So let's go ahead and get started. In terms of announcements, here's my office hours for this week. In terms of we're moving into chapters 12 and 13 in the textbook, we are going to be in Canvas today for an in-class assessment. And then in terms of events, we do have lab this Thursday and Friday. Lab 7 is...
do at the beginning of your lab on Thursday and Friday. Copies are up here on the desk if you didn't pick one up. We do have tutoring this week and please double check grades. We try to do our best. Please double check and make sure we've got everything that you've earned.
Questions on anything? Well, if not, what we're going to start looking at today is market structures, which we talked about in the lab. I'll refer back to the lab as we go through. We have perfect, and then we're going to look at the different types of market structures.
We'll focus a little bit more on perfect competition and monopoly this week. Okay? So in terms of markets, so up until now, when we've examined markets, we've assumed perfect competition. Firms are price takers and that there's a large number of firms that have no market power.
And what we want to do is start to relax that. And so when we're looking at market structures, we're going to be focusing on the supply side of the market or firms. And market structure on that side is highly dependent on the number of firms in the market. OK, and their ability to meet the assumptions.
And we'll go through that. What does perfect competition mean? This type of the area of study of economics that studies market structures is called industrial organization or IO for short.
So market structures can be examined on a continuum with perfect competition on one end and our favorite board game on the other. But we're not going to be playing the board game, but monopoly on the other end. And in between, we have two other forms of market structures, monopolistic competition and oligopoly. So along this continuum, what changes is market power.
And market power simply is the ability to influence the market price directly or indirectly. When it's direct, it means when you set your prices, it influences what everyone else does in the market. Indirectly is through like advertising, branding and other forms of marketing or changing quality differences in your products. And so market power increases as you move from perfect competition. across to monopoly, which has the most market power.
So we've already studied perfectly competitive markets and industries. So these are markets with a lot of producers, a lot of firms, and none of the firms have market power. They're completely kind of to a degree at the whims of the market in terms of their prices that they receive.
And so they don't have the ability. There's no marketing or anything that gives them any ability to even indirectly influence the price. Can you think of any examples of perfect competition? And it's not an easy one to think of. Really, the closest example I can think of usually are grain markets in developing countries that do not have well-established commodity markets.
And so everything is sold at the farm gate. It's sold on the spot market or at a local market. And so they literally take the price that's handed to them at farm gate. And there's no differentiation in the product either. Unlike in U.S. commodity markets, you can forward contract.
So you can do marketing. And there are quality differences matter, especially for like wheat. Protein content matters.
Cotton's another big one. And so quality difference gives you premiums and discounts. And so that all influences market prices.
And so you can actually situate yourself better in the market, depending on how you manage and market your own. product. And so there's not a lot of cases. We have been closer to this in the past.
It's been a few decades since we've been close to this. And so more likely we're moving into a lot of our commodity markets move from here and in between here. And so a lot of markets, there's not, and we'll talk about this, perfect competition tends to serve as our ideal in form of that's the most competition in the market.
Yet, most markets are going to fall here and up. Okay? At the other end of the spectrum from perfect competition is monopoly. While it's an awesome board game, it is a market with one firm. That's the object of monopoly.
And so there's one producer or seller. They are a price maker. And that's one of the big differences that starts changing.
So for them, Price is not fixed. They actually are part of the process in the market. And for them, they're the only firm.
And so they're the ones who set it on their side. So monopolies are characterized by imperfect information. They're very secretive and very keep a lot of their information close at hand and protect it.
And high barriers to entry. They actively keep competitors. potential competitors out of the market. Can you think of monopolies?
What's some examples of monopolies, even historical? Yes. What?
Oil, but it's been quite a while. US Standard Oil used to be a monopoly. It was granted by the government, but so that kind of went away. They took that away.
Our phone company used to be. Who was the monopoly for our phone company until the 70s? Well, not Moffat. Well, the head of the Bells, AT&T. AT&T used to be the only phone company in the United States until about the mid-70s, when the federal government, who set them up, built the company, privatized it, became a private company, and then in the 70s decided, hey, you're a monopoly.
