Chapter 7: Market Structure
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1. Perfect Competition
2. Monopoly
3. Monopolistic Competition and Oligopoly
4. Regulation and Deregulation
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Property Management Software. Real-Estate-Google-Monopoly
http://www.trexglobal.com. (accessed October 2, 2010).
1. Perfect Competition
The simplest market structure in which a large number of
firms all produce the same product an no single seller
controls supply or price
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
Street Vendors
Free Software
New York Stock Exchange

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A Stock Exchange located at 11 Wall Street Lower Manhattan, NYC
Largest by market capitalization of its listed companies at $11.92 trillion as of Aug
2010
Four Conditions
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Many Buyers and
Sellers participate in
the market
Sellers offer identical
products- commodity -a
product that is the
same no matter who
produces or sells it
Examples notebook
paper, paper clips,
sugar, low grade
gasoline
Buyers and Sellers are
well informed
Sellers are able to
enter and exit the
market freely
Many Buyers
And Sellers
Informed
Buyers and
Sellers
Identical
Products
Perfect
Competition
Free Market
Entry and Exit
No control
Over Price
Barriers to Entry
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Any factor that
makes it difficult
for a new firm to
enter a market
Imperfect
competition - a
market structure
that fails to meet
the conditions of
perfect competition
Start-Up Costs expenses a new
business must pay
before it can begin
to produce and sell
goods
Technology -need a
lot of preparation
and study
Perfect
Competition
Number of Firms:
Many
Variety of Goods:
None
Barriers to Entry:
None
Control over Prices:
None
Price and Output

Competition within Perfect Competition market keep both
prices and production costs low
Market Equilibrium in
Perfect Competition
What factors
allow a perfectly
competitive
market to reach
equilibrium?
10
De
m
Su
5
ly
pp
What prevents
any on firm from
raising its
prices?
Equilibrium
Price
Equilibrium
Quantity
P
r
i
c
e
an
d
0
5
Quantity (Output)
10
2. Monopoly
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A market in which a single seller dominates
Economies of Scale -factors that cause a producer’s average
cost per unit to fall as output rises
Natural monopolies -a market that runs most efficiently
when one large firm provides all of the output
Technology and Change – can ruin monopolies (example AT&T
to cell phones)
To prevent resources
from being wasted,
public water is a natural
monopoly.
Nivangune, Geetai, A
Clean Desk=A Healthier
You, Medimanage.com
(accessed October 2,
2010
Effects on Economies Of Scale
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C
o
s
t
Average Total Cost Curve
Without Economies of
Scale
Average
Costs Rises
when output
exceeds a
certain level.
Output

C
o
s
t
Average Total Cost Curve
With Economies of Scale
Average Costs
of production
falls when firms
produce more
Output
Why do production costs fall as output increases? Describe the cost
curve for a firm without economies of scale.
Perfect Competition vs.
Monopoly
How are monopolies similar to perfect competition?
Different?
Perfect
Competition
Number of Firms:
Many
Variety of Goods:
None
Barriers to Entry:
None
Monopoly
Control over Prices:
None
Number of Firms:
One
Variety of Goods:
None
Barriers to Entry:
Complete
Control over Prices:
Complete
Government Monopolies
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A Monopoly created by the government
A Patent - license giving inventor exclusive right for a specific
period of time
Franchise -a contract that gives a single firm the right to sell its
goods within an exclusive market
License -gov’t issued right to operate a business
Industrial Organizations -Major League Baseball
Output Decisions
Demand Schedule for a Product
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Monopolies face limited
choice –either output or
price
Monopolistic Dilemma -if
a company produces
more, the price will fall,
if it produces less, the
price will rise
Falling Marginal Revenueif company decrease
price, demand will
increase, but marginal
revenue will decrease
Setting a Price Marginal revenue is
slightly higher than the
price
Price Week
Total
Demand Revenue
Change
in Rev
Marginal
Revenue
$12
8,000
$96,000
---
---
$11
9,000
$99,000
$3,000
$3
$10
10,000
$100,000 $1,000
$1
$9
11,000
$99,000
$-1,000 $-1
$8
12,000
$96,000
-3,000$ $-3
Why does revenue fall production increases from 10,000 to 11,000?
How does producing fewer goods benefit a monopolist?
Output Decisions
Demand Schedule for a Product

