market structure

1. Quick Evaluation
• Lectures
• Videos
• Focus Note Guides
• Books
• In-class problems/case studies
I think _____ is helping me the most in learning.
I could learn better if ________________

2. MARKET STRUCTURE
How many firms are there and
why do we care?

3. What do we want from firms?
• New ideas, products and services
• Lowest possible price and highest possible quantity
• Efficient use of resources
• Safe products
• Honest selling

4. Industry types
• Perfect Competition
• Monopolistic Competition
• Oligopoly
• Monopoly
• Natural Monopoly

5. Perfect Competition
Conditions:
•Identical Product
•Many Buyers and Sellers
•All buyers and sellers have perfect information
•No barriers to entry/exit

6. Perfect Competition - Examples
Agriculture
Commodities
Coal
Timber
Cotton

7. Identical Product
• No need for single firm to advertise
• May be industry-wide advertising
• Buyers choose just on price
• Push all firms to a single price

8. Many Buyers and Sellers
• No one firm or buyer has any market power
• Market power is the ability to influence price by restricting or
increasing quantity supplied or quantity demanded.
• Buyers and sellers are PRICE TAKERS BOTH AS
SELLERS AND AS BUYERS OF LABOR AND
MATERIALS

9. Tendency to normal profits
• Firms will seek profits by looking for ways to
1.Lower costs
2.Stifle competition
3.Or differentiate product/service
• Can lead to innovation and invention
• OR a race to the bottom through cost-cutting

10. No entry or exit barriers
• New firms will enter in response to positive economic
profits.
• Pushing market price down and economic profits to zero

11. Perfect Competition
Conditions
Identical Product
Many Buyers & Sellers
Perfect Information
Easy Entry/Exit
Implications
• No need for firm advertising
• Customers choose on price
• Individuals & firms price
takers. Maximum quantity
• Rely on oversight from
trade association or
government
• Zero economic profit

12. Pros of Perfect Competition
• Innovation and invention in search of profit advantage
• Ease of entry and exit will lead the industry to zero profits
• Costs in each firm will be minimized and production
quantity maximized

13. Cons of Competition
• Needs to be enforced
• Race to the bottom by minimizing costs

14. When examining a market, ask:
• How many firms are there?
• What barriers to entry exist?
• How differentiated is the product?
• Similar or not?
• Differences real or perception-driven?
• What is the effect of above on prices and profits?

15. Most industries are not PC
• Concentration ratios different industries
Perfect Monopolistic Oligopoly Monopoly
Competition Competition

16. Monopoly
Conditions:
•One seller
•No close substitutes
•Very high barriers to entry

17. High barriers to entry
• Structural
• Economies of Scale
• Commodity Control
• Brand Loyalty
• Strategic
• Predatory Pricing
• Product differentiation
• Legal
• Patents, Copyrights,Trademarks
• Licenses
• Natural Monopolies

18. Monopoly
Examples

19. Monopoly
Conditions:
• One seller
• No close substitutes
• High Barriers to Entry
Implications:
• Firm = Market
• Price Searcher –
Restricted Quantity
• Motivation to invest in
R&D
• Positive LR Economic
Profits

20. Monopoly
Pros
• Promote exploration and
innovation with the
promise of large profits
Cons
• Deadweight loss from
restricted quantity and
higher price
• Can stifle competition and
innovation

21. Monopolistic Competition
• Many sellers & buyers
• Slightly differentiated product
• Style/type, location, or quality
• Perfect information
• Easy entry and exit

22. Monopolistic Competition -
Examples

23. Monopolistic Competition
Conditions
• Many Buyers/Sellers
• Differentiated Product
• Perfect Information
• Easy Entry/Exit
Implications
• Mostly price takers
• Firm-specific advertising
• Assortment
• Low price
• Highlight perceived difference
– branding
• Zero economic profit in Long
Run
• Innovation Incentives

24. Pros/Cons of Monopolistic Competition
PROS
• Lots of choice and
locations
• For the firm some market
power – can raise P
• Easy entry pushes profit
to zero
CONS
• Lots of Choice means
EXCESS CAPACITY
• Are marketing dollars
productive?

25. Product differentiated?
NO YES
One
Number of
Firms? Few
Many
Perfect
Competition
Monopolistic
Competition

26. Oligopoly
• Few sellers and many buyers
• Products can be differentiated, like cars
OR homogeneous, like oil
• Significant barriers to entry
• Economies of scale
• Distribution channel
• Advertising

27. Oligopoly - Examples

28. High Barriers to Entry
• Types:
• Fixed Costs or scale is large
• Market Dominance is an advantage
• Distribution channels controlled
• What does that mean: High Profits

29. Few Sellers
• Price Searchers –
• Interdependent – what one firm does impacts
the other firms
• Always consider competition when making P & Q
decisions
• High risk of collusion
• Collusion – secret or illegal cooperation

30. Oligopoly summary
Conditions
• Few sellers
• Just two = Duopoly
• Homogeneous
or
• Differentiated
• Significant Barriers to
Entry
Implications
• Price Searcher
• Firms interdependent
• Restrict quantity and thus
control price
• Positive LR Profits

32. What do we want from firms?
• New ideas, products and services
• Lowest possible price and highest possible quantity
• Efficient use of resources
• Safe products
• Honest selling

33. Which industry type is best?
• It depends!
• (Fair) Competition results in:
• Highest quantity
• Lowest price
• Motivation to innovate & invent
• Efficient allocation of resources
• But, what if patents didn’t exist? What if we provided the
lowest cost possible education or prisons (does quality
matter more than lowest cost)?