FIXED COST VARIABLE COST 1000 $2000 $1000 2000 $2000 $1700 3000 $2000 $2500 4000 $2000 $7000

PROFIT AT: 1000 BUSHELS ( $4 x 1000) - $3000 = $1000 2000 BUSHELS ( $4 x 2000) - $3700 = $4300 3000 BUSHELS ( $4 x 3000 ) - $4500 = $7500 < 4000 BUSHELS ( $4 x 4000 ) - $9000 = $7000

OPPOSITE SIDE – MONOPOLY

ONE SELLER – NO COMPETITORS

COMPLETE CONTROL OVER PRICE – “PRICE SETTER”

SOME CREATED BY LAW – U.S. POSTAL SERVICE

OTHERS ARE “NATURAL MONOPOLIES” – POWER COMPANIES – WILL BE REGULATED

WILL A MONOPOLY ALWAYS INCREASE PRICE?

NO – THEY STILL FACE THE DEMAND CURVE – PEOPLE BUY LESS WHEN PRICE RISES

WILL SET PRICE AND QUANTITY (AMOUNT SOLD) THAT MAXIMIZES PROFIT

EXAMPLE – ELECTRIC POWER COMPANY

PRICE PER WATT #WATTS SOLD REVENUES TOTAL COST PROFIT

$0.25 100,000 $25,000 $20,000 $5000

$0.50 80,000 $40,000 $17,000 $23,000

$1.00 60,000 $60,000 $15,000 $45,000 <

$2.00 25,000 $50,000 $12,000 $38,000

MONOPOLIES ARE LIMITED

IT IS FEDERAL LAW TO REGULATE OR BREAK-UP MONOPOLIES - MICROSOFT EXAMPLE

TECHNOLOGY CAN ELIMINATE MONOPOLIES – CABLE TV NOW COMPETES WITH SATELLITE TV

OLIGOPOLY

SMALL NUMBER OF PRODUCERS, EACH MAKING AND SELLING THE SAME PRODUCT

CAN COMPETE – THEN LIKE PERFECT COMPETITION

OR CAN COLLUDE

COLLUSIVE OLIGOPOLIES

COOPERATE INSTEAD OF COMPETEAGREE TO COMMON PRICE AND SPECIFIC SELLING TERRITORIESINCREASE PROFIT

PROBLEM – COLLUSIVE OLIGOPOLIES ARE ILLEGAL IN THE U.S.

HOWEVER, SOME INTERNATIONAL COLLUSIVE OLIGOPOLIES EXIST - OPEC

TWO COLLUSIVE OLIGOPOLIES ARE LEGAL IN THE U.S.

PROFESSIONAL SPORTS (SUPREME COURT RULING)

AGRICULTURAL COOPERATIVES

MONOPOLISTIC COMPETITION

MANY BUSINESSES, ALL SELLING THE SAME PRODUCT

HOWEVER, TO AVOID BEING IN “PERFECT COMPETITION”, THEY “TWEAK” THE CHARACTERISTICS OF THEIR PRODUCT SO PEOPLE THINK THEY ARE UNIQUE

GIVES THEM POWER OVER PRICE

“TWEAKING” CAN BE REAL OR JUST “HYPE”

EXAMPLE: AUTO DEALERS

MARKET SEGMENTATION

USED BY ALL BUSINESSES EXCEPT THOSE IN PERFECT COMPETITION

GOAL: DIVIDE BUYERS INTO DIFFERENT GROUPS, CHARGE EACH GROUP A DIFFERENT PRICE, AND INCREASE PROFITS

CAN ONLY WORK IF: - BUYERS CAN’T RESELL THE PRODUCT - BUYERS CAN’T SWITCH GROUPS

MARKET SEGMENTATION (CON’T)

RULE: BUYERS WITH INELASTIC DEMAND CURVES PAY MORE; THOSE WITH ELASTIC DEMAND CURVES PAY LESS

EXAMPLES: AIRLINE TRAVEL: LEISURE VS. BUSINESS BULK BUYING SENIOR CITIZEN DISCOUNTS PEAK VS. OFF-PEAK

WHAT’S THE “BEST” MARKET STRUCTURE?

FOR SOCIETY AS A WHOLE – ECONOMIST ARGUE IT IS “PERFECT COMPETITION”

* LOWEST PRICES FOR BUYERS

* MOST ATTENTION TO NEEDS OF BUYERS

* ALLOWS SUPPY TO EXPAND AND CONTRACT WITH CONDITIONS

AND, COMPETITION FOSTERS INNOVATION

FIRMS IN PERFECT COMPETION ARE CONSTANTLY MOTIVATED TO “BUILD A BETTER MOUSETRAP” SO CAN TAKE CUSTOMERS FROM OTHER FIRMS

LEADS TO INVENTIONS, INNOVATIONS, BETTER PRODUCTS AND LESS COSTLY PRODUCTS

SOCIETY BENEFITS