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Market Structure. Market Structure. The nature and degree of competition among firms in the same industry. Perfect Competition. Market structure characterized by a large number of well-informed independent buyers and sellers who exchange identical products. A Theoretical idea.

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Market structure1
Market Structure

  • The nature and degree of competition among firms in the same industry


Perfect competition
Perfect Competition

  • Market structure characterized by a large number of well-informed independent buyers and sellers who exchange identical products.

  • A Theoretical idea

Q: So why does perfect competition serve as a theoretical market structure?

A: Its advantages serve as a yardstick or example for other structures to be measured by.


Perfect competition conditions
Perfect Competition Conditions

  • Must be a large number of buyers and sellers

  • Buyers and sellers deal in identical product

  • Each buyer and seller acts independently

  • Buyers and sellers are reasonably well-informed about product and prices

  • Buyers and sellers are free to enter into, conduct, or get out of business


Monopolistic competition
Monopolistic Competition

  • Market structure that has all the conditions of perfect competition except for identical products.

  • Seller has the ability to raise or lower the price

  • If sellers raise or lower the price enough, customers will change brands


Monopolistic competition1
Monopolistic Competition

  • Characterized by product differentiation: real or perceived differences between competing products in the same industry.

  • To make their products stand out, they use nonprice competition: the use of advertising, giveaways, or other promotions designed to convince buyers that the product is somehow unique or fundamentally better than a competitor’s.


Oligopoly
Oligopoly

  • Market Structure in which a few large sellers dominate the industry

  • Products may be distinct like the car industry or standardized like the steel industry

  • When one firm changes prices, enhances product, etc the other firms usually follow or they run the risk of losing customers


Monopoly
Monopoly

  • Market structure with a single seller of a particular product

  • Few Pure Monopolies today…very rare



Types of monopolies
Types of Monopolies

  • Natural Monopoly: market situation where the costs of production are minimized by having a single firm produce the product

    • IE: Public utilities

  • Geographic Monopoly: market structure based on the absence of other sellers in a particular geographic area

    • IE: Only 1 gas station in a small town


Types of monopolies1
Types of Monopolies

  • Technological Monopoly: based on a firm’s ownership or control of a production method, process, or other scientific advance

    • IE: item with a patent

  • Government Monopoly: monopoly owned and operated by the government

    • IE: oversee water use, weapon-grade uranium for military


Market failure
Market Failure

  • Condition that causes a competitive market to fail


5 reasons for failure
5 Reasons for Failure:

  • Inadequate Competition

  • Inadequate Information – if the knowledge is important to buyers and sellers but is difficult to obtain

  • Resource Immobility – factors of production do not move to markets where returns are the highest

  • Public Goods – products that are collectively consumed by everyone

  • Externalities – unintended side effect that either benefits or harms a third party not involved.


Externalities
Externalities

  • Negative: harm, cost, or inconvenience suffered by a third party because of actions by others

    • IE: Noise from an airport, pollution

  • Positive: a benefit someone receives who was not involved in the activity that generated the benefit.

    • IE: Airport expansion provides more business for local restaurants

Doesn’t matter if they are positive or negative: they are considered market failures, because their costs and benefits are not reflected in the market prices that buyers and sellers pay.


The role of government
The Role of Government

  • The government exercises its power to maintain competition within markets

  • Two ways that government can maintain competitive markets:

    • Prohibiting market structures that are not competitive

    • Regulating markets where full competition is not possible


Antitrust legislation
Antitrust Legislation

  • Trust: illegal combination of corporations or companies organized to hinder competition

  • Price Discrimination: the practice of selling the same product to different consumers at different prices

  • Cease and Desist Order: ruling requiring a company to stop an unfair business practice that reduces or limits competition


Anti monopoly legislation
Anti-Monopoly Legislation

  • Sherman Antitrust Act 1890 – Outlawed all contracts to stop the growth of trusts and monopolies

  • Clayton Antitrust Act 1914 – Strengthened the Sherman Act by outlawing price discrimination

  • Federal Trade Commission Act 1914 – Established the Federal Trade Commission to regulate unfair methods of competition in interstate commerce.

  • Robinson-Patman Act 1936 – Made it where everyone got the same rebates and discounts


What two market failures does the government have the ability to correct

Q:

Inadequate Information

and Public Goods

What two market failures does the government have the ability to correct?

A:


Improve economic efficiency
Improve Economic Efficiency

  • Promote Transparency – information and actions are not hidden and are easily available for review

    • Public Disclosure: requirement that businesses reveal certain information to the public

  • Provide Public Goods


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