Monopoly, oligopoly, monopolistic competition

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Texas Tech High ECON Chapter 9 Lesson 4 sectn 2 Monopoly, oligopoly, monopolistic competition

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Monopoly, oligopoly, monopolistic competition

  1. 1. four FOUR four FOUR four FOUR four FOUR fourFOUR four FOUR four FOUR four FOUR four FOURfour FOUR four FOUR four FOUR four FOUR fourFOUR four FOUR four FOUR four FOUR four FOURfour FOUR four FOUR four FOUR four FOUR fouNINE nine NINE nine NINE nine NINE nine NINE ninenine NINE nine NINE nine NINE nine NINE nine NINEnine NINE nine NINE nine NINE nine NINE nine nineNINE nine NINE nine NINE nine NINE nine NINE nintwo TWO two TWO two TWO two TWO two TWOtwo TWO two TWO two TWO two TWO two TWOtwo TWO two TWO two TWO two TWO two TWOtwo TWO two TWO two TWO two TWO two TWOLESSONChapterSectionpage152
  2. 2. In this section we’ll belooking at advertising’smajor role in 2 types ofmarket structures.
  3. 3. Perfect Competitionis a ______ structureIt has many______________ , & nosingle __________can affect prices.marketbuyers & sellersbuyer/seller
  4. 4. In the U.S.Most industries represent some form ofIMPERFECT COMPETITION3 types of IMPERFECT MKT STRUCTURESMonopoly / Oligopoly / Monopolistic Competition
  5. 5. The most extreme form ofIMPERFECT COMPETITIONA Pure MonopolyOne seller controls the supply of thegood/service & thus determines the price.EX: ?Some local utility companiesFew suchmarkets existin the world
  6. 6. So a monopolyis a market situation in which a single suppliermakes up an entire industry for a good/servicewith no close substitutes.NEXT: characteristics of a monopoly
  7. 7. 1 A SINGLE SELLER2 NO SUBSTITUTES3 NO ENTRY4 Almost Complete MKT Price ControlCharacteristics of a Monopoly
  8. 8. 3. NO ENTRYMonopolist is protected byobstacles to competitionpreventing others fromentering the market.
  9. 9. 4. Almost Complete MKT Price ControlBy controlling the availablesupply, the monopolist cancontrol the market price.
  10. 10. BARRIERSTOENTRYIF a monopoly ismaking all the profitsin a particular industry,why don’t others jumpin to get a share?OBSTACLES to COMPETITIONthat prevent othersfrom entering a market
  11. 11. BARRIERS TO ENTRYLEGALEXAMPLE:Somestatelawspreventacompetingelectric,gasorwatercompanyfromoperatingsomewherewhereapublicutilitycompanyalreadyprovidesservice.FEAR of WASTEFUL DUPLICATIONE X A M P L E :3watercompaniestryingtolaywatermainsalongstreets
  12. 12. Another BARRIER of ENTRYCOST OF GETTING STARTEDOR Excessive Money Capital CostsE X A M P L E : CAR & STEEL INDUSTRIESBIGinitalinvestment– costof equipment= HUGE startup costs keep companiesfrom entering some industries.Owning essential raw materials is also abarrier of entry. EXAMPLE:TheDeBeersCompany
  13. 13. 4 Types of Pure MonopoliesDistinction iswhytheyexist1.Natural2.Geographic3.Technological4.Government
  14. 14. IN THE PAST,they thought having 1 company providing apublic good or service was + efficient, ornatural.SOGov. granted exclusive rights toNATURAL MONOPOLIES= providers of such things as utilities,AND ???
  15. 15. Busservice,& cable TV.Thesize,orscale.ofmostnaturalmonopoliesgavethemECONOMIES OF SCALEBIG
  16. 16. ECONOMIES OF SCALELOW PRODUCTION COSTSLarge Output
  17. 17. GEOGRAPHIC MONOPOLYEXAMPLE: Store in remote Alaskan VillageNOBODYinterested
  18. 18. MAIL-ORDER, INTERNET & CATALOGUESPutting a dent in the number of Geographic Monopolies
  19. 19. INVENTIONSTECHNOLOGICAL MONOPOLY
  20. 20. PATENTTO MAKE, USE, or SELL an invention for a set number of yearsExclusive Right
  21. 21. Exclusive RightTo SELL, PUBLISH, orREPRODUCE creative worksfor a set number of years
  22. 22. GOVERNMENT MONOPOLYSIMILAR TO Natural, Geographic, or Technological Monopoly?S I M I L A R TO N a t u ra l , M o n o p o l yThedifferenceisthatthegovernmentitself holdsthemonopolyEXAMPLES?
  23. 23. CONSTRUCTION & MAINTENANCE
  24. 24. ByLOCAL,STATE&NATIONALGOVERNMENTS
  25. 25. BUTjusthowimportantaremonopoliesTODAY?MOREorLESSthaninthePAST?Monopolies are FARLESS importanttoday!BUT why isthat?
  26. 26. GEOGRAPHIC MONOPOLIESare losing out toMail-order businesses &E-commerce
  27. 27. NATURAL MONOPOLIESare beingbroken upbyTechnology & Government Deregulation
  28. 28. TECHNOLOGICAL MONOPOLIESRARELYlastlongerthan thePATENTIF even that long.Why?NEW PATENTS for products with SLIGHT VARIATIONSEXAMPLE: Early 1980’s MICROCOMPUTER REVOLUTION.Companies made changes to products & added features to get patents
