Types of Markets Structures
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TYPES OF MARKETS STRUCTURES:
Perfect competition = Pure Competition
Monopolistic Competition
Oligopoly
Monopoly
Perfect Competition =- Dosesnt 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