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Perfect Competition
 Many buyers and sellers
 Sellers offer identical products
– Commodities
 Buyers and sellers are well informed
Market Structures
about the product
 Sellers are able to enter and exit the
market freely
Perfect Competition
 Buyers and sellers well informed
Advantages
Disadvantages
about products
 Efficient
 Sellers can enter / exit market freely
 Price takers -- Each firm receives the
same price regardless of how much is
produced.
**No one can have enough power to influence the
total market quantity or price.**
Monopoly
Imperfect Competition
 Any market structure that is not
perfect competition
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Monopolistic competition
Oligopoly
Monopoly
Cartel
 Why?
– Barriers to entry
• Startup costs
• Technology
• Knowledge
Economies of Scale
 Startup costs are high and average
 Single supplier
 Why?
– Barriers prevent firms from entering
market
costs fall for each additional unit
produced
 Never reaches increasing costs per unit
 Take advantage of market power to
charge high prices
 Illegal, with certain exceptions
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Economies of Scale
Monopolistic Pricing
 Will not set at MC = MR
 Will set at market price of demand
 Price discrimination
– Price depends on group
– Targeted discounts
– Limits
• Some market power
• Distinct customer groups
• Difficult resale
Government Monopolies
Natural Monopoly
 Natural monopoly
 Technological monopoly
 Franchises
 Licenses
 More efficient with one company
provides all output, so government
allows it
 Industrial organizations
 Competition forces company to
leave generally because product or
service has high cost factors
– Public services
Natural Monopoly
 Technology can destroy a natural
monopoly
– New innovation cuts fixed costs to the
point small firms can be efficient
• Example
– Telephone companies in the beginning and now
Technological Monopoly
 Patent (20 years)
– Exclusive rights to sell
– Making, using, selling, offering for
sale, or importing the patented
invention
– Allows firms to set prices that
maximize opportunity to make a
profit
• Pharmaceuticals
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Franchises and Licenses
 Franchise
– Contract that allows a single firm to
sell products
• Park food service
 License
– Grants firms the right to operate a
business
• Restricts or prevents competitors from
working together
– Airlines
Monopolistic Competition
Industrial Organizations
 Companies in certain industries are
allowed to restrict the number of
firms in a market
– Sports leagues
 Problem
– Team owners can charge high prices for
tickets
– Teams are not in all towns
Oligopoly
 Many companies (lots of competition)
 Few barriers to entry
 Slight control over price
– Substitution effect
 Differentiated products
– Non-price competition
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Physical characteristics
Location
Service level
Advertising, image, status
Cartel
 Similar to an oligopoly
A trust is
similar to a
cartel.
 FORMAL organization of producers
to coordinate prices and production
– OPEC
• Produce about 40% of world’s oil
• Control 75% of world’s oil reserves
• Set production quotas
 Few large firms dominate the market
– 4 largest firms produce 70-80% of market
 Significant barriers to entry
 Cooperation and collusion
– Price leadership
• Disagreements can cause a price war
– Collusion
• Price fixing
Government Regulation
 Antitrust laws
– Encourage competition
• Policies to keep firms from controlling the
price and supply of goods
– No predatory pricing
– No monopolies
• 1911 Standard Oil Trust and American
Tobacco Company
• 1982 AT & T
• Microsoft
– Approves mergers
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Deregulation
 Removal of government controls
 Forced competition
– Airlines
– Utilities
– Railroads
– Broadcasting
 Problems
– Lots of new firms enter industry
• Over-expansion
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