Class Notes 6


AED Economics 200 Principles of Food and Resource Economics Winter, 2003

6. Market Structure: Monopolistic Competition and Oligopoly Government Intervention: Antitrust and Regulation
Market Structure
	Number of firms/ Product type		Activity of Firm
			Selling	Buying
		Many/homogeneous	pure or perfect competition	pure or perfect competition
		Many/differentiated	monopolistic competition	monopsonistic competition
		Few/homogeneous or differentiated	oligopoly	oligopsony
		One/unique	monopoly	monopsony
Determinant of Structure - barriers to entry
	Strategic - Firms' desire to differentiate product (create "market niche") License Patent Natural Cost structure of firms Control of scarce resource Network good
Characteristics of most imperfectly competitive markets
	Interdependence of firms Price searchers rather than price takers Product differentiation Non-price competition Advertising Product design Research and Development Price Discrimination Firm needs market power Separable submarkets Arbitrage prevented or minimized
Imperfectly Competitive Markets
	- Monopoly Model - Monopolist Competition Characteristics -many sellers and buyers -differentiated product -easy entry and exit Model Excess capacity - Oligopoly Characteristics -few sellers and many buyers -homogeneous or differentiated product -significant barriers to entry Several models to explain observed behaviors
Oligopoly Models:
	- Kinked Demand Curve - Price Leadership - Cartels - firms agree to act like monopoly - incentive for cheating - Game Theory - strategic behavior given interdependence of firms - example, Prisoner's Dilemma - Contestable Markets - concentrated markets may not result in high prices and reduced output - easy entry - new firms have same costs as incumbent firms - incumbent firms can exit market and dispose of fixed assets
Industrial Concentration - good or bad?
	Case against concentrated industries
	Inefficient Unprogressive Income inequality Political dangers
	In defense of concentrated industries
	Superior products Underestimating competition Potential competition Foreign competition Substitutes Economies of scale Technological progress through R&D
Anti-trust laws - based on U.S. Constitution, Art.I, Sec.8 - gives Congress right to regulate commerce
	Sherman Antitrust Act (1890) Section 1 - makes restraint of trade illegal Section 2 - illegal to conspire with others Clayton Act (1914) - specifies illegal actions when they lessen competition or create a monopoly price discrimination between purchasers exclusive dealings - prohibiting retailer from selling product of a rival tie-in sales interlocking directorates some mergers Federal Trade Commission (1914) - empowered to combat unfair methods of competition Robinson-Patman Act (1936) - amended Clayton Act; designed to limit price discrimination Wheeler-Lea Act (1938) - empowered FTC to deal with false and deceptive trade practices (e.g., advertising) Celler-Kefauver Antimerger Act (1950) - amended Clayton Act limits mergers by buying assets prohibited mergers where there was concentration Hart-Scott-Rodino Act (1976) - amended Clayton Act requires premerger notification by firms
Exemptions from Anti-trust Laws
	Agricultural cooperatives - Clayton Act Labor unions - Clayton Act Sports organizations Export industries - Webb-Pomerene Act Regulated industries and insurance
Govt. intervention to affect market structure, conduct, performance
	Prosecute anti-competitive practices
	Price fixing Market segmentation and agreements not to compete False and deceptive advertising tie-in sales
	Affect structure of industry
	Break up monopoly Prevent mergers and acquisitions
	Regulation of industries
Government Ownership
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