Chapter 7 Market Structures

What is market structure?

nature & degree of competition among firms doing business in the same industry

What are the 4 types of market structures?

perfect competition, monopolistic competition, oligopoly, monopoly

What is perfect competition?

large number of informed independent buyers & sellers who exchange identical products (idealistic)

example: farmer’s market

What is monopolistic competition?

similar to perfect competition, except products not identical

What is product differentiation?

real or perceived differences between competing products in the same industry

What is use of non price competition?

advertising, giveaways, promotions to convince consumers that their product is better

What are examples of non price competition?

designer clothing, cosmetics, shoes, sneakers, computers

What is oligopoly?

• few, very large sellers dominate the industry

• the acts of one company are mimicked by the others; reliance on non price competition

What is collusion?

formal agreement to set specific prices or cooperate

What is price fixing?

agreeing to charge the same or similar prices for a product (usually price is higher than price through competition)

What are examples of price fixing?

fast food, cars, cereals, airlines

What is a monopoly?

market with only one seller for a product

What is a natural monopoly?

• costs of production minimized by having one business produce

• One company can be more efficient, resulting in economy of scale: average cost of production falls as company gets larger

  • example: public utilities

What is a geographic monopoly?

absence of other sellers in a certain region or area

• example: gas station in the middle of nowhere

What is a technological monopoly?

owning/controlling manufacturing process or scientific advancement

• example: inventions, patents, copyrights, trademarks

What is a government monopoly?

owned/operated by government

• example: state stores selling alcohol

What are examples of market failures?

• inadequate competition

• inadequate information

• resource immobility

• public goods

• externalities

What is inadequate competition?

inefficient use of resources, wasteful spending

What is resource immobility?

land, capital, labor & entrepreneurs don’t move to markets where returns are the highest

What are public goods?

products consumed by everyone

• examples: police/fire, national defense, flood controls, etc

• Usually funded by government, not private sector due to lack of profits from them

What are externalities?

unintended side effect that can benefit or harm a third party; not reflected in market prices

What is an example of a negative externality?

smog/ pollution

What is an example of a positive externality?

new jobs created