Types of Market Structure Four principal models of market structures Perfect Competition Many producers sell identical product Monopoly Single producer sells a single undifferentiated product ID: 491592
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Slide1
MonopoliesSlide2
Types of Market Structure
Four principal models of market structures:
Perfect Competition
Many producers sell identical product
Monopoly
Single producer sells a single, undifferentiated product
Oligopoly
Few producers, more than one but not a large number, sell products that are identical or differentiated
Monopolistic competition
Many producers each sell a differentiated productSlide3
Types of Market Structures
System is based on:
1. Number of producers in the market
2. whether the goods offered are identical or differentiated
Differentiated goods are goods that are different but considered somewhat substitutable by consumers (Coke vs. Pepsi)Slide4
Types of Market Structure
Are Products Differentiated?
How Many Producers Are There?
Oligopoly
Perfect competition
No
One
Few
Many
Yes
Monopolistic competition
Not applicable
MonopolySlide5
Meaning of Monopoly
A monopolist is a firm that is the only producer of a good that has no close substitutes. An industry controlled by a monopolist is known as a monopoly,
e.g. De Beers
(diamond supplier from mines in South Africa)
The ability of a monopolist to raise its price above the competitive level by reducing output is known as market power.Slide6
Monopoly
True monopolies don’t exist (exceptions of course in pharmaceuticals) today due to legal obstacles
Antitrust Laws – prevent monopolies from emerging
Oligopolies are more common
Ex. Automobiles, airline ticketsSlide7
What Monopolists Do….
How did Cecil Rhodes (De Beers Company) consolidate South African diamond producers into a single company?
1. Monopolist moves up the demand curve by reducing quantity supplied to a point which the quantity produced is lower than the price which is higher than under perfect competition
Known as MARKET POWERSlide8
What a Monopolist Do….
M
C
S
D
Q
C
Q
M
Quantity
Price
P
M
P
C
2. … and raises price.
1. Compared to perfect competition, a monopolist reduces output…Slide9
What a Monopolist Do….
Market power is what monopolies are all about
Wheat farmers have no market power, there are thousands of wheat farmers
Water Utility Companies do have market power, you have to pay the price they charge for water, you have no other company to use!Slide10
What a Monopolist Do….
Monopolists reduce output and raise prices compared to the perfectly competitive industry level to create profit
What allows monopolists to be monopolists?Slide11
Why do Monopolies Exist?
Due to barriers of entry:
1. Control of a scarce resource or input
2. Increasing returns to scale
3. technological superiority
4. government-created barriersSlide12
1. Control of a scarce resource or input
Monopolists control a resource or input crucial to an industry can prevent other firms from entering its market
De Beers controlled all the mines that produced the bulk of the world’s diamondsSlide13
2. Increasing returns to scale
Local utility companies are monopolies, why don’t rival companies compete to provide alternatives?
Due to increasing returns to scale:
Average total cost falls as output increases, firms tend to grow larger which then these companies have a cost advantage over any potential entry to the market and thus….a monopoly can startSlide14
2. Increasing returns to scale
Natural monopolies are created and sustained by increasing returns to scale
Defining characteristic is that it possesses increasing returns to scale over the range of output that is relevant for the industry
Examples of a natural monopoly:
Water, gas, electric, local land-line phone service and cable televisionSlide15
2. Increasing Returns to Scale Create Natural Monopoly
D
A
T
C
Quantity
Price, cost
Relevant output range
Natural monopoly. Average total cost is falling over the relevant output range
Natural monopolist’s break-even priceSlide16
3. Technological Superiority
A firm that maintains a consistent technological advantage over potential competitors can establish itself as a monopolist
Ex. 1970s-1990s, Intel maintained a consistent advantage over potential competitorsSlide17
3. Technological Superiority
Although, in certain high-tech industries, technological superiority is not a guarantee of success against competitors
Network externalities – a condition that arises when the value of a good to the consumer rises as the number of people who also use the good rises
Ex. Microsoft – a monopolist due to the phenomenon of network externalitiesSlide18
4. Government-Created Barriers
Patent – inventor given the sole right to make, use, or sell that invention for a period of 16-20 years (depending on country)
Only given to new products, such as drugs or devices
Ex. iPhone
Copyright – gives the creator of a literacy or artistic work the sole rights to profit from that work, usually for period equal to the creator’s lifetime plus 70 years
Ex: NFL, Super Bowl Logo, Coca Cola Logo, Pepsi LogoSlide19
4. Government-Created Barriers
Why Patents and Copyrights?
Due to allowing incentives for inventors and encouraging invention and creativitySlide20
Notes on MonopoliesSlide21
Types of Market Structure
Four principal models of market structures:
Perfect Competition
Monopoly
Oligopoly
Monopolistic competitionSlide22
Types of Market Structures
System is based on:
1.
2.
Differentiated goods are goods that are different but considered somewhat substitutable by consumers (Coke vs. Pepsi)Slide23
Types of Market Structure
Are Products Differentiated?
How Many Producers Are There?
No
One
Few
Many
YesSlide24
Meaning of Monopoly
A monopolist is a firm that is the only producer of a good that has no close substitutes. An industry controlled by a monopolist is known as a ____________,
e.g. De Beers
(diamond supplier from mines in South Africa)
The ability of a monopolist to raise its price above the competitive level by reducing output is known as __________________.Slide25
Monopoly
True monopolies don’t exist (exceptions of course in pharmaceuticals) today due to legal obstacles
Oligopolies are more commonSlide26
What Monopolists Do….
How did Cecil Rhodes (De Beers Company) consolidate South African diamond producers into a single company?
1. Monopolist moves up the demand curve by reducing quantity supplied to a point which the quantity produced is lower than the price which is higher than under perfect competition
Known as __________________Slide27
What a Monopolist Do….
M
C
S
D
Q
C
Q
M
Quantity
Price
P
M
P
CSlide28
What a Monopolist Do….
Market power is what monopolies are all about
Wheat farmers have no market power, there are thousands of wheat farmers
Water Utility Companies do have market power, you have to pay the price they charge for water, you have no other company to use!Slide29
What a Monopolist Do….
Monopolists reduce output and raise prices compared to the perfectly competitive industry level to create profit
What allows monopolists to be monopolists?Slide30
Why do Monopolies Exist?
Due to barriers of entry:
1.
2.
3.
4. Slide31
1. Control of a scarce resource or input
Monopolists control a resource or input crucial to an industry can prevent other firms from entering its marketSlide32
2. Increasing returns to scale
Local utility companies are monopolies, why don’t rival companies compete to provide alternatives?
Due to increasing returns to scale:Slide33
2. Increasing returns to scale
Natural monopolies are created and sustained by increasing returns to scale
Defining characteristic is that it possesses increasing returns to scale over the range of output that is relevant for the industry
Examples of a natural monopoly:Slide34
2. Increasing Returns to Scale Create Natural Monopoly
D
A
T
C
Quantity
Price, costSlide35
3. Technological Superiority
A firm that maintains a consistent technological advantage over potential competitors can establish itself as a monopolistSlide36
3. Technological Superiority
Although, in certain high-tech industries, technological superiority is not a guarantee of success against competitors
Network externalities – a condition that arises when the value of a good to the consumer rises as the number of people who also use the good risesSlide37
4. Government-Created Barriers
Patent – inventor given the sole right to make, use, or sell that invention for a period of 16-20 years (depending on country)
Copyright – gives the creator of a literacy or artistic work the sole rights to profit from that work, usually for period equal to the creator’s lifetime plus 70 yearsSlide38
4. Government-Created Barriers
Why Patents and Copyrights?