Market Structures PDF

Market Structures Lesson 4 What is Market?  MARKET In common language, market means a place where goods are purchased. In economics, market means an arrangement which establish effective relationship between buyers and seller of a commodity. Hence, each commo...

Market Structures Lesson 4 What is Market?  MARKET In common language, market means a place where goods are purchased. In economics, market means an arrangement which establish effective relationship between buyers and seller of a commodity. Hence, each commodity has its own market.  MARKET The market differ from one another due to differences in the number of buyers, number of sellers, nature of the product, influence over price, availability of information, conditions of supply etc. Why do we have market?  Why do we have Market? In order to satisfy a person’s needs and wants. It consist of: sellers, buyers, products and services.  What is Competition  Models of Competition  Models of Competition It is a description of the type of market that a particular business or industry operates in. Also known as Market Structure.  4 Types of Models of Competition 1. Perfect Competition 2. Monopoly 3. Monopolistic Competition 4. Oligopoly  Perfect Competition Perfect Competition A market structure in which a large number of firms (businesses) produce the same product. Only reason to choose one firm over another is the PRICE  Four Conditions for Perfect Competition 1. Many buyers and sellers People have lots of options to choose whom they buy from. 2. Identical Products There are no differences between what is sold by different suppliers. They are exactly the same! Four Conditions for Perfect Competition 3. Informed Buyers and Sellers Buyers know the prices and quality of product sold by all venders to make the best decision 4. Free Market Entry and Exit Businesses can enter the market when they can make money and exit when they can’t. What types of businesses are Perfectly Competitive? Farm Markets (ex. Public Market) – Many farmers selling their vegetables (Many buyers and sellers) – A carrot from farmer Brown is equal to a carrot from farmer Jones (Identical Products) – Buyers can compare prices and quality by walking the market (Informed Buyers/Sellers) – Farmers choose to bring produce or not. Inexpensive to rent a space in the market Monopoly  Monopoly A market dominated by a single seller. They form when barriers prevent competitors from entering the market. This is often because of the high costs to supply a product. They take advantage of their monopoly power and charge high prices. Examples of Monopolies Monopolisti c Competitio n  Monopolistic Competition Many companies compete in an open market to sell products that are similar, but not identical.  Four conditions of Monopolistic Competition 1. Many Firms Mono. Comp. do not have high start-up costs and so have more firms. 2. 2. Few Artificial Barriers to Entry Barriers to entry are relatively low.  Four conditions of Monopolistic Competition 3. Slight Control over Price Firms have some freedom to raise prices because each firm’s goods are a little different from everyone else’s 4. Differentiated Products Firms have some control over selling price because they can differentiate, or distinguish, their products from other products in the market.  What types of businesses are Monopolistically Competitive? Lots! Most markets exist in this model. Ex. Soft Drinks – Coke, Pepsi, RC, etc. (many firms) – Relatively inexpensive to produce, don’t need huge factories, chemicals, etc. (Few artificial barriers to entry) – Coke is a little more expensive than RC (Slight control over price) – Some people like Coke more than Pepsi, etc. (Differentiated Products)  So, how do Firms in Monopolistic Competition get customers? Through Nonprice Competition: a way to attract customers through style, service or location, but not a lower price. 4 types of Nonprice Competition 1. Characteristics of Goods Firms distinguish products through size, color, shape, texture or taste Ex. Coke vs. Pepsi, Lemon Pepsi, Vanilla Coke 2. Location of Sale A convenience store in the middle of the desert differentiates by selling it miles from competitors 4 types of Nonprice Competition (cont.) 3. Service Level Some sellers can charge higher prices because they offer customers a higher level of service Ex. Fancy sit-down restaurant vs. McDonalds 4. Advertising Image Advertising creates apparent differences between products in the marketplace. Ex. Jordans vs. Carmelo Anthony’s shoes  Monopolistic vs. Perfect Competition Perfect Competition Monopolistic Competition Prices Lower, firms have no Higher, firms have some control control Profits Lower Higher in short term, but must work hard to keep ahead of rivals Cost and Low costs, no variety Higher costs for differentiation, Variety (identical products) wide variety Oligopoly  Oligopoly A market dominated by a few, large profitable firms  How do Oligopolies work? Collusion: An agreement among members of an oligopoly to set prices and production levels. Price Fixing: An agreement among firms to sell at the same or similar prices.  How do Oligopolies work? Cartels: An association by producers established to coordinate prices and production. Ex. OPEC: Organization of Petroleum Exporting Countries controls the oil supply and manipulates prices of gasoline. Ex. DeBeers controls 80% of world’s diamonds, keeps prices high by limiting supply. Market Power  Market Power The ability of a company to control prices and output Markets dominated by one or a few firms (monopoly or oligopoly) have higher prices and lower output. (great market power) Markets with many sellers (monopolistic and perfect competition) have lower prices and higher output. (little or no market power)  Predatory Pricing Setting the market price below cost levels for short term to drive out competitors. Firms in Monopolistic and perfect competition do this to gain market power. Ex. My pizza shop sells slices for $0.50 each, even though it costs me $0.75 to make. I am losing money ($-  Government and Competition The Government keeps firms from controlling prices and supply of important goods. Antitrust laws are laws that encourage competition and break up monopolies/oligopolies in the marketplace  4 forms of Anti- trust Laws 1. Regulating Business Practices Government can intervene if a firm has too much market power 2. Breaking Up Monopolies Antitrust laws have been used to break up monopolies  Antitrust Laws (cont) 3. Blocking Mergers A merger is a combination of two or more companies into one firm. The government can block this if it decreases competition 4. Preserving Incentives In 1997, new guidelines on mergers were introduced allowing companies to merge if they show benefits to consumers.  Deregulation The removal of some government controls over a market. It is used to promote competition. Deregulation allows more competition in a market, lowers prices and increases variety (benefits), but often can lead to layoffs and business closings (negatives) in the short term because of the change. Ex. Airline Deregulation in the early 1980s. New, smaller, cheaper airlines emerged, but the older, larger airlines are having trouble competing and have had to cut back on flights, employees, and benefits (in-flight meals etc.) “GUESS WHAT” ARE YOU READY? Perfect Competition Oligopoly Monopoly Monopoly Perfect Competition Monopolistic Competition Monopolistic Competition What is Market? Types of Market?