chapter 7 market structures

•What are the characteristics of perfect competition?

-Many buyers and sellers -Identical products -Informed buyers and sellers -Easy market entry and exit -No control over price Ex: agricultural products, socks, pencils

•There are only a few perfectly competitive markets in today's world because these markets must meet four strict conditions:

-Many buyers and sellers participating in the market -Sellers offering identical products -Buyers and sellers that are well-informed about products -Sellers are able to enter and exit the market freely

•Many buyers and sellers

-Perfectly competitive markets must have many buyers and sellers. •No one person or firm can be so powerful as to influence the total market quantity or market price.

•What are the characteristics of a monopoly?

-A single seller -Many barriers to entry for new firms -No variety of goods -Complete control over price •Since they have the market cornered for a particular good or service, monopolies can change high prices and the quantity of goods is lower than it would be in a competitive market.

•The simplest market structure is perfect competition, also called pure competition. •A perfectly competitive market:

-Has a large number of firms -Has firms that produce the same product -Assumes the market is in equilibrium -Assumes that firms sell the same product at the same price

•What government actions can lead to the creation of monopolies?

-Issuing a patent - gives a company exclusive rights to sell a new good or service for a particular period of time. -Granting a franchise - gives a single firm the right to sell its goods within an exclusive market -Issuing a license - allows firms to operate a business, especially where scarce resources are involved -Restricting the number of firms in a market

•Free market entry and exit

-It is very easy for sellers to enter and exit in a perfectly competitive market. •Usually they enter when a product is very popular and exit when the demand for that product decreases.

•There are three practices that concern government regarding oligopolies.

-Price leadership: This can lead to price wars when companies in an oligopoly disagree -Collusion: This leads to price fixing and is illegal in the United States -Cartels: By coordinating prices and production, cartels offer its members strong incentives to produce more than its quota, which leads to falling prices.

•How are output decisions made in a perfectly competitive market?

-Since no supplier in a perfectly competitive market can influence prices, producers make their output decisions based on their most efficient use of resources.

•Identical Products

-There is no difference in the products sold in a perfectly competitive market. •These commodities include things like low-grade gasoline, notebook paper, and sugar.

•Informed buyers and sellers

-Under conditions of perfect competition, the market provides the buyer with full information about the product features and its price. •Both buyers and sellers have full disclosure about the product.

franchises / franchise

-a contract that gives 1 firm the right to sell its goods/services within an exclusive area -mostly private franchises like fast food companies

oligopoly examples

-cars, airlines, household appliances (fridge, stoves, etc) -barriers to entry: patenets, license

How Price is Determined in a Perfect Competition Market / how price is determined in a perfectly competitive market

-determined by market -market is assumed to be at equilibrium -assume all firms selling the same product at same prices

Why isn't the automobile industry a perfectly competitive market ?

-hard market entry -companies have some control over prices -not many firms

how do firms compete in monopolistic competition

-non-price competition -flavor -ads -packaging -better service

price leaders in an oligopoly

-one firm changes prices, all others follow suit

what is a market structure

-the extent and characteristics of competition taking into account number of buyers and sellers, cost, market entry difficulty, etc.

regulation and deregulation

-why govts impose regulations on markets --to try to prevent anti-competitive practices -why are less competitive markets usually bad for consumers --can lead to higher prices and lower outputs -anti-trust laws --laws to encourage market place competition and to break up or prevent monopolies -merge / merger --when 2+ larger companies consolidates into one company with governments permission deregulation: -sometimes good (airlines, trains, cargo), sometimes bad (banks not being watches => econ panic of 2008, cable industry [rates way too high])

characteristics of a monpoly

1. single seller of unique product/service 2. a monopolist can limit output and charge higher prices 3. government regulated 4. high barriers to entry 5. economies of scales

franchise

a contract that gives a single firm the right to sell its goods within an exclusive market

cartel

a formal organization of producers that agree to coordinate prices and production -organization that engages in collusion

license

a government-issued right to operate a business

patent

a license that gives the inventor of a new product the exclusive right to sell it for a specific period of time

monopoly

a market in which a single seller dominates - a market where a single supplier provides a unique good/service to any number of buyers -form because no clear substitutes and high barrier to enter that market examples (some no longer) -debeers (diamond, former) -microsoft? -AT&T (former)

oligopoly

a market structure in which a few large firms dominate a market -few firms -significant barriers to entry -similar but differentiated products -some control over prices

