MARKET STRUCTURE Market structure describes the nature of

MARKET STRUCTURE Market structure describes the nature of competition within a market.

MARKET STRUCTURE The product market for a good includes all those products that consumers consider to be close substitutes for that good.

MARKET STRUCTURE Imperfect competition arises when there is not enough competition among firms to prevent individual firms from raising their price above the equilibrium level determined by supply and demand.

WHAT IS A MONOPOLY? Market power is the ability of a firm to change the market price of a good or service. Monopoly is a product market served by only one firm. The one supplier in a monopoly is called a monopolist.

WHAT IS A MONOPOLY? Barriers to entry are obstacles that prevent firms from entering particular markets. A natural monopoly is a market in which high startup costs make it prohibitively expensive for more than one firm to operate.

WHAT IS A MONOPOLY? The average cost is the total cost of production divided by the quantity of output. Economies of scale exist if, in the long run, an increase in output results in a decrease in average cost.

WHAT IS A MONOPOLY? The Four Main Sources of Market Power: • High Start- Up Costs • Exclusive Access to a Critical Input • Government Protection • Unfair Practices

WHAT IS A MONOPOLY? Threats to a Monopolist: The major threat is introduction of competition. Others include: • Technological change • The entry of international firms • The end of government protection

WHAT DO MONOPOLISTS DO? Monopolists as Price Makers Maximizing Profit (MR=MC)

MONOPOLY: USING THE GRAPH Find the output where MR = MC on the graph for the profit maximizing output.

THE INEFFICIENCY OF MONOPOLY A consumer’s reservation price for a product is the highest price he or she is willing to pay to own one more unit of the product.

PRICE DISCRIMINATION Price discrimination is the practice of charging different customers different prices for the same good. 1. Some customers must have higher reservation prices than others for the same good. 2. The firm must be able to distinguish between customers with higher and lower reservation prices. 3. It cannot be possible for customers to resell the good. 4. The firm must have market power. Under perfect competition, competitors would enter and drive the price down to the marginal cost of production.

PRICE DISCRIMINATION Perfect Price Discrimination and Efficiency Removes the inefficiency in single pricing models. Price Discrimination in Practice Examples: Movie ticket prices based on time, lunch versus dinner specials at restaurants; golf course prices on weekends versus weekdays

MONOPLY AND INNOVATION Innovative new products improve our standard of living and promote economic growth. • High profits can support innovation. • Some profits strengthen barriers to entry.

OLIGOPOLY: A SMALL NUMBER OF FIRMS An oligopoly is a market with a small number of firms. An oligopolist is a firm in an oligopoly industry.

OLIGOPOLY: A SMALL NUMBER OF FIRMS Collusion among oligopolists exists as they work together. A cartel is a group of firms that agree to work together and act like a monopoly.

MONOPOLISTIC COMPETITION In a market characterized by monopolistic competition, many firms supply similar but not identical goods. – Differentiated products are goods and services that differ somewhat from other competitive products. – Building Brand Loyalty gives customers reasons to buy a specific firm’s product – Free Entry means that short run profits draws in new competition

MONOPOLISTIC COMPETITION Monopolistic Competition versus Perfect Competition and Monopoly

MONOPOLISTIC COMPETITION Pros Cons • offering a wider range of products • competition for the service offered • profits in the short run for firm • higher price than perfectly competition markets • Inefficiently low quantity of output • profits fall as advertising budgets rise

MARKET STRUCTURE AND EFFICIENCY Perfect Competition results in the efficient level of production. Monopoly Price will be higher and the quantity of output lower with increased market power. Monopolistic Competition, Oligopoly, and Efficiency Non-price competition (advertising and branding) create noncompetitive practices.

DIRECT REGULATION: PRICE CONTROLS Price controls are policies by which the government sets the prices in an industry. • • • The goal is to bring about efficient quantity of good. Public utility rates set where MR=MC but many firms would not operate due to high start-up costs. So, regulated price is where price equals average total cost. Difficult to set pricing policy as markets and consumer preferences change.

ANTITRUST POLICY Antitrust policy is a set of laws designed to promote competition in the marketplace. Anti-trust laws passed to: • limit non-competitive actions • limit price-fixing • prohibit predatory acts The Enforcement of Antitrust Policy The Department of Justice and the Federal Trade Commission regulate some business practices and examine proposed mergers.