Market Structure Continuum No Competition Pure Free Market <============================================ Perfect Competition MONOPOLISTIC COMPETITION Oligopoly Monopoly
MonopolyMarket Characteristics • One Seller • Unique Product—(no substitutes) • Very difficult to enter/leave industry • Price Setters: great deal of price control
Examples of Monopolies More Distant Past: • Standard Oil (John D. Rockefeller) • United States Steel (Andrew Carnegie) More Recent Past: • American Telephone & Telegraph (AT & T) • Microsoft
Current Monopolies NATURAL MONOPOLY: a market that runs most efficiently when one firm supplies all of the output • Electric Utilities • Water for your home • Garbage collection LOCAL MONOPOLY: for various reasons there are no other competitors in a geographic area i.e. only gas station in a small town Avoid buying gas here if you can!
Bottom Line: Monopolies lead to a) Higher price & lower Quantity produced b) Less variety of products
Anti-Trust Laws Anti-Trust Laws, administered by the U.S. Department of Justice, can be used to • Break up a monopoly (like Standard Oil or AT & T) b) Prevent companies from merging to maintain competition (AT & T and T-Mobile?)
Video clip from “Fair Fight in the Marketplace” Offender: Archer Daniels Midland Co. (segment 2) 6 min. 24 sec.
U.S. Economy How close to Adam Smith’s World? No Competition Pure Free Market <============================================ Perfect Competition Monopolistic Competition OLIGOPOLY Monopoly
Oligopoly Examples • Car makers • Steel industry • Aircraft manufacturing • Oil industry • Airlines • Tobacco industry • Beer industry • Soda industry • Home Improvement • Music recording industry • Textbook industry • Wireless communications industry • Aerospace industry
Automobile Production Airliner Production Can you have Perfect Competition in: N0, because of Economies of Scale. Economic Activity is often MORE EFFICIENT when done on a LARGE SCALE
Economies of Scale Definition: factors that cause a producer’s average cost per unit to fall as output rises
Economies of Scale Example 1 unit of energy 1000 units of energy 10,000 units of energy 100,000 units of energy 1,000,000 units of energy 100 units of energy Cost of building power plant (fixed cost) $10,000,000 $10,000,000 $10,000,000 $10,000,000 $10,000,000 $10,000,000 Cost per unit of energy produced $100,000 $10,000 $1000 $100 $10 $10,000,000