Competition in Markets

• Perfectly competitive markets are characterized by many well-informed buyers and sellers, identical products being sold, and easy access into and out of the market for sellers

• Start-up costs and a need for technological training can present barriers to entry into some markets

• Competition in perfectly competitive markets promotes efficient use of resources and the lowest possible prices

• A monopoly is a market in which a single supplier provides a unique product to any number of buyers

• Monopolies form when barriers prevent competitors from entering the market

• Different market factors create different types of monopolies

• The government is involved in creating and regulating monopolies

• Monopolies may use price discrimination to increase sales

• Monopolistic competition is a market characterized by many firms, few barriers to entry, little control over price, and differentiated products

• Because distinctions can be made among goods sold in monopolistic competition, firms engage in non-price competition in addition to competing on price

• An oligopoly is a market dominated by a few large, profitable firms that sell differentiated products and have some control over price

• The government uses antitrust laws to regulate markets dominated by one or a few firms, to breakup monopolies, and to block mergers that can hurt competition

• The government tries to promote competition and the greater choice that may accompany it

• The government sometimes deregulates industries to promote competition.

Monopolies

• Barriers to entry are the principle condition that allows monopolies to exist

• Economists use a strict set of requirements to characterize a monopoly

  • single seller

  • barriers to entry

  • unique product - the good or service supplied has no substitute

• Different market conditions can create different types of monopolies

• Economies of scale – characteristics that cause a producer’s average cost to drop as production rises

• A average total cost curve without economies of scale will first fall, and then trend upward because the cost rises when output exceeds a certain level

• With economies of scale, the average cost of production falls when the firm produces more. Because of this, the product has the potential to saturate the market

• However, some business leaders are scaling down, not up. Disposable factories and disposable strategies are new keys to lowering costs and boosting performance

Natural Monopolies

• One firm provides all the output. If a second firm enters the market, competition will drive down the market price, quantity sold will decrease, and one or both firms will not be able to cover the cost and will go out of business

• Example : public water

The Monopolists Dilemma

• The law of demand states that buyers will demand more of a good at lower prices and less at higher prices. The law of demand means that when the monopolist increases the price, it will sell less, and when it lowers the price, it will sell more.