1. Four market structures
Pure Competition - accepts the market price in order to sell their products. They are also called price takers
All firms produce an identical product (homogeneous)
Many sellers and buyers are in the market
No barriers to entry or exit exist
Competitive markets do not have economies of scale
Information is perfect
The firms maximize profit by adjusting production level, but cannot influence market price
- Examples: Agricultural markets, retail, some service markets, and stock markets

Monopolistically Competition - similar to a purely competitive market, but firms have a touch of monopoly power
Called a price searcher
Many firms in market, but not as many as pure competition
Low entry barriers
Produce differentiated products (heterogeneous)
Gives a little monopoly power
Face a downward sloping demand curve
Different from competitors' products
Nonprice competition - compete in other areas other than price
Product quality - physical or qualitative differences
Services - condition surrounding the sale of a product
Location and accessibility
Promotion, packaging, and brand names - imaginary or real differences in quality
Use advertising to create differentiated product
Oligopolies - few sellers in a market
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Strategic behavior or interdependence – a firm has to consider the competitors, when deciding prices, production level, or product quality
Mergers - a firm can buy other firms and combine them into one company
Oligpopolies have entry barriers
Products may be identical (homogeneous) or differentiated
Identical products - milk, cement, gasoline, etc.
Differentiated products - sodas, shoes, computers, etc.
Use product style, quality, and advertising
Examples: Automobiles, steel, pharmaceuticals, breakfast cereals, soft drinks, and beer
U.S. beer industry
In 1947, beer industry had over 400 independent breweries
In 1967, there were 124 suppliers
In 1980, there were 33
Currently, four brewing companies dominate the U.S. market

Monopoly - a firm is sole producer / supplier of a product in the market
Single seller of a product
No close substitutes for the product
A monopolist can exert control over the price
He decreases production level and market price increases
Other firms are prevented from entering the market, because of high barriers
No competition
Could earn long-run economic profits
Examples: public utility companies, electricity, telephone, water, and natural gas
Monopoly – demand for monopolist's product is whole market

2. Two Schools of Thought for Industrial Organization
Structural-Conduct-Performance (SCP) Approach
Direct relationship between market structure, market conduct, and market performance
Pure competition is allocative efficient, P = MC
Market price equals marginal cost (MC)
Marginal cost is the change in production if the firm changes production by one unit
Consumers determine market price
Firms determine marginal costs
Thus, long-run profits are driven to zero
Monopoly is allocative inefficient, P > MC
Oligopolies could have P > MC
Chicago School of Thought
Both schools of thought are used to explain a firm's behavior
3. Market structure affects firm's behavior
Firms strive to become monopolies
Monopolies/oligopolies prevent entry of new firms
Market structure can change over time
Market power – firm can influence market price
Pure competition – firms have no market power
Example: If firm raises price, the buyers buy from competitors
Example: Monopoly can raise market price by reducing production or sales

4. Examples of market power
Seller concentration – a measure of size distribution and of number of firms
Economies of scale – a firm has to be large to supply product cheaply
Brand proliferation – company’s products take up shelf space
Product differentiation – leads to nonprice competition
Products are similar but not perfect substitutes
Location, types of sales clerks, etc.
Product specification – company wants to establish standards
Regulations – some industries are heavily regulated while others are not
Utility industry – electricity, water, natural gas are heavily regulated
Gov. regulated prices, profits, and production, including which technologies
5. Government
Before the U.S. Civil War (1860 - 1864)
United States was an agrarian society
After the Civil War
Railroad companies connect markets by railroad
Large capital markets formed
Markets became international
Companies became incorporated
U.S government passed the Sherman Act
Gov. corruption was severe during this time
Gov. may fine or incarcerate anyone who "monpolizes"
Monopoly is not illegal, but only the behavior to use monopoly power
U.S. laws evolved
Book lists many laws
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