When 8,000 doses are made, the
market price is 12.
P
r 12
i
c
e 10
s
Price
Week
Demand
Total
Revenue
Change
in Rev
Marginal
Revenue
$12
8,000
$96,000
---
---
$11
9,000
$99,000
$3,000
$3
$10
10,000
$100,000
$1,000
$1
$9
11,000
$99,000
$-1,000
$-1
$8
12,000
$96,000
3,000$
$-3
8
0
8
10
Output
12
As
production rises to 11,000
doses, the price falls to $9.
Price Discrimination
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The division of consumers into groups based on how much they will pay for
a good
Market Power -ability to control prices and total market output
Targeted Discounts -discounted airline fares, Manufacturers’ Rebates,
Senior citizen discounts, children . . . free
$11
Market
Price
b
Setting a
Price in a
Monopoly
De
ma
nd
P
r
i
c
e
How does
Point C show
the benefits
to consumers
in a perfectly
competitive
market?
c
a
M
$3
0
a
M
ar
9,000
gi
na
lR
t
os
C
al
in
g
r
ev
en
ue
Output
Limits of Price Discrimination
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Market must meet three conditions
 Some market Power -must have some control
 Distinct Customer Groups – seniors v. citizens
 Difficult resale-
3. Monopolistic Competition and
Oligopoly
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A market structure
in which many
companies sell
products that are
similar but not
identical
Different from
perfect competition
because products
are not similar
Examples – Jeans,
bagel shops, ice
cream stands, gas
stations, retail
store
Like, NO,Tyler, I would
never go out with you!
•Jeans are an example
of monopolistic
competition because
jeans can vary size,
color, style, and
designer
•“Are those bugle boy
jeans you are
wearing.”
Four Conditions
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Many firms -not
marked by economies
of scale
Few article barriers to
entry
Little control over
price -will buy others
if price rises
Differentiated
products -making a
product different from
others, but similar
Monopolistic
Competition
Number of Firms:
Many
Variety of Goods:
Somed
Barriers to Entry:
Low
Control over Prices:
Limited
Non price Competition
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A way to attract customers through style, service, or location, but not
at a lower price
Physical characteristics -running shoes, pens, cars, and toothpaste
Location -will fail or succeed based on location
Service Level -fast food, dinners
Advertising, image, or status – designer names
•The designer athletic shoes
are way more expensive than
the sensible sneakers, but
you buy them anyways.
•Status along with designer
shoe is a form of non price
competition
•Wawa is closer to Mr.
Schenk’s house than Giant.
For a late night snack, he
will go to Wawa for peanut
butter cups, even though
they are cheaper at Giant
Prices, Output, and Profits
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Prices – competition curves raising prices
Output – falls pretty fairly
Profits – earn just enough to cover costs
Oligopoly
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A market structure in
which a few large
firms dominate a
market
Markets for air
travel, automobiles,
breakfast cereals,
and household
appliances
Pepsi, Coke, Coca Cola
Oligopoly
Number of Firms:
A Few
Variety of Goods:
Some
Barriers to Entry:
High
Control over Prices:
Some
Oligarchy
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Barriers to entry -technological or
through government licenses or
patents-high start up costs
Price Wars -a series of competitive
price cuts that lowers the market
price below the cost of production
Collision – illegal agreement among
firms to divide the market
Price fixing- an agreement among
firms to charge one price for the
same good
Cartel -a formal organization of
producers that agree to coordinate
prices and production
The U.S. government decides to go after an agri-business giant with a price-fixing
accusation, based on the evidence submitted by their star witness, vice president
turned informant Mark Whitacre Mark Whitacre has worked for lysine developing
company ADM for many years and has even found his way into upper management. But
nothing has prepared him for the job he is about to undertake - being a spy for the
FBI. Unwillingly pressured into working as an informant against the illegal price-fixing
activities of his company, Whitacre gradually adopts the idea that he's a true secret
agent. But as his incessant lies keep piling up, his world begins crashing down around
him
The OPEC Cartel
The Organization of Petroleum
Exporting Countries (OPEC) is an
international cartel of major oil
producers. OPEC members produce
about 40% of the world’s oil and control
about 75% of the world’s oil reserves.
Members meet regularly to set
production quotas. Most experts agree
that world oil supplies are not
sufficient to meet increased demand.
In 2008, Libya’s OPEC delegation made
a prediction: “The easy, cheap oil is
80over.”
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Share of Total Oil
Reserves
Who controls most of
the oil reserves? How
about the least? How
does that affect the
United States?
70
60
50
40
30
20
10
0
European
Union
OPEC
Non-OPEC
Russia
1st
Qtr
Powerful trusts in the late 1800’s led Congress to pass antitrust
legislation.
4. Regulation and Deregulation
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Sometimes the government
takes steps to promote
competition because
markets with more
competition have lower
prices.
Market Power -ability of a
firm to control prices and
total output
Predatory Pricing -selling a
price below cost for a short
period of time to drive
competition out
Government and Competition
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Key Events in Federal AntiTrust Policy
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Sherman Anti Trust – laws that encouraged competition
in the market place
Government broke up monopolies
Blocking Mergers -when two or more companies join to
form single firm
Date
Event
1901
Theodore Roosevelt became President and begins
enforcing the 1890’s Sherman AntiTrust Act, which
outlaws mergers and monopolies that restrain trade
between states.
1911
Supreme Court breaks up Rockefeller’s Standard Oil
Trust Company
1950
Celler-Kefauver Act allows government to stop
mergers that could hurt competition
1982
AT&T agrees to break up its local phone service into
several companies
2001
Department of Justice settles its lawsuit with
Microsoft.
Deregulation
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The removal of some government controls over a market
Decided in the late 1970’s, Congress deregulated some of
the market because it was reducing competition.
Deregulated the airlines, trucking, banking, railroad, natural
gas, and television broadcasting industries
Government Passes Antitrust Laws
Regulation and Deregulation
Laws are used to regulate business
New laws limit unfair business
Deregulation promotes competition
Comparison of Market
Structures
Perfect
Competition
Monopolistic
Competition
Oligopoly
Monopoly
Number of
Firms
Many
Many
A Few
Dominate
One
Variety of
Goods
None
Some
Some
None
Control over
Prices
None
Little
Some
Complete
Barriers to
Entry
None
Low
High
Complete
Examples
Wheat,
Shares of
stock
Jeans, Books
Cars, Movie
Studios,
Soda
Companies
Public Water