We no longer want you to be a monopoly. They broke them into the seven Bells. And then the seven bells then became, they've merged, changed, spun off.
Other companies have come into the market. And so, yeah, we now have a lot of competition in the phone market. But there was none.
All your phones, all your services, everything dealing with phones was AT&T. The postal service until ATX. Yeah, but there's always been. That's a tricky one because we've had Pony Express and other services too over time.
Ones that naturally come about that we still have are energy. So electricity provision in some parts of the country like Westar Energy, which is now Avergy or AT&T. Railroads were also monopoly when they first came about. Anything the government had to build the infrastructure for, they tended to create a monopoly.
Let it run until they decided, hey, now we'll let competition into the marketplace. One step down from a monopoly is oligopoly. And oligopoly is a type of market where there's a small number of sellers, producers, or very large firms.
Their products are highly differentiated. And they also have the ability, because it's a small number of firms, they can heavily influence the market price. So in essence, there's a small number of firms that hold almost all the market share. And so there's a few large companies competing against each other.
There are oligopolies where there's a large number of firms in the market, but there's a really small number that pretty much determine what happens in the market. All the tiny ones just follow the leader. Oligopolies are characterized by imperfect information and also keep.
They're very secretive. and keep their high barriers to entry. They keep other competitors out. Software companies have been, and computer companies have been very good at this.
Intel is one of them. In essence, Intel allowed the other primary chip provider outside of chips for like video graphic chips and now what they're using for supercomputers. was AMD until the recent past. AMD has held about 10 to 15 percent of the chip market for about 20 years.
It's because Intel allowed them to. Intel did not want to be taken to court because being seen as a monopoly, but it was interesting while Microsoft was taken to court for being a monopoly and they're going back, Intel was not. And so Intel literally let AMD exist. It was a conscious decision on their part, supposedly from insider information, that they gave them market share so they wouldn't be brought to court. And enough that the FTC never questioned it.
But in essence, Intel controlled the market. They could have easily became a monopoly. They, like Microsoft, controlled not only making the chips, they owned all the subsidiary industries that bought from them.
or supplied them. Microsoft is the same way. They not only own all the software, they own all the subsidiaries, the people who print their packaging, write their CDs, and a lot of other companies. And so people don't realize how big these software companies actually are.
One of the other things with oligopolies too is they're fiercely competitive. If you think of industrial espionage, this is where it happens. All those movies about industrial espionage, insider trading, the tobacco companies, all those good movies, they're about oligopolies.
Makes for good drama and TV. Monopolistic competition and monopoly, not so much. And so this is where kind of those types of movies come along. Examples of oligopoly, software, Internet, social media. OK, car industry.
It has been an oligopoly almost since the start. Ford almost took it over, but they never got a strong enough market share. But they were by far when it started for a long time, the biggest producer. And now we have the big three that still exist. Some have disappeared.
And now our companies, which used to be the three largest in the world, we fight for the number one, two, three, four and five spots and six spots. So obviously Toyota fights for number one and two. Honda is also up there. And there's some other companies that I that own Hitachi and there's other companies that are in the car business.
We just don't know about it. Parent companies for other brand names. Airline industry is a big one.
Delta is by far the largest airline now internationally. And hospitals, especially in hospitals, tend to be monopolies in local rural areas. In cities that are 100,000 or bigger, they tend to have more than one hospital.
And so they actually compete. And so hospitals fall in this, especially since a lot of hospitals are now chained. Our local hospital is owned by Via Christi, which owns a bunch of hospitals.
And we'll talk about each of these types of industries in more detail. A step down from oligopoly, and this is my favorite type of market just because I love the name, monopolistic competition. Do not mistake this for monopoly. It's not the same thing.
They're quite different. So in monopolistic competition, we have a large number of producers. None of the producers, though, are big enough to directly influence price.
And so they do it indirectly. They differentiate their products. They market. They advertise.
