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Market Structures: Perfect Competition

Market Structures: Perfect Competition. Ch 7.1, p. 159. Words. Perfect competition Commodity Barrier to entry Imperfect competition Start-up costs. Perfect Competition.

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Market Structures: Perfect Competition

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  1. Market Structures:Perfect Competition Ch 7.1, p. 159

  2. Words • Perfect competition • Commodity • Barrier to entry • Imperfect competition • Start-up costs

  3. Perfect Competition • A market structure in which a large number of firms all produce the same product and no single seller controls supply or prices

  4. Perfect Competition • Requires 4 things: • Many buyers and sellers • Identical products • Informed buyers and sellers • Free market entry and exit

  5. Start-up Costs • The expenses a new business must pay before producing and selling goods/services • Sometimes up to 10x more than anticipated

  6. Technology • Good or bad for starting a company? • Good or bad for competition?

  7. The reason we care about competition • Perfectly competitive markets have the lowest possible prices. • Buyers get the best deals • The last thing we want is a monopoly

  8. Q and A • What are the four conditions of perfect competition? • Many buyers and sellers, identical products, informed ppl, free market entry/exit • Which of these markets are perfectly competitive? • Bottled water? Pizza? Cars? Computers?

  9. Monopoly Ch 7.2, p. 165

  10. Terms • Monopoly • Economies of scale • Natural monopoly • Gov’t. monopoly • Patent • Franchise • License • Price discrimination • Market power

  11. Monopoly • A market in which a single seller dominates

  12. Why have monopolies? • Economies of scale make it more profitable to have a single huge company • Econ. of scale: average cost per unit decreases as output increases

  13. Natural Monopolies • A market that runs most efficiently when one large firm supplies all of the output

  14. Government Monopolies • A monopoly created or approved by the gov’t. • Mail service? • Gov’t. created monopolies exist for normal ppl too: • Patents • Franchises • Licenses

  15. Sports Leagues • Aka government-approved monopolies • They set prices, teams, and strictly control a single flow of goods/services

  16. Monopolist’s Dilemma • If a monopolist produces more, the price of a good will fall. • That sucks when you control all goods.

  17. Setting Prices • Easier when you control the entire market. • Look to: • Profit goals • Price discrimination: who will pay what • Market power: monopoly’s control • Targeted Discounts: who can we trap?

  18. Discount Examples • Discounted Airline Fares • Rebates • Senior Citizen or Student • Children • Stay Free Hotels

  19. Types of Cards // Discount Received

  20. Inquiries • Why are monopolies bad for the economy as a whole? • What is market power? • How does price discrimination work?

  21. Monopolistic Competition and Oligopoly Ch 7.3, p.174

  22. Terms of Art • Monopolistic competition • Differentiation • Nonprice competition • Oligopoly • Price war • Collusion • Price fixing • Cartel

  23. Monopolistic Competition • A market structure in which many companies sell products that are similar but not identical • E.g. blue jeans

  24. Four Conditions of Monopolistic Competition • Many firms • Few artificial barriers to entry • Little control over price • Differentiated products

  25. Nonprice Competition • A way to attract customers through style, service, location, etc. • But not by a low price!

  26. Nonprice Options • Physical characteristics • Location • Service • advertising

  27. Random: Oligopoly • Like a monopoly, but with a few firms instead of one. • E.g., computer software • Collusion is common • Illegal agreements to fix prices in a cartel-like manner

  28. Queries • What is differentiation? • Can you give an example of price fixing? • How do you decide which jeans to buy?

  29. Regulation and Deregulation Ch 7.4, p. 180

  30. Words • Predatory pricing • Antitrust laws • Trust • Merger • Deregulation

  31. Market Power • There are lots of ways to dominate a marketplace • Having a monopoly is just one of them • Sometimes firms even attempt predatory pricing • Lowing prices below input costs to drive competitors out of business

  32. Government Enters Ring • Trusts were a problem at the turn of the 20th century • Trust: illegal grouping of companies that discouraged competition • Basically a cartel • So we started to create antitrust legislation • Aimed to break up these huge companies dominating the market

  33. What’s more • The gov’t. didn’t just stop at breaking up trusts • They also block mergers from happening in the first place • Merger: when two or more companies join to form a single firm

  34. So when do we allow monopolistic mergers? • When companies can prove that a monopolistic merger would lower costs and prices or lead to a better product.

  35. People Must Come First!

  36. Deregulation • The removal of some government controls over a market • Lots of ways to look at pros/cons • Airlines were deregulated with President Carter in 1978 and super regulated in 2001 under Bush

  37. Questions • What is an antitrust law? • When do we allow monopolistic mergers to happen? • What is predatory pricing?

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