Market Structures

Pure/ Perfect competition is a market structure in which a large number of firms all produce the same product.

1. Many Buyers and SellersThere are many participants on both the buying and selling sides.

2. Identical ProductsThere are no differences between the products sold by different suppliers.

3. Informed Buyers and SellersThe market provides the buyer with full information about the product and its price.

4. Free Market Entry and ExitFirms can enter the market when they can make money and leave it when they can't.

The Four Conditions for The Four Conditions for Pure/Perfect CompetitionPure/Perfect Competition

•the four conditions needed for pure/perfect competition.

Pure/Perfect CompetitionPure/Perfect Competition

Ability to control prices: None, sell what Ability to control prices: None, sell what you can at the market price. you can at the market price.

-PRICE TAKER-PRICE TAKER

Ease of Entry: VERY, very easyEase of Entry: VERY, very easy

Factors that make it difficult for new firms to enter a market are called barriers to

entry.

Barriers to EntryBarriers to Entry

Start-up Costs The expenses that a new

business must pay before the first product reaches the customer.

Technology Some markets require a high

degree of technological know-how. As a result, new entrepreneurs cannot easily enter these markets.

Market Equilibrium in Perfect Competition

Quantity

Pri

ce

One of the primary characteristics of perfectly competitive markets is that they

are efficient. In a perfectly competitive market, price and output reach their

equilibrium levels.

Supply

Demand

Equilibrium Price

Eq

uili

briu

m

Qu

an

tity

Price and OutputPrice and Output

Existence of Non-Price Competition: NoneExistence of Non-Price Competition: None

Examples: Agriculture and the Stock Examples: Agriculture and the Stock MarketMarket

Other: Theoretical –Would lead to Other: Theoretical –Would lead to completely efficient resources.completely efficient resources.

-No firm has power to influence price.-No firm has power to influence price.

-Govn’t or something prevents this from -Govn’t or something prevents this from happening.happening.

Pure/Perfect CompetitionPure/Perfect Competition

In monopolistic competition, many companies compete in an open market to sell products

which are similar, but not identical.

Monopolistic CompetitionMonopolistic Competition

Many FirmsAs a rule, monopolistically competitive market are not marked by economies of scale or high start-up costs, allowing more firms.

Differentiated and Similar Products: Firms have some control over their selling price because they can differentiate, or distinguish, their goods from other products in the market.

Slight Control over PriceFirms in a monopolistically competitive market have some freedom to raise prices because each firm's goods are a little different from everyone else's.

Few Artificial Barriers to EntryFirms in a monopolistically competitive market do not face high barriers to entry.

Monopolistic CompetitionMonopolistic Competition

Non-price competition: to attract customers through style, service, or location, but not a lower price.

PRODUCT DIFFERENTATION

Non-price Competition

1. Characteristics of GoodsThe simplest way for a firm to distinguish its products is to offer a newsize, color, shape, texture, or taste.

2. Location of SaleA convenience store in the middle of the desert differentiates itproduct simply by selling it hundreds of miles away from the nearestcompetitor.

3. Service LevelSome sellers can charge higher prices because they offer customers a

higher level of service.

4. Advertising ImageFirms also use advertising to create apparent differences between

their own offerings and other products in the marketplace.

four characteristics of monopolistic competition.four characteristics of monopolistic competition.

Monopolistic CompetitionMonopolistic Competition

Examples:Examples:

Jeans, Haircuts, Washing Machines, Jeans, Haircuts, Washing Machines,

Gas StationsGas Stations

Other: Only thing that separates pure Other: Only thing that separates pure competition from monopolistic is competition from monopolistic is PRODUCT DIFFERENTATION.PRODUCT DIFFERENTATION.

OligopolyOligopoly Dominated by a few large, profitable

firms. Similar products Entry: Significant barriers, difficult: Significant barriers, difficult Non-Price Competition: YES: YES Examples: Soap, Cereal, Automobiles, : Soap, Cereal, Automobiles,

AirlinesAirlines Other: Interdependent, Price Wars: Interdependent, Price Wars

An oligopoly is a market structure in which a An oligopoly is a market structure in which a few large firms dominate a marketfew large firms dominate a market

Oligopoly

Illegal ActionsCollusion: an agreement among members of an oligopoly to set prices and production levels. Cartels: an association by producers established to coordinate prices and production. Price-fixing: an agreement among firms to sell at the same or similar prices.

Price Control?Price Control?

MonopolyMonopoly Number of Firms: ONE FIRM, a monopoly is a

market dominated by a single seller.

Similar or Different Products: Monopolies offer different products

LARGE ABILITY to CONTROL PRICES Monopolies can take advantage of their monopoly power and charge high prices.

VERY, VERY Hard to enter: Monopolies form when barriers prevent firms from entering a market that has a single supplier.

MonopolyMonopoly NON-PRICE Competition: None, only : None, only

firmfirm

doing their product!doing their product!

Examples: Diamonds, Electricity, : Diamonds, Electricity, MicrosoftMicrosoft

A monopoly is a market dominated by a single seller.A monopoly is a market dominated by a single seller.

Price discrimination: the division of customers into groups based on how

much they will pay for a good.

Price DiscriminationPrice Discrimination

Price discrimination is a feature of Price discrimination is a feature of monopolies.monopolies.

Targeted discounts, like student discounts Targeted discounts, like student discounts are one form of price discrimination.are one form of price discrimination.

Price discrimination requires some market Price discrimination requires some market power, distinct customer groups, and power, distinct customer groups, and difficult resale.difficult resale.

Other: Types of Monopolies Natural Monopoly

Costs minimized by having one provider Marta, water

Geographic Monopoly Only one in an area

Technological Monopoly Provided by patents or copyrights, Polaroid

Government Monopoly Created by the government, Lottery