perfect competition

a market structure in which a large number of firms all produce the same product and no single seller controls supply or prices

monopolistic competition

a market structure in which many companies sell products that are similar but not identical -there are many firms -few barriers to entry -little control over price -similar but differentiated products -ex: breakfast cereals, toothpaste, jeans

natural monopoly

a market that runs most efficiently when one large firm supplies all of the output -ex: water service (NOT BOTTLED WATER)

government monopoly

a monopoly created and regulated by the government

license

a right to operate a business issued by the government usually when resources are scarce

price war

a series of competitive price cuts that lowers the market price below the cost of production

nonprice competition

a way to attract customers through style, service, or location, but not a lower price •In a monopolistically competitive market, nonprice competition plays a big role.

price fixing

an agreement among firms to charge one price for the same good

collusion

an illegal agreement among firms to divide the market, set prices, or limit production

barrier to entry

any factor that makes it difficult for a new firm to enter a market

elasticity of demand in monopolistic competition

elastic because a lot of substitutes

economies of scale

factors that cause a producer's average cost per unit to fall as output rises

a difference between monopolies and perfect competition

in a perfectly competitive market marginal revenue is always the same as price, and each firm receives the same price no matter how much it produces. •Neither assumption is true in a monopoly.

differentiation

making a product different from other, similar products

what is marginal revenue in a monopoly?

monopolies choose output or price, not both, to maximize profit -usually less output, increase price -perfectly competitive market: marginal revenue = market price -monopoly: marginal revenue > market price MR > MP

monopsony

one big buyer, many sellers

how does monopolistic competition differ from perfect competition

perfect competition: identical monopolistic competition: similar but differentiated perfect competition: 0 control over prices monopolistic competition: little control over prices

market power

the ability of a company to control prices and total market output

price discrimination

the division of consumers into groups based on how much they will pay for a good -charging different groups of people different prices on the same product (based on age, income, job)

start-up costs

the expenses a new business must pay before it can begin to produce and sell goods

predatory pricing

when firms tries to sell at below cost to knock out other firms in a market -trying to increase market share

industrial organizations

when government allows companies in an industry to restrict the number of firms in a market

Economies of scale

when output increases and average cost decreases

imperfect competition

• a market structure that fails to meet the conditions of perfect competition

•What are the characteristics of an oligopoly

•Few firms in the market •Some variety of goods •Many barriers to entry •Some control over prices

price discrimination

•In many cases, the monopolist charges the same price to all customers. •But in some instances, the monopolist may be able to charge different prices to different groups. This is known as price discrimination. -Price discrimination is based on the idea that each customer has a maximum price that he or she will pay for a good.

•What are the characteristics of monopolistic competition

•Many firms in the market •Some variety of goods •Minimal barriers to entry •Little control over prices •In monopolistic competition, many companies compete in an open market to sell similar, but not identical, products. •Common examples or monopolistically competitive firms are: -Bagel shops -Gas stations -Retail stores •Many Firms -Low start-up costs allow many firms to enter the market. •Few barriers to entry -It is easy for new firms to enter the market. •Little control over price -If a firm raises their prices too high, consumers will go elsewhere to buy the product. •Differentiated products -Allows a firm to profit from the differences between their product and a competitor's product.

prices in a perfectly competitive market

•Perfectly competitive markets are efficient and competition keeps both prices and production costs low. -In a perfectly competitive market prices correctly represent the opportunity costs of each product. -They are also the lowest sustainable prices possible.

Common barriers of entry barriers to entry

•Start-up costs / startup costs: When start-up costs are high it is more difficult for new firms to enter the market. Therefore, markets with high start-up costs are less likely to be perfectly competitive. •Technology: Markets that require a high degree of technical knowledge can be difficult to enter into without preparation and study .•Landscaping presents no technical challenges and start-up costs are low. However, an auto repair shop requires advanced technical skills and the equipment needed to run the shop makes start-up costs another significant barrier to entry.

natural monopoly

•Technology can sometimes destroy a natural monopoly. -A new innovation can cut fixed costs and make small companies as efficient as one large firm.

targeted discounts

•There are many targeted discounts available to particular groups, including: -Discounted airline fairs -Senior citizen and student discounts -Children fly or stay free promotions

commodity

•a product that is considered the same no matter who produces or sells it -ex: agricultural products, raw materials consumers chose the one that's the lowest price