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  1. 1. Chapter 6: Market Structures
  2. 2. Section 1: Highly Competitive Markets <ul><li>Consumers benefit most from a competitive market </li></ul><ul><li>Why? Consumers have wide range of products </li></ul><ul><li>Two types of competitive markets: perfect competition and monopolistic competition </li></ul>
  3. 3. Perfect Competition <ul><li>Situation in which no one buyer or seller controls demand, supply, or price </li></ul>
  4. 4. <ul><li>4 conditions present in perfect competition: </li></ul><ul><ul><li>1) There are many buyers and sellers, therefore no one entity controls market </li></ul></ul><ul><ul><li>2) Sellers offer identical products and buyers have choice to purchase what they want </li></ul></ul><ul><ul><li>3) Buyers must be informed and knowledgeable about products </li></ul></ul><ul><ul><li>4) Sellers must be able to easily enter or exit the market (low start-up costs, level of technology needed) </li></ul></ul>
  5. 5. What does perfect competition look like? <ul><li>Some agricultural markets in US </li></ul><ul><li>Apples - thousands of independent farmers and growers </li></ul><ul><ul><li>No one buyer or seller controls prices </li></ul></ul><ul><ul><li>Buyers make decision based on price alone </li></ul></ul><ul><ul><li>Buyers are informed (variety of apples, place of origin, how grown) </li></ul></ul><ul><ul><li>Farmers can easily enter or exit market (if, of course, they own the land) </li></ul></ul>
  6. 6. Monopolistic Competition <ul><li>One main difference - sellers offer different, rather than identical, products </li></ul><ul><ul><li>Sellers try to differentiate (point out differences) between their products and their competitors </li></ul></ul><ul><ul><li>Sellers compete on a basis other than price - name brand versus cheap-o jeans; advertising is key </li></ul></ul><ul><ul><li>Main goal of product differentiation and competition is to increase profits </li></ul></ul>
  7. 7. Section 2: Imperfectly Competitive Markets <ul><li>1 - Oligopolies: a few large sellers control most of the production of a good or service </li></ul><ul><ul><li>There are only a few large sellers </li></ul></ul><ul><ul><li>Sellers offer identical or similar products </li></ul></ul><ul><ul><li>Other sellers cannot enter the market easily </li></ul></ul>
  8. 8. <ul><li>Examples: </li></ul><ul><ul><li>Breakfast Cereals - Kellogg’s, General Mills, and Post account for 80% of sales </li></ul></ul><ul><ul><ul><ul><li>Companies may set own price (interdependent pricing) in accordance with demands of buyer </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Price leadership: one of largest sellers will set the price for its product…this can lead to a price war - sellers aggressively undercut each other’s prices in an attempt to gain market share - benefits consumers </li></ul></ul></ul></ul>
  9. 9. Collusion and Cartels <ul><li>In a collusion sellers secretly agree to set production levels or prices for their products - illegal!!! Why might this be illegal? </li></ul><ul><li>With a cartel companies openly organize a system of price setting and market sharing. Cartels are also illegal in the United States. </li></ul><ul><ul><li>South Africa’s De Beers Diamond company is “successful” cartel </li></ul></ul>
  10. 10. <ul><li>2 - Monopolies: a single seller controls all production of a good or service </li></ul><ul><ul><li>There is a single seller </li></ul></ul><ul><ul><li>No close substitute goods are available </li></ul></ul><ul><ul><li>Other sellers cannot enter the market easily </li></ul></ul><ul><ul><li>Natural monopolies: public and private utilities - electric companies, cable television services </li></ul></ul><ul><ul><li>Geographic monopolies: general store in remote area </li></ul></ul><ul><ul><li>Technological monopolies: general dynamics and submarines; companies must get patent - which grants a company exclusive right to produce, use, rent, sell an invention for a certain amount of time; copyrights - gives authors, musicians, artists exclusive rights to publish, duplicate, perform, display, sell creative works </li></ul></ul><ul><ul><li>Government monopolies: water and sewer services </li></ul></ul>
  11. 11. <ul><li>Examples of monopolies: cable television company </li></ul>
  12. 12. Section 3: Market Regulation <ul><li>After the Civil War “big business” or huge monopolies took over the marketplace </li></ul><ul><li>At first, US respected “laissez-faire” economic philosophy - government does not and will not interfere </li></ul><ul><li>By 1880s that changed b/c people were worried about unfair business practices </li></ul>
  13. 13. Antitrust Legislation in the US <ul><li>Interstate Commerce Act - committee was formed (ICC) to control soaring railroad prices - abolished in 1995 (when railroad system had long been obselete) </li></ul><ul><li>Sherman Antitrust Act - banned agreements and actions that restrain trade </li></ul><ul><ul><li>Standard Oil Company - broken up because of Sherman Antitrust Act, became “smaller” branch - Standard Oil of New Jersey (controlled by John D. Rockefeller). In 1972 it changed its name to EXXON, and we know the rest…Exxon is one of the largest industrial corporations in the US and the World </li></ul></ul>
  14. 14. <ul><li>Clayton Antitrust Act (1914) - prohibited price setting and price discrimination </li></ul><ul><li>Federal Trade Commission Act (1914) - created committee to investigate charges of unfair methods of competition </li></ul><ul><li>Robinson-Patman Act (1936) - reinforced laws against price discrimination </li></ul><ul><li>Entertainment monopolies today: Clear Channel Communications - huge in entertainment industry - controls over 1,170 radio stations, 19 television stations, 700,000 billboards, also owns and operates 135 live entertainment venues. In 2001 they were sued (by another smaller entertainment company) because of “monopolistic, predatory and anticompetitive business practices”. Now artists must use the company to promote their music. Is this fair? </li></ul>