Chapter 7
Market Structures
Competition
The Four Market Structures
Market
Structure
Perfect
Competition
Monopolistic
Competition
Oligopoly
Monopoly
Control
Over Price
Number of
Firms
None
Many small
firms
(thousands in
real life)
Identical; all
the same
Low; not
hard to get
into
Many small
firms
(hundreds in
real life)
Similar but
slightly
different
Low; not
hard to get
into
Few (tens in
real life)
Same or
different
(doesn’t
matter)
High; very
difficult to
get into
Some
A lot
Total
one
Types of
Goods
Unique
Barriers to
Entry
High; very
difficult to
get into
Rank the items in order from most
competition to least competition.
___ tomatoes
___ dairy farms
___ cars
___ baseball teams
___ electricity
___ kitchen appliances
___ notebook paper
___fast food
___ bottled water
___ computer software
A perfectly competitive
market is…
…one with a large number of firms all
producing essentially the same
products.
5 Characteristics of Perfect
Competition
1. Many buyers and sellers participate in the market
2. Sellers offer identical products (commodities)
3. Buyers and sellers are well informed about
products
4. Sellers are able to enter and exit the market freely
5. No control over prices.
Barriers to entry
• Are any factor that makes it difficult for a new firm
to enter the market
• Barriers to entry into a perfect market can include:
o Start-up costs
o Technology
• Barriers to entry can lead to imperfect competition
(a market structure that fails to meet the conditions
of perfect competition)
Prices and Output
• Prices in a perfectly competitive market are the
lowest sustainable prices possible. (Equilibrium)
• Consumers benefit the most from perfect
competition because the prices remain low.
• Suppliers make decisions about output based on
their most efficient use of resources.
Monopoly
Only 1
unique
product
single
seller
Government
Regulation
Higher
prices
7 Characteristics of
a Monopoly
Economies
of scale
Many
barriers
to entry
Limited
output
Economies of Scale
• Economies of scale are factors that cause a
producer’s average cost per unit to fall as output
rises.
• High start-up costs can be spread out among more
and more goods as production rises.
• Example: A hydroelectric plant
Natural Monopolies
• A natural monopoly is a market that runs most
efficiently when one large firm provides all of the
output.
• Public water and electricity are natural monopolies
because it is more efficient to have a single
provider in a geographic area.
• New technology can destroy a natural monopoly
o A new innovation can cut fixed costs for smaller companies (ex.
cell phones)
Government Monopolies
• Patents: gives a company exclusive rights to sell a
new good or service for a specific period of time.
• Franchises: contracts that give a single firm the right
to sell its goods within an exclusive market.
• Licenses: government issued right to operate a
business.
Government Monopolies
• Decrease the number of suppliers in a market, so it
limits competition and is less beneficial to the
consumer.
• Major League Baseball and other sports leagues are
granted an exemption to anti-trust laws and
allowed to operate as a legal monopoly.
Monopolistic Competition
and Oligopoly
Monopolistic Competition
• To have monopolistic competition,
businesses must sell goods that are
similar but not exactly the same in an
open market.
Monopolistic competition develops
from four conditions:
1. Many firms – due to small start-up costs
2. Few artificial barriers – no patents and
too many firms
3. Little control over price- price can
reflect the product but there are many to
compete with.
4. Differentiated products- seller can profit
from the differences
Nonprice Competition
• The ability to differentiate products means that firms
do not have to compete on price alone. Competition
through ways other than price is known as nonprice
competition.
Forms of Nonprice Competition
Physical
Characteristics
Explain:
How it looks;
color, texture,
size, shape,
etc.
Example:
Location
Explain:
Where can
you buy it?;
Convenience.
Example:
Service Level
Advertizing
(or image)
Explain:
Are you being
taken care of or
do you need to
get it yourself?
Explain:
Brand names,
commercials,
and word of
mouth
Example:
Example:
Prices and Output
• Prices under monopolistic competition will be higher
than they would be in perfect competition, because
firms have some power over prices, but they are still
lower than a monopoly. Therefore, total output in a
monopolistically competitive market also falls
somewhere between that of a monopoly and that of
perfect competition.
2 market trends that prevent monopolistically
competitive firms from increasing their profits…
Fierce competition
• Rivals will find new ways
to differentiate their
product to bring
customers back
• Rivalries prevent any one
firm from earning
excessive profits for long
New substitutes
• New firms enter the
market easily with a
cheaper product
• Consumers will switch to
these substitutes
Consumer benefits?
• Many firms are offering a wide variety of similar
goods to choose from. Firms will offer competitive
prices and other incentive for consumers to buy
their product.
Oligopoly
• An oligopoly describes a market dominated by a
few large, profitable firms.
• An oligopoly can form when significant barriers to
entry keep new companies from entering the market
to compete with existing firms.
Barriers to Entry
• Pepsi and Coca-cola are an example of an oligopoly. What
barriers to entry prevent a smaller company from entering
the market?
o Brand loyalty and intimidation
o High start-up costs for production and equipment.
Price War
• Competing companies in an oligopoly cut prices
very low to win business from their rival.
How would price fixing and
collusion help producers?
• Competing companies in an oligopoly make an
agreement to operate like one large company, or
monopoly, in the market with the power to raise
prices to increase profit, or cut prices to eliminate
smaller competitors.
Regulation and
Deregulation
Is government regulation
unconstitutional?
Is government regulation
unconstitutional?
• Article 1, Section 8, Clause 3 of the U.S.
Constitution states:
“The Congress shall have the power…To
regulate commerce with foreign nations,
and among the several states, and with
the Indian tribes;”
How does the government
promote competition?
Regulation
Deregulation
• Prevents firms from
forming cartels or
monopolies
• Remove regulations on
firms that are not natural
monopolies
• Break up monopolies
• Remove barriers to entry
• Regulate price
• Remove price controls
When does the government
regulate competition?
• Market power is concentrated to one or a
small group of firms.
o Trusts
• Prevent predatory pricing
o Selling a product below cost for a short period of
time to drive competitors out of the market.
Sherman Antitrust Act
• Passed in 1890
• Allows the federal government to assert power over
corporations that did business in many states.
• Prohibits agreements in restraint of trade -- such as
price-fixing or refusals to deal -- and forbids
monopolies.
Standard Oil Co. Inc.
• John D. Rockefeller (The Richest Man in the World)
founder, chairman, and major shareholder
• American oil producing, transporting, refining, and
marketing company.
• In 1904- controlled 91% of production and 85% of all
final sales of oil
• 1911-Supreme Court declared it an “unreasonable”
monopoly and order it to be broken up.