Competition and

Market Structures
 What is a market?
• any structure that allows buyers and sellers
to exchange any type of goods, services
and information.

• The exchange of goods or services, with or

without money, is a transaction
 Market Structures
• What is the primary aim/goal of businesses?
– To maximize profits
– This goal can motivate companies to eliminate
competition, increase prices and lower quality of
products.
 Market Structures
• What is competition?
– Striving against others to reach an objective
– The government attempts to maintain competition
in the market to insure low prices and high
quality of products
– Antitrust laws are in place to stop monopoly
power
 4 Types of Competition
• Perfect Competition • Imperfect Competition
 Pure Competition  Monopolistic Competition
 Oligopoly
 Monopoly
 Pure/Perfect Competition
– Doesn’t really exist (theoretical)
– Large number of buyers and sellers
– Identical product
– Well informed buyers and sellers
– *Agricultural or Produce products (closest to theoretical)
– Grown or raised on farms

More Competition Less Competition

All other forms of competition are
imperfect competition

imperfect means the products are slightly different

 Monopolistic Competition
• Lots of buyers and sellers who are well informed, but products are slightly different.

– Product differentiation
– Wopper vs. Big Mac vs.

• Monopolistic competitors use non-price competition

– Advertising, giveaways, or other promotions

Fast food industry is an example

More Competition Less Competition

 Monopolistic Competition

Gap Levis J.Crew

Same as pure competition except for
product differentiation
 Monopolistic Competition

Are these shampoos/conditioners different?

Pantene $14.50 Frederic Fekkai $54
Monopolistic Competition

Are these mascaras different?

Maybelline Sisley
$4 $43
 Oligopoly
• A few very large sellers dominate the industry
• Collusion: some oligopolies formally agree to set prices
• Sometimes they engage in price wars, which can be very damaging
to the company, but great for customers

More Competition Less Competition

Oligopoly
 Oligopoly

Boeing

Air-Bus
 Oligopoly

Few producers control supply and price

 Coca-Cola Classic
• Coca-Cola classic • Fanta
• Sprite • Fresca
• Dasani • Minute Maid
• Barq's • Mr. Pibb
• Dannon • Powerade
• Nestea • Seagrams Ginger Ale & Mixers
• Rockstar • TAB
• Evian
 Nestlé SA
• Nestlé Waters
• Perrier
• S. Pellegrino
• Nespresso
• Nescafé
• Carnation Milk
 Pepsi-co
• Aquafina • MUG Root Beer
• Pepsi • Slice
• Mountain Dew • Gatorade
• Sierra Mist • Dole Juice
• Sobe • Tropicana
• Lipton Brisk Tea
 Dr. Pepper Snapple Group

• 7 Up
• Canada Dry
• Clamato
• Dr Pepper
• Hawaiian
Punch
• Mott's
• Orangina
• Snapple
Toyota Chrysler
• Toyota • Chrysler
• Scion • Jeep
• Lexus • Dodge

• Chevrolet
• Saturn
• Buick • Hummer
• Pontiac • SAAB
• Cadillac
• GMC
General Motors
 Monopoly
• Only one seller of a particular product
• There are very few monopolies
• Many regulations limit them, or they are illegal
• One seller dominates the market for a product with at least 75% control.
*defined by the Sherman Act

More Competition Less Competition

Some companies that have just recently
lost monopoly power
Types of Monopolies
• Natural Monopoly - exists as a result of the high
startup costs for infrastructure or materials. They
appear in industries that require unique raw
materials, technology or equipment. The market
cant handle competition in this product and it is
inefficient to have failure.
Government Monopoly –
a government agency is the sole
provider of a particular good or
service and competition is sometimes
prohibited by law.

Waterworks
Technological
Monopoly - occurs when
one company controls
manufacturing methods
or has rights/patents to
exclusively produce it.

Segway

i-Pad
Antitrust Exemption Monopoly-
Companies that are considered
sporting events or exhibitions, or are
not a form of commerce, thus do not
need to be limited.
• Geographic Monopoly – A condition
that exists in a local area or region
where one company is the sole provider
of a good or service in an isolated area.
 4 types of Nonprice Competition
1. Characteristics of Goods
Firms distinguish products through size, color, shape, texture or
taste
Ex. Coke vs. Pepsi, Lemon Pepsi, Vanilla Coke
2. Location of Sale
A convenience store in the middle of the desert differentiates by
selling it miles from competitors
 4 types of Nonprice Competition (cont.)
3. Service Level
Some sellers can charge higher prices because they offer customers
a higher level of service
Ex. Fancy sit-down restaurant vs. McDonalds
4. Advertising Image
Advertising creates apparent differences between products in the
marketplace.
Ex. Jordans vs. Carmelo Anthony’s shoes
Monopolistic vs. Perfect Competition
Perfect Monopolistic
Competition Competition
Prices Lower, firms have Higher, firms have
no control some control
Profits Lower Higher in short term,
but must work hard to
keep ahead of rivals
Cost Low costs, no Higher costs for
and variety (identical differentiation, wide
Variety products) variety
 Oligopoly
• Def. A market dominated by a few, large profitable firms
 How do Oligopolies work?
• Collusion: • Cartels:An association by
An agreement among producers established to
members of an oligopoly coordinate prices and
to set prices and production.
production levels.
Ex. OPEC: Organization of
• Price Fixing: Petroleum Exporting Countries
An agreement among firms controls the oil supply and
to sell at the same or manipulates prices of gasoline.
similar prices. Ex. DeBeers controls 80% of
• Both are Illegal in the world’s diamonds, keeps prices
high by limiting supply.
U.S.
 Market Power
Def. The ability of a company to control prices and output

Markets dominated by one or a few firms (monopoly or

oligopoly) have higher prices and lower output. (great
market power)
Markets with many sellers (monopolistic and perfect
competition) have lower prices and higher output. (little or
no market power)
 Predatory Pricing
• Def. Setting the market price below cost levels
for short term to drive out competitors. Firms
in Monopolistic and perfect competition do
this to gain market power.
• Ex. My pizza shop sells slices for $0.50 each,
even though it costs me $0.75 to make. I am
losing money ($-0.25), but it drives the
competition out of business, so I can raise the
price later.
 Government and Competition
• The Government keeps firms from controlling prices and
supply of important goods. Antitrust laws are laws that
encourage competition and break up
monopolies/oligopolies in the marketplace
 4 forms of Anti-trust Laws
1. Regulating Business Practices
Government can intervene if a firm has too much market power
2. Breaking Up Monopolies
Antitrust laws have been used to break up monopolies (ex. Standard
Oil, AT&T)
 Antitrust Laws (cont)
3. Blocking Mergers
A merger is a combination of two or more companies into one
firm. The government can block this if it decreases competition
4. Preserving Incentives
In 1997, new guidelines on mergers were introduced allowing
companies to merge if they show benefits to consumers.
 Deregulation
• Def. The removal of some government controls over
a market. It is used to promote competition.
• Deregulation allows more competition in a market,
lowers prices and increases variety (benefits), but
often can lead to layoffs and business closings
(negatives) in the short term because of the change.
• Ex. Airline Deregulation in the early 1980s. New,
smaller, cheaper airlines emerged, but the older,
larger airlines are having trouble competing and have
had to cut back on flights, employees, and benefits
(in-flight meals etc.)