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Transcript of Market Structure
Now if we remember our previous unit, we categorized businesses by the
number of owners
Monopoly, Oligopoly, and Monopolistic Competition
To answer this question we need to know some basic vocabulary
Competition forces entrepreneurs to keep
prices low enough to attract customers.
Rivalry between entrepreneurs of similar products
to win more business by offering lower prices or higher quality.
But prices must remain high enough to ensure
Competition also forces companies to be
. Companies are constantly looking for ways to
improve their products to beat
out the competition.
What is the main reason entrepreneurs
Why would you?
But as the ancient and Sapient philosopher,
"Mo money, Mo Problems"
Last but not least, competition gives us consumers
Fast forward to now and we'll learn that businesses are also categorized by Market Structure, or
the amount of competition they face
There are Four basic market structures:
We're first going to focus on this one!
Perfect Competition is a market situation where there are
buyers and sellers, and
no single buyer or seller can affect the price
For P.C. to exist, five conditions must be met:
Easy Entry and Exit from the market
Easily Obtainable Information
Independence. Buyers and sellers do not work together to
control the price
When these conditions are met,
supply and demand
- not individual sellers or buyers,
control the price
There are no pure examples of perfectly competitive markets in the U.S. But we can get close with the
No single farmer has any
on wheat prices. The market price is also known as the
, and any farmer who attempts to raise their price will not be able to sell their harvest
The most extreme form of imperfect competition is a
. In this market a
controls the supply of the good or service thus determining the price
A monopolist could
raise prices without fear of losing customers
because buyers would have nowhere else to go for that good or service
Question for you:
It sounds like monopolists have it pretty good. Why don't other businesses
join the monopoly market?
Barriers to entry
! These barriers prevent other firms from entering the market
Costs of starting the business
Characteristics of a Monopoly: How to spot one!
A Single Seller
exists for a particular good or service
no close substitutes
for the good or service that the monopolist sells
Barriers to Entry
Other firms are kept from entering the market through
obstacles to competition
Almost Complete Control of Market Price
By controlling the
, they control the market price.
Monopolies can also be categorized into
depending on why the monopolist exists
: When the government grants exclusive rights to companies that provide services like
transportation, utilities, or military
A small county store in a rural setting. The
potential for profits
are so small that other firms choose not to enter the market
If you invent something, you can have a
over your invention. A government
gives you the exclusive rights to make, rent, or sell your invention for around
King C. Gillette
Similarly, a copyright
, and other
for the rest of the life of the author plus an additional 70 years
Copyright battle between Ray Charles' children and Warner Music
Finally we have
These monopolies are very similar to Natural Monopolies, but they are held by the Government itself
Oligopolistic Markets can be defined as an industry
firms that have some control over price.
not considered harmful
to consumers as much as monopolies are. While prices are not quite as low as they would be in a perfectly competitive market, Oligopoly prices are
Market Prices for Consumers
Like Monopolies, there are
of an Oligopoly.
The Market is Dominated by a
. These large firms are usually responsible for
percent of the market
Just like Monopolies, there are
barriers to entry!
Ever thought of starting your own cell-phone company? Good luck with that...
or slightly different products
Advertisements will focus on minor differences in goods or services
instead of the price
: Any move one firm makes will cause a reaction from the other firms
Of the Four Market Structures,
is the most
structure in the United States
This market is characterized by a
large number of sellers
who offer similar but slightly different products or services. We call this
We've previously noted
fast-food restaurant chains
as obvious examples of Monopolistically Competitive Markets. What else can we think of?
One thing that can help us understand Monopolistic Competition is that it is very similar to
. The major difference being the number of
sellers or firms
in the market.
Monopolies and Oligopolies have the most
amount of control
over the price of a market for previously discussed reasons.
Monopolies control the price because they are the
only show in town
. Oligopolies control the price through
a large part of the market.
M.C. has a little control of the price through something called
If a firm succeeds in building
for a product, it can raise prices slightly
without fear of losing
too many customers.
How do firms build customer loyalty?
Enter: Competitive Advertising
Advertisements attempt to
that their product is superior, and
different from their competitors
Can anyone think of a commercial jingle, or song that convinced them to buy a product?
When advertisements are successful, it allows firms like GAP, Nike, and Best Buy to charge
more for their products
. That's why firms pour millions upon millions of dollars into their advertisements
Some say brand name companies make people
pay more money
just for the name associated with the product.
Others say that the brand names can represent a
guarantee of quality
Can you think of many vegetable/fruit commercials off the top of your head?
Very little incentive to advertise with so much competition in a homogeneous market