Market structures and competition

Monopolistic Competition

• Profit Maximization
• There is still price competition so you cannot raise your price too high
• Producers will maximize profits by using the market price for their product as a guide to decide how many will be produced and sold

OLIGOPOLY

• Characteristics
• Market structure in which very few large sellers of a product dominate
• Product can be differentiated (autos) or identical (steel)
• Due to few number of firms, one firm can cause a change in output, sales and price in the industry as a whole
• Because there are so few firms, whenever one firm does something, the other firms usually follow

COLLUSION

• When firms work together to decide on price and output
• Example is price fixing, usually above
• the market price
• This is against the law in the US, but
• some does still take place

OLIGOPOLY

• Pricing Behavior
• Since they typically follow each other one firm can lower the price and expect the others to follow
• This can lead to a price war, prices could go lower than the cost of producing the product (losses)
• One firm can hope that the other firms raise their prices if they do, but there is no guarantee and you could lose business
• These firms will typical use non-price competition to attract customers
• Use advertising campaigns, change the product in some way to make it “better”

MONOPOLIES

• Characteristics
• Exact opposite of pure competition
• Market structure in which there is only one seller of a particular product with no close substitutes
• Very few in the US economy - Why?
• we have traditionally disliked monopolies and have tried to outlaw them
• Its usually easy to find a reasonably close substitute for most products
• new technologies often introduce products that compete with existing monopolies
• No pure monopolies exist, but some firms come close