monopoly, oligopoly, monopolistic competition
DESCRIPTION
Texas Tech High ECON Chapter 9 Lesson 4 sectn 2 Monopoly, oligopoly, monopolistic competitionTRANSCRIPT
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LESSONChapter
Section
page
152
In this section we’ll be looking at advertising’s major role in 2 types of
market structures.
Perfect Competition
is a ______ structure
It has many______________ , & no single __________can affect prices.
market
buyers & sellersbuyer/seller
In the U.S.Most industries represent some form of
IMPERFECT COMPETITION
3 types of IMPERFECT MKT STRUCTURESMonopoly / Oligopoly / Monopolistic Competition
The most extreme form of IMPERFECT COMPETITION
A Pure Monopoly
One seller controls the supply of the good/service & thus determines the price.
EX: ?
Some local utility companiesFew such
markets exist in the world
So a monopolyis a market situation in which a single supplier
makes up an entire industry for a good/service with no close substitutes.
NEXT: characteristics of a monopoly
1 A SINGLE SELLER
2 NO SUBSTITUTES
3 NO ENTRY
4 Almost Complete MKT Price Control
Characteristics of a Monopoly
3. NO ENTRY
Monopolist is protected by obstacles to competi ti on preventi ng others from
entering the market.
4. Almost Complete MKT Price Control
By controlling the available supply, the monopolist can
control the market price.
BARRIERS TO ENTRYIF a monopoly is
making all the profits in a particular industry, why don’t others jump
in to get a share?
OBSTACLES to COMPETITION that prevent others from entering a market
BARRIERS TO ENTRY
LEGAL EXAMPLE: Some state laws prevent a competing electric, gas or water company from
operating somewhere where a public utility company already
provides service.
FEAR of WASTEFUL DUPLICATION
E X A M P L E :3 water companies trying to lay water mains along streets
Another BARRIER of ENTRYCOST OF GETTING STARTEDOR Excessive Money Capital Costs
E X A M P L E : CAR & STEEL INDUSTRIES
BIG inital investment – cost of equipment= HUGE startup costs keep companies
from entering some industries.Owning essential raw materials is also a barrier of entry. EXAMPLE: The DeBeers Company
4 Ty p e s o f P u re M o n o p o l i e s
Distinction is why they exist
1.Natural 2.Geographic 3.Technological 4.Government
IN THE PAST, they thought having 1 company providing a public good or service was + efficient, or natural.
SOGov. granted exclusive rights toNATURAL MONOPOLIES
= providers of such things as utilities,
AND ???
Bus service, & cable TV.
The size, or scale. of most natural monopolies gave them
ECONOMIES OF SCALE
BIG
ECONOMIES OF SCALE
L O W P R O D U C T I O N C O S T S
Large Output
GEOGRAPHIC MONOPOLY
EXAMPLE: Store in remote Alaskan Vil lage
NOBODY interested
MAIL-ORDER, INTERNET & CATALOGUESPutting a dent in the number of Geographic Monopolies
INVENTIONSTECHNOLOGICAL MONOPOLY
PATENT
TO MAKE, USE, or SELL an invention for a set number of years
Exclusive Right
Exclusive RightTo SELL, PUBLISH, or
REPRODUCE creative works for a set number of years
GOVERNMENT MONOPOLYSIMILAR TO Natural, Geographic, or Technological Monopoly? S I M I L A R T O N a t u r a l , M o n o p o l y
The difference is that the government itself holds the monopoly
EXAMPLES?
CONSTRUCTION & MAINTENANCE
Bridges
ROADSBy LOCAL, STATE & NATIONAL GOVERNMENTS
BUTjust how important are monopolies TODAY?
MORE or LESS than in the PAST?
Monopolies are FAR LESS important
today!
B U T w hy i s t h a t ?
GEOGRAPHIC MONOPOLIES are losing out to
Mail-order businesses &E-commerce
NATURAL MONOPOLIES
are being broken up
by
Technology & Government Deregulation
TECHNOLOGICAL MONOPOLIES RARELY last longer than the PATENTIF even that long.
Why?NEW PATENTS for products with SLIGHT VARIATIONS
E X A M P L E : Ea r l y 1 9 8 0 ’s M I C R O C O M P U T E R R E VO LU T I O N . Companies made changes to products & added features to get patents
OLIGOPOLY
MONOPOLY – 1 supplier Several suppliers WITH some CONTROL over PRICE =
Page155
5 CONDITIONS for a MKT structure to be an OLIGOPOLYDomination – Few Sellers
Barriers to EntryIdentical/Slightly Different Products
Non-Price CompetitionInterdependence
Domination by a Few Sellers
Several LARGE firms
to 80% of the market
D o m i n a ti o n b y a F e w S e l l e r s
BARRIERS to ENTRYHIGH
DIFFICULT
Capital Costs
for new companies to enter major markets
I D E N T I C A L / S L I G H T LY D I F F E R E N T
PRODUCTSExamples:
AIRLINE TRAVEL
DOMESTIC CARS
KITCHEN APPLIANCES
NON- PR ICE COMPETIT ION
ADVERTISINGEmphasizes MINOR differences
ANDattempts to build
customer loyalty
INTERDEPENDENCE
Any change on the part of 1 firm will cause a reaction on
the part of other firms in the oligopoly.
