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Susbilla_Ch7 Market Structures

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Stephanie S

on 11 October 2016

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Transcript of Susbilla_Ch7 Market Structures

What is Market Structure?
Market Structure: How a market is organized, based mainly on the level of competition in the market.
Monopolistic Competition
Large number of products in the market
Products are almost similar to differentiated
Easy to start a new business, but there are some hurdles
Some control over prices
Oligopoly
Small number of producers
in a market
Products are almost similar
but different
Not very easy to start a new business
Large amount of control over prices
Market Structures and Failures
Market Structures and the Real World
Everthing we have dealt with so far has been discussed in a "perfect" world. There are no outside influences, no ethics or morals
Perfect Competition
Many producers, Identical Products
It's time to talk about what happens when we're no longer in a perfect world, and problems emerge in the market
Defined by 4 Main Characteristics:
Number of producers
Similarity of Products
Ease of Entry
Control over prices
Number of Producers
Number of producers helps determine level of competition
More producers = More competition
Exampels: Burger places, clothing companies

**Remember that competition provides choices, that's why it's good for consumers
Similarity of products
Markets with similar products are more competitive
Making your product different in some way gives it an advantage in the market
Ease of Entry
Measure of how easy it is to start a new business
Markets that are easier to enter are more competitive
Limited by:
Start up costs
Competitors in the market
Available customers in the market
Control over prices
The level of power producers have to control prices in the market
Market Power: Ability to control the market by controlling goods produced
If you can set prices without losing customers, you have an advantage
(inelastic)
Based on these characteristics, economists have identified 4 basic market structures:
Perfect Competition
Monopoly
Oligopoly
Monopolistic competition
Lots of producers
Products are almost identical
Very easy to start a new business
No control over prices
Commodities

Products that are identical no matter who produces them
Examples: wheat, oil, cotton
Producers are
price takers
, meaning they cannot set the prices. Instead prices are determined by the consumers.
Transaction Costs
A feature of highly competitive markets (such as perfect competition) is the ability to "shop" around, do research for the best deal
However, this takes time and effort
Transaction Costs:
the costs
(usually time and effort)
of shopping around for the best product at the best price
What do you think the role of the Internet has been in reference to transaction costs?
Most common form of market structure
Product Differentiation
Product differentiation:
in which products are similar, but contain certain characteristics that separate them from each other
Examples: Shoe companies
Nike
Reebok
Adidas
Under Armour
Creates brand loyalty which gives companies market power
Non price Competition
Non-Price Competition:

having to use other factors besides price to get consumers to buy their product over their competition

Companies might try to use the following characteristics to
"get an edge"
Physical characteristics
Service
Location
Status and image
By convincing consumers to buy their product, companies increase their market share
Market Share:
proportion or total sales in a market
Concentration Ratio
The proportion of the total market controlled by just a few companies
In general, a market is considered an
oligopoly
if the
top 4 producers control at least 60% of the market
Price Leadership
The ability to set the price
of a product in a market that
less dominant companies will follow
can drive up prices to benefit producers OR
can drive prices down to get rid of competitors
Price Wars:
when comapnies in a market drive prices up or down to cut out the competition
Monopoly
Only ONE producer
in a market
No variance in the product
Very difficult to enter/start a new business
Producer has complete control
over prices
3 Types of Legal Monopolies
Resource monopolies:
1 producer controls a natural resource
Other producers can't get into the market because
they do not have access to the product
Government-Controlled Monopolies:
government supports monopoly if the product benefits the public
Done in 3 ways:
Patents and copy rights
Public franchise
Licenses
Natural Monopolies:
when one company can do something better and cheaper
Beneficial because they're efficient
Market Failure
Pros and Cons to Market Structures
Benefits to Perfect Competition
Forces efficiency
Products are
cheaper
for consumers
Negatives to Monopolies
Expensive
for consumers
Lack of innovation and efficiency
Can lead to
poorer quality products

Market Failure:
failure to clear the market at equilibrium price
(market-clearing price)

Externalities: side effect from consumer and producer interactions
Two types:
Negative, Positive

Negative Externalities
A costly result that falls on someone who is not a part of the interaction between producer and consumer.
Can be
monetary
but also an
undesired effect
Examples:
Pollution--smog
Neighbor's loud party
Weird smell from nearby factory
Positive Externalities
A
benefit
that falls on someone who is not a part of the interaction between a consumer and producer
Usually something that benefits community as a whole
Examples
college education
fuel efficient cars
immunizations
Public goods: goods and services used by everyone (the public) but are difficult to get people to pay for
Private goods are different from public goods because they are not provided by the government
and are excludable.
Excludable
means that
if you do not pay for the good, you do not use the good
Contrast this with
public goods
that are
nonexcludable,

meaning it doesn't matter if you use it or not, you still have to pay for it (through taxes)
Free-Rider Problem
Free-rider problem is why private firms do no provide public goods. They want to avoid giving consumers a "free-ride".
For the use of a streetlight, the private firm would have to charge an individual each time a they used the streetlight

Think Celebrity Endorsements
The Free-rider problem
is a problem in which
people may freely benefit from a good or service that is paid for by someone else
Full transcript