  29. 29. OLIGOPOLYMONOPOLY – 1 supplierSeveralsuppliersWITHsomeCONTROLoverPRICE=Page155
  30. 30. 5 CONDITIONS for a MKT structureto be an OLIGOPOLYDomination–Few SellersBarrierstoEntryIdentical/SlightlyDifferentProductsNon-PriceCompetitionInterdependence
  31. 31. Domination by a Few SellersSeveralLARGEfirmsto80%ofthemarket
  32. 32. D o m i n a t i o n b y a F e w S e l l e rsBARRIERS to ENTRYHIGHDIFFICULTCapitalCostsfor newcompanies toenter majormarkets
  33. 33. IDENTICAL/SLIGHTLY DIFFERENTPRODUCTSExamples:
  34. 34. AIRLINE TRAVEL
  35. 35. DOMESTIC CARS
  36. 36. KITCHEN APPLIANCES
  37. 37. NON- PRICE COMPETITIONADVERTISINGEmphasizes MINOR differences
  38. 38. ANDattemptsto buildcustomerloyalty
  39. 39. INTERDEPENDENCEAny change on the part of 1firm will cause a reaction onthe part of other firms in theoligopoly.
  40. 40. FIGURE 38page155U.S. IndustriesTOP 4 firms in eachproduce over 80% ofTOTAL OUTPUT
  41. 41. Domestic Motor Vehicles90%
  42. 42. 87%BreakfastCereal
  43. 43. 85%SOFTDRINKS
  44. 44. TobaccoProducts82%
  45. 45. PrimaryAluminum74%
  46. 46. Non-PriceCompetitionOligopolists engage inEXAMPLE: Some car makers have an oligopoly on the domesticcar market. Millions/billions spent on advertising todifferentiate their products in the consumer mind.
  47. 47. PRODUCT DIFFERENTIATIONThe price you pay for BRAND productisn’t just based on supply/demand.Manufacturers’ useof minordifferences inquality/features totry to differentiatebetween similargoods & services
  48. 48. INTERDEPENDENT BEHAVIORFEW FIRMS in oligopoliesSO When 1 airline cuts its airfares to gainMKT share, the others follow suitPRICE WARLOWER PRICESInitially good for consumersIfpricesdroptoomuch,anairlinemaybeforcedoutofbusinessFEWERairlines/LESSCOMPETITION/PRICESINCREASEinthelongrun
  49. 49. Competing Firms in an OliogopolySecretly agree to RAISE PRICES / DIVIDE the MKT
  50. 50. COLLUSIONHEAVY PENALTIESFinesPrison Sentences
  51. 51. A n i m p o r t a n t fo r m o f C O L LU S I O NAnarrangementamonggroupsofindustrialbusinesses,oftenindifferentcountries,toreduceinternationalcompetition
  52. 52. MOST COMMONU.S. Market StructureMonopolisticL A R G E # o f S E L L E R S o f f e r S I M I I L A R ,s l i g h t l y d i f f e r e n t P R O D U C T SEXAMPLES:?
  53. 53. Monopolistic CompetitionCOSMETICS
  54. 54. DESIGNER CLOTHESMonopolistic Competition
  55. 55. MonopolisticCompetitionMKT situation LARGE # of SELLERSOffering SIMILAR productsEACH has SOME CONTROLover PRICE
  56. 56. MANYSELLERSNo SINGLE SELLER / SMALL GROUPdominates the market
  57. 57. ENTRY intoMONOPOLISTICCOMPETITION iseasierthan in a monopoly/ oligopolyDISADVANTAGEHIGHCostofADVERTISING
  58. 58. DIFFERENTIATED PRODUCTSEACHsuppliersellsaSLIGHTLYDIFFERENTPRODUCTtoATTRACTBUYERS
  59. 59. NON-PRICECOMPETITIONBusinesses compete by usingPRODUCT DIFFERENTIATION & by ADVERTISING
  60. 60. SOME CONTROL over PRICEBuildingCUSTOMERLOYALTYthruPRODUCTDIFFERENTIATION,eachfirmhasSOMECONTROLoverthePRICEitcharges
  61. 61. MONOPOLISTICCOMPETION&OLIGOPOLYare similarB I G D I F F E R E N C E / # o f S E L L E R SOLIGOPOLY – FEW FIRMS dominate an industry.CONTROL over PRICE is interdependent.MONOPOLISTIC COMPETIONhasMANYFIRMS,NOrealINTERDEPENDENCE/SLIGHTDIFFERENCEamongproducts
  62. 62. ADVERTISINGCompetitiveEvenMOREimportantinMONOPOLISTICCOMPETITIONADVERTISING leads to PRODUCT DIFFERENTIATION& competition FOR CONSUMER DOLLARSSHELF SPACE
  63. 63. When advertising works, companiescan CHARGE MORE for their productsNike, The Gap and Procter & Gamblespend millions / year
  64. 64. TablePage 158
  65. 65. PERFECT CompetitionMANY SellersNearlySIMILARProductsEASY EntryControlOverPrice: MarketEXAMPLES:
  66. 66. MONOPOLY onesellerUniqueproductNO close substitute toproduct / serviceBarrierstoEntry VERY HIGHControl Over Price CONSIDERABLEEXAMPLES: Water,electricity,1stclassmaildelivery
  67. 67. MONOPOLISTIC COMPETITIONMANY SELLERS Differentiated productsBarriers to Entry EASYControl Over Price YES.Notasmuchasmonopoly;ConsumerDemandEXAMPLES: Clothing, Restaurant meals
  68. 68. OLIGOPOLYFEWSELLERSIdentical/slightly differentiatedproductsBarrierstoEntry SignificantlyhighControlOverPriceYES.Notasmuchasinmonopoly;InterdependenceintheindustryEXAMPLES:CARS
  69. 69. COMING UP NEXTSection 3Government Policies TowardCompetition

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