FIGURE 38
page155
U.S. IndustriesTOP 4 firms in each
produce over 80% of TOTAL OUTPUT
Domestic Motor Vehicles
90%
87% Breakfast
Cereal
85%
SOFT DRINKS
Tobacco Products82%
Primary Aluminum
74%
Non-Price Competition
O l i g o p o l i s t s e n g a g e i n
EXAMPLE: Some car makers have an oligopoly on the domestic car market. Millions/billions spent on advertising to differentiate their products in the consumer mind.
PRODUCT DIFFERENTIATION
The price you pay for BRAND product isn’t just based on supply/demand.
Manufacturers’ use of minor differences in quality/features to try to differentiate between similar goods & services
INTERDEPENDENT BEHAVIORF E W F I R M S i n o l i g o p o l i e s
SO When 1 airline cuts its airfares to gain MKT share, the others follow suit
PRICE WARLOWER PRICESInitially good for consumers
If prices drop too much, an airline may be forced out of businessFEWER airlines / LESS COMPETITION / PRICES INCREASE in the long run
Competing Firms in an OliogopolySecretly agree to RAISE PRICES / DIVIDE the MKT
ILLEGAL
COLLUSIONHEAVY PENALTIES
FinesPrison Sentences
A n i m p o r t a n t f o r m o f C O L L U S I O N
An arrangement among groups of industrial businesses, often in different countries, to reduce international competition
CONTROL price / production / distribution of goods
MOST COMMONU.S. Market Structure
Monopol i sti c Competi ti on
L A R G E # o f S E L L E R S o ff e r S I M I I L A R ,s l i g h t l y d i ff e r e n t P R O D U C T S
EXAMPLES:?
Monopolistic C
ompetitionToothpaste
Monopolisti c Competi ti on
COSMETICS
DESIGNER CLOTHES
Monopolisti c Competi ti on
Monopol i sti c Competi ti on
MKT situati on LARGE # of SELLERS
O ff e r i n g S I M I L A R p ro d u c t s
EACH has SOME CONTROLover PRICE
MANY SELLERS
No SINGLE SELLER / SMALL GROUP dominates the market
ENTRY into MONOPOLISTIC COMPETITION is easier than in a monopoly / oligopoly
DISADVANTAGEHIGH Cost of ADVERTISING
D I F F E R E N T I AT E D P R O D U C T S
EACH supplier sells a
SLIGHTLY DIFFERENTPRODUCT to ATTRACT BUYERS
N O N - P R I C E COMPETITION
Businesses compete by using PRODUCT DIFFERENTIATION & by ADVERTISING
SOME CONTROL over PRICE
Building CUSTOMER LOYALTY thru PRODUCT DIFFERENTIATION, each firm has SOME CONTROL over the PRICE it charges
MONOPOLISTIC COMPETION & OLIGOPOLY are similar
B I G D I F F E R E N C E / # o f S E L L E R S
OLIGOPOLY – FEW FIRMS dominate an industry. CONTROL over PRICE is interdependent.
MONOPOLISTIC COMPETION has MANY FIRMS, NO real INTERDEPENDENCE / SLIGHT DIFFERENCE among products
ADVERTISINGCompeti ti ve
Even MORE important in MONOPOLISTIC COMPETITION
ADVERTISING leads to PRODUCT DIFFERENTIATION & competition FOR CONSUMER DOLLARS
SHELF SPACE
When advertising works, companies can CHARGE MORE for their products
Nike, The Gap and Procter & Gamble spend millions / year
Table
Page 158
PERFECT CompetitionMANY Sellers
Nearly SIMILAR Products
EASY Entr yControl Over Price: Market
EXAMPLES:
MONOPOLY one seller
Unique product NO c lose substi tute to product / ser v ice
Barriers to Entry V E RY H I G HControl Over Price CONSIDERABLE
EXAMPLES: Water, electricity, 1st class mail delivery
MONOPOLISTIC COMPETITION
MANY SELLERS Differentiated products
Barr iers to Entr y EASYControl Over Price YES. Not as much as monopoly;
Consumer Demand
EXAMPLES: Clothing, Restaurant meals
OLIGOPOLYFEW SELLERS Identi ca l/s l ight ly d iff erenti ated
products
Barriers to Entry Significantly high
XX Control Over Price YES. Not as much as in monopoly; Interdependence in the industry
EXAMPLES:CARS
COMING UP NEXTSection 3
Government Policies Toward Competition