Types of Markets Structures

TYPES OF MARKETS STRUCTURES:

Perfect competition = Pure Competition

Monopolistic Competition

Oligopoly

Monopoly

Perfect Competition =- Dosesn't exist

Characteristics:

Large # of buyers and sellers

Homogeneous Product = products have to be the same

Perfect Knowledge = all buyers and all sellers know what each are doing

Free entry and exit = these people can leave or enter market whenever

One price

Resources are mobile.

Short Run = not enough time for people to make changes

Long Run = time to make changes

the supply curve is the marginal cost curve above the demand curve

Decreasing Cost = type of market people would like to be in. Expansion in numbers, reduction in input costs.

Constant Cost = Page 577, constant return

Increasing Cost = example, Bus Lines

MONOPOLY = a market structure example, Northeast Utilities

Characteristics:

No Close Substitutes

Inelastic product

One seller, many busyers

little knowledge

high barriers to enter and leave market

resources are not mobile.

must be a necessity

Problem with Monopolies

Monopolies tend to misalocate resources

Not as efficient = monopolies work where MC = MR

Monopolies will not produce as much as consumer wants

Monopolies lack incentives, no competition

Ways of Controlling Monopolies

Regulate

Break it up

Taxes

Good Points of Monopolies

Average cost is lower and passes on to the consumer

May be the only rational way to offer a product

Cartels = example: OPEC - a monopoly, outside of the US Control, deals in a natural resource.

Natural monopoly = as you increase your volume - your cost of production goes down, the savings should be passed onto the consumer.

Types of Monopolies:

Strategic Monopoly = a company that controls a particular input in a product

Natural = based on economies of scale

Trade Secret = no time limit - because you have not declared a patent. if someon gets your secret, and get a patent for it, you are out of luck.

Patent Monopolies = patent on a product lasts for 17 years.

regulated Monopolies = govt give the company the right to be a monopoly, examplet Gas and Electric companies. But the Govt reserves the right to control your business. Govt allows you to make a FAIR RATE of RETURN.

OLIGOPOLY = just a few firms are oligopolies

Characteristics:

Few sellers - many buyers

Interdependence --very interested in what others are doing

Barriers to enter and exit

Price is not important

Market share IS important.

The last thing a Oligopoly wants is a price war

Not will to compete in price, more willing to compete for the market share.

Oligopolies use a lot of advertising

They will follow a price decrease.

A price drop will cause a KINED DEMAND CURVE, page 627

Concentration ratio = sum of the largest 5 firms in sales divided by sum of all the companies. If the total is greater than 75, your company is an oligopoly.

How do companies become an oligopoly?

Companies can merge - horizontal merger, vertical merger, and conglomerate.

Horizontal merger - companies are interested in merging with companies on the same production levels or retail levels.

Vertical Merger = merging of different product lines

Conglomerate - a company that has purchased companies that have something in common, example: United Technologies

STRATEGIC BEHAVIORS: pertains to oligopolies

Assign someone in the industry to be a price leader

Have a company that is a barometer company ( that has their pulse on the market)

Price wares - way of getting