Market Structures

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Market Structures
by David Beck 2000
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Competition is a GOOD thing!

• Keeps prices down.
• Promotes efficiency / discourages waste.
• Encourages innovation.
• Fosters production of quality goods and services.

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But in some ways monopoly is a good thing too!
Oh my HOW?

• Provides incentive for inventiveness because of
  patent protections.
• Hidden incentive Everyone wants to be a
  monopoly!
• Natural monopoly actually limits waste and is
  most efficient.

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Here is the market spectrum
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly

• As you go from left to right, at least some firms
  in the industry have more MARKET POWER than
  others.

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What does MARKET POWER mean?

• Firms can do more things to control the price in
  that industry.
• So lets look more closely at each market
  structure, and remember, depending on which
  industry your firm is in, that will have an
  impact on how much revenue you will get.
• And why is that important??? HUH? HUH?! HUH??!!

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Perfect Competition

• In this industry
• There are a large number of firms.
• All products are exactly the same.
• Firms have no control over price. It is a
  price-taker.

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Monopolistic Competition

• In this industry
• Each firm has a monopoly on its own product.
• Emphasis is on brand name products.
• Much is spent on advertising.

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Oligopoly

• In this industry
• There are only a few sellers, sometimes as few as
  3 or 4.
• If in a cartel, they will engage in price-fixing.
• It is difficult to enter because of economies of
  scale.

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Monopoly

• In this industry
• There is only one seller.
• It is a price-searcher, which means it may set
  a price too high.
• It may also make a deficient product and stifle
  innovation.
• Sometimes it must be regulated by government.

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Something you should know!

• Microsoft is NOT a monopoly!!!
• Its competitors are so jealous of its success
  that they begged the government to go after it!
• Microsoft still
• Makes a quality product.
• Must keep its prices down.
• Works hard toward innovation.

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Maximizing Profits

• Firms produce output at the point where marginal
  revenue equals marginal costs.
• MRMC!

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Profit Maximization for Widgets
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Profit Maximization for Widgets
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Profit Maximization for Widgets
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Profit Maximization for Widgets
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Profit Maximization for Widgets
Aaaghh! Stop already! Were losing too much
money!!!