Market StructuresMarket Structures

California StandardCalifornia Standard12.2 Students analyze the elements of

America's market economy in a global setting.

7. Analyze how domestic and international competition in a market economy affects goods and services produced and the quality, quantity, and price of those products.

What is an industry or market?What is an industry or market?List 8 different industries/markets

We categorize industries/markets by how many competitors exist in that market/industry

We categorize industries/markets by how many competitors exist in that market/industry

Pure/PerfectCompetition

PureMonopoly

MonopolisticCompetition Oligopoly

FOUR MARKET STRUCTURES

More Competitors

Less

Competitors

How does Competition affect the consumer? Explain

How does Competition affect the consumer? Explain

3 Characteristics of Perfect Competition

3 Characteristics of Perfect Competition

1) Many buyers and sellers act independently

1) Many buyers and sellers act independently

No single buyer or seller in a market has enough power to control demand, supply, or prices.

2) Sellers offer identical products

2) Sellers offer identical products

Buyers choose one product over another primarily on price, not unique characteristics.

3) Sellers can enter or exit the market easily 3) Sellers can enter or exit the market easily

Sellers must be able to enter a profitable market—or leave an unprofitable one-easily. This ensures that a single seller cannot dominate a particular market. Few Barriers to Entry

Barriers to entry: factors that keep competition from entering a market/industry

QuestionQuestion

Relating to Barriers to Entry, what are 3 concerns that you would have if I came up to you to tell you that to become rich, I was going to start a Steel Producing Company?

Example of Perfect CompetitionExample of Perfect CompetitionAgricultural Products1) Thousands of independent farmers compete to sell their products to millions of buyers2) For the most part, products are identical.

3) Farmers who already own land can switch to different products easily

Monopolistic Competition

Monopolistic Competition Key difference from Perfect

Competition: Sellers offer similar, rather than identical, products. Each firm seeks to have a monopoly-like power by selling a unique product - Product Variation

Product VariationProduct VariationProduct variation is more common than having

identical products. Sellers try to differentiate, or point out differences (real or merely seem real), between their products and those of their competitors.

Sellers here, compete on a basis other than price. They compete through advertising and by emphasizing their brand names.

Think of an industry where there is Monopolistic Competition. List the different ways producers differentiate their products in this industry

Think of an industry where there is Monopolistic Competition. List the different ways producers differentiate their products in this industry

3rd Market Structure: Oligopolies3rd Market Structure: OligopoliesA market structure in which a few large sellers control most of the production of a good or service

3 Conditions of an Oligopoly3 Conditions of an Oligopoly1)The critical characteristic of an

Oligopoly is the presence of only a few large sellers

A market is considered an oligopoly when the largest three or four sellers produce most (maybe 70% or more) of the market’s total output

Conditions of OligopolyConditions of Oligopoly

2) Sellers offer identical or similar products

Conditions of an OligopolyConditions of an Oligopoly

3) Difficult Market EntrySignificant Barriers to Entry- Examples?

High Start-Up Costs, A lot of Technical Knowledge Needed, High Consumer Loyalty

List 3 industries that would qualify as oligopolies

List 3 industries that would qualify as oligopolies

Vocabulary: CollusionVocabulary: CollusionWhen sellers secretly agree to set

production levels or prices for their productsIllegal and carries heavy penalties such as fines and even prison sentences

Vocabulary: CartelsVocabulary: CartelsWhere companies openly organize a

system of price setting and market sharing

Illegal in the US but not everywhere in the world

Examples: Diamonds (De Beers) and Oil (OPEC)

MonopoliesMonopolies

Where a single seller controls all production of a good or service

Conditions of a MonopolyConditions of a Monopoly1) A Single Seller2) No Close Substitutes3) Difficult Market Entry4) Seller has a great deal of

Price Control

Types of MonopoliesTypes of Monopolies

Natural Monopoly – Sometimes having competition in an industry can be inefficient and not in the public best interest. The government will sometimes grant or allow some companies a Natural Monopoly.

Ex. Utility Companies – Enormously expensive, require construction, essential for the public. Regulated by the government

Types of Monopolies Cont’dTypes of Monopolies Cont’dTechnological Monopolies – Patent: Grants a company or individual the

exclusive right to produce, use, rent and sell an invention for 20 years

Why? To motivate ingenuity and creativity. To give incentive to invent productsCopyright: Protects the work of authors, musicians and artists

Expanding Business: MergersExpanding Business: Mergers

Horizontal MergersMerging two companies

within the same industry

Examples: 1)American Airlines buying US Air 2) AT&T buying Cingular Wireless

Expanding Business: MergersExpanding Business: Mergers

Vertical Merger – Merger of two companies that are at

different stages in the same production process

Example: A merger between Sears and Maytag

Expanding Business: MergersExpanding Business: Mergers

Conglomerate Mergers Merger of two companies that

are in different businesses

Examples: General Electric: Jet Engines, NBC, Insurance, Financing; PepsiCo: Pepsi, Frito-Lay, KFC, Pizza Hut, Taco Bell

Conglomerate Merger Example“I was chairman for two days, and

then I had jets with my engines hit a building I insured, which was covered by a network I owned, and we are still growing 2001 earnings by 11 percent.”

-Jeffrey Immelt CEO of General ElectricSeptember 2001