MARKET STRUCTURE

Market Structure• The nature and degree of competition

among firms in the same industry

Perfect Competition

• Market structure characterized by a large number of well-informed independent buyers and sellers who exchange identical products.

• A Theoretical ideaQ: So why does perfect competition serve as a theoretical market structure?A: Its advantages serve as a yardstick or example for other structures to be measured by.

Perfect Competition Conditions

1. Must be a large number of buyers and sellers2. Buyers and sellers deal in identical product3. Each buyer and seller acts independently4. Buyers and sellers are reasonably well-

informed about product and prices5. Buyers and sellers are free to enter into,

conduct, or get out of business

Monopolistic Competition

• Market structure that has all the conditions of perfect competition except for identical products.

• Seller has the ability to raise or lower the price• If sellers raise or lower the price enough,

customers will change brands

Monopolistic Competition

• Characterized by product differentiation: real or perceived differences between competing products in the same industry.

• To make their products stand out, they use nonprice competition: the use of advertising, giveaways, or other promotions designed to convince buyers that the product is somehow unique or fundamentally better than a competitor’s.

Oligopoly

• Market Structure in which a few large sellers dominate the industry

• Products may be distinct like the car industry or standardized like the steel industry

• When one firm changes prices, enhances product, etc the other firms usually follow or they run the risk of losing customers

Monopoly

• Market structure with a single seller of a particular product

• Few Pure Monopolies today…very rare

Characteristics of Market StructureNumber

of Firms in Industry

Influence over Price

Product Differentiation Advertising

Entry into Market Examples

Perfect Competition Many None None None Easy

Perfect: NoneNear: Truck Farming

Monopolistic Competition Many Limited

Fair Amount

Fair Amount Easy

Gas StationsWomen’s clothing

OligopolyFew Some

Fair Amount Some Difficult

AutomobilesAluminum

Pure Monopoly One Extensive None None

Almost Impossible

Perfect: NoneNear: Water

Types of Monopolies

• Natural Monopoly: market situation where the costs of production are minimized by having a single firm produce the product– IE: Public utilities

• Geographic Monopoly: market structure based on the absence of other sellers in a particular geographic area– IE: Only 1 gas station in a small town

Types of Monopolies• Technological Monopoly: based on a

firm’s ownership or control of a production method, process, or other scientific advance– IE: item with a patent

• Government Monopoly: monopoly owned and operated by the government– IE: oversee water use, weapon-grade

uranium for military

Market Failure• Condition that causes a

competitive market to fail

5 Reasons for Failure:1. Inadequate Competition2. Inadequate Information – if the knowledge is

important to buyers and sellers but is difficult to obtain

3. Resource Immobility – factors of production do not move to markets where returns are the highest

4. Public Goods – products that are collectively consumed by everyone

5. Externalities – unintended side effect that either benefits or harms a third party not involved.

Externalities• Negative: harm, cost, or inconvenience

suffered by a third party because of actions by others– IE: Noise from an airport, pollution

• Positive: a benefit someone receives who was not involved in the activity that generated the benefit.– IE: Airport expansion provides more business for

local restaurantsDoesn’t matter if they are positive or negative: they are considered market failures, because their costs and benefits are not reflected in the market prices that buyers and sellers pay.

The Role of Government

• The government exercises its power to maintain competition within markets

• Two ways that government can maintain competitive markets:1. Prohibiting market structures that are not

competitive2. Regulating markets where full competition is not

possible

Antitrust Legislation

• Trust: illegal combination of corporations or companies organized to hinder competition

• Price Discrimination: the practice of selling the same product to different consumers at different prices

• Cease and Desist Order: ruling requiring a company to stop an unfair business practice that reduces or limits competition

Anti-Monopoly Legislation

• Sherman Antitrust Act 1890 – Outlawed all contracts to stop the growth of trusts and monopolies

• Clayton Antitrust Act 1914 – Strengthened the Sherman Act by outlawing price discrimination

• Federal Trade Commission Act 1914 – Established the Federal Trade Commission to regulate unfair methods of competition in interstate commerce.

• Robinson-Patman Act 1936 – Made it where everyone got the same rebates and discounts

Q:What two market failures does the government have the ability to correct?

Inadequate Informationand Public GoodsA:

Improve Economic Efficiency

• Promote Transparency – information and actions are not hidden and are easily available for review– Public Disclosure: requirement that businesses

reveal certain information to the public• Provide Public Goods