Market Structures

Market Structures

Why study market structures?

• Businesses operate in different market environments.
• Each market type possesses unique characteristics:
  • Number of sellers
  • Nature of goods/services produced
  • Barriers to market entry and exit
• Market structure determines price levels.

Perfect Competition

1. Large Number of Sellers
   • Hundreds or thousands of sellers
   • Typically involves agricultural products or non-manufactured goods.
2. Homogeneous Products
   • All sellers offer identical products.
   • No incentive for non-price competition (e.g., advertising) due to product similarity.
3. Absence of Price Controls
   • Numerous producers and consumers prevent single entities from controlling prices.
   • Market forces, not individual firms, determine prices.
4. Minimal Barriers to Entry/Exit
   • New sellers can easily enter or leave the market.

Examples:

• Farmers/Agricultural Producers: orange, sweet corn, apple, and wheat growers
• Fisheries: bass, trout, salmon

No Tools of Competition

Monopolistic Competition

1. Many Buyers and Sellers
   • Around 100 firms
   • Firms operate independently; no single firm can dominate the market.
2. Differentiated Products
   • Sellers aim to make their products slightly unique.
   • Differentiation achieved through branding, packaging, design, despite similarities.
3. Limited Price Control
   • No single seller has enough power to manipulate prices significantly.
   • Informed buyers are aware of product differences.
   • Non-price competition is used to attract customers.
     • Advertising
     • Service improvements
     • Reputation building
4. Moderate Barriers to Entry
   • Relatively easy market entry and exit.

Examples:

• Toothpaste: Crest, Colgate, Aquafresh, Sensodyne, Arm & Hammer
• Laundry Detergent: Tide, All, Simple Truth, Cheer, Gain
• Cosmetics: MAC, Maybelline, Cover Girl, Loreal, NYC, Urban Decay, Clinique

Tools of Competition

• Product differentiation fosters buyer loyalty
• Buyer loyalty allows gradual price increases.
• Excessive price hikes may cause brand switching.
• Most Common Market Structure

Stop and Think

1. Identify a product to which you are loyal and its price.
2. Determine the price point at which you would discontinue purchasing it.
3. Identify a substitute product you would buy instead.

Oligopolies

1. Few Firms Dominate
   • 3-5 firms control at least 70% of the market.
   • Numerous smaller firms exist with minimal influence.
2. Similar Products
   • Products can be highly similar (soda, cereal, oil) or somewhat differentiated (cars, movie production).
3. Significant Price Control
   • Enabled by brand loyalty and information access.
   • Non-price competition (advertising) is common.
4. High Barriers to Entry
   • Difficult to penetrate the established group of firms.
   • Proprietary patents and raw materials create competitive obstacles.

Examples:

• Phone companies: Verizon, Sprint, U.S. Cellular, AT&T
• TV Networks: NBC, CBS, ABC, Fox
• Car Companies: Ford, General Motors, Chrysler

Tools of Competition

• Price Leadership:
  • When one firm introduces a new product at a specific price, others follow suit to avoid losing customers.
• Cartels:
  • Agreements among firms to reduce competition through cooperation.

Stop & Talk: Why would oligopolies want to reduce competition?

Monopolies

1. Single Firm Controls Market
   • Only seller available to consumers.
   • Achieved intentionally or by chance.
2. Unique Product
   • No close substitutes exist.
   • The product is one-of-a-kind.
3. Near-Total Price Control
   • Arises from being the sole seller.
   • Government regulations may apply.
4. Extremely High Barriers to Entry
   • Nearly impossible for new firms to become monopolies.
   • Monopolies are rare.

Are monopolies legal?

Types of Legal Monopolies

1. Natural Monopoly
   • Competition would be impractical or lead to chaos.
   • Cost-effective with only one firm.
   • Examples: Utility Companies (gas, electric, trash)
2. Government Monopoly
   • Deals with essential economic products for public welfare.
   • Examples: interstate highway system, public schools, post office
3. Geographic Monopoly
   • A firm is the only seller in a specific location by chance.
   • Example: The only general store in a small town
4. Technological Monopoly
   • Results from a patent on a new invention or technology.
   • Example: Polaroid Camera

Market Structure Word Scramble

• Oligopoly
  • Few control 70% of the market
  • Verizon, Sprint, US Cellular
  • Price leadership
  • Difficult to enter
  • High barriers to entry
• Perfect Competition
  • Watermelon
  • Largest number of sellers
  • Easiest to enter
  • Identical product
  • No price controls
• Pure Monopoly
  • Sometimes illegal
  • Completely unique product
  • Natural, geographic, technological, & governmental
  • Most control of price
  • One seller
• Monopolistic Competition
  • Similar products
  • Toothpaste, laundry detergent
  • Most common structure
  • Less than 100 sellers
  • Buyer loyalty