They brand. And this is how market prices are influenced. Monopolistic competition is characterized by relatively free entry and exit.
You can get into these markets and get set up without huge barriers and finances. And you can exit from the market if you want to as well without high costs. And there's lots of examples.
Most examples in markets tend to fall in oligopoly or here. Craft brew, micro brew, craft brew. I would argue general beer, that's an oligopoly. But the craft brew, micro brew market is very much monopolistic competition.
And I grew up in a town where I grew up in Fort Collins, Colorado, and that was the microbrewer capital of the U.S., if not of the world for a while. When I grew up there, there were 36 microbrews from people's garages all the way up to every bar brewed their own beer. And I remember New Belgium in 95 when they started out of the garage, and now it's the second largest craft brew company in the U.S. So Fat Tire, if you've ever heard of it. A lot of some of other products that we tend to think of, I just throw soap up here, but more general, a lot of products in our Walmart Target.
There's a lot of companies that make these different products, and it's a big mix. Cleaning products, are they from an oligopoly or monopolistic competition? Most of these are made by a few companies. Soap is an oligopoly.
oligopolistic market. So a market that has oligopoly characteristics is called oligopolistic. One of my favorite econ words. Gotta use it five times by the end of the week.
And then this one is interesting. I would say when you get to the high end of fashion, that tends to be monopolistically competitive. Fashion itself isn't. Most brands are owned by other brands.
We think brands are independent. They're not. The example I used is there's Old Navy.
There's a chain of stores based on quality. What's above Old Navy? Gap is the next step.
Yep, in their branding. What's above from Gap? Banana Republic. And who's the parent company?
Prada. They're all the same company. All the brands.
And they own other brands as well. That's true. Ralph Lauren owns a ton of brands.
We don't think about it that way, but that's kind of how it goes. We think it's like all these producers. It's really not. It's a few very large, big ones that make all of the brands. It tends to be at the high end where you get some differences.
But even they get bought out. And so. A lot of our industries are in oligopoly or a mix between. And so what I want you to do is this is where we're going to jump onto Canvas.
So there's lots of examples in agriculture that we have examples of oligopoly and monopolistic competition. I want you to log into Canvas and think about the following question. What is an example of an agricultural market that is an oligopoly or that is monopolistically competitive? Think about this. Write your answer in Canvas.
And then what I want you to do is share that with your neighbor. What did you think of and why you think this market is an oligopoly or monopolistically competitive? OK, so take a few, take two, three minutes. Write your answer and then share with your neighbor.
Thank you. But they still have to agree. It's. So what are some examples of oligopolies in ag?
Tractors. John Deere, Case IH. What else? Or implement dealers too, right?
What else? Packers. Yep.
Beef processing. Actually anywhere in livestock, mostly. Once you get off the producer level.
Beef packing. Beef packing. Other examples of oligopolies?
Seed companies. Seed companies, yes. What part? Did you say coffee?
Yeah. I'd say it depends on what part you're looking at. I mean at the processing international where they then are taking the beans and producing that and packaging yes at an individual level it depends where in the world you are. It would probably be monopolistic competition depending on the country.
It really depends. I've studied coffee production in Uganda and Ethiopia because I've had students working on it. So we got to know the industries there. So it's very much small producers and some big ones, but they're still very independent. Small co-ops have been sell to larger producers.
And then it goes to more of an monopoly when you get to the trading level where it goes international. What about monopolistically competitive? We had a really good example over here.
Trailer manufacturers. Yeah, trailer manufacturers. What are some other examples of monopolistically competitive firms? I'll just say, hey, farmers themselves, ranchers, at that level it's probably monopolistically competitive. What?
Beads. Different brands of beads. If it's more local, yeah. Especially hay production.
Agritourism. Yeah, agritourism. Because that tends to be very local still. And so there's lots of examples. What I tend to find is our major production stuff, especially for inputs and processing, tend to be much more oligopolies than for equipment.
And then on the other side, we still have a lot of monopolistically competitive. Restaurants are kind of monopolistically competitive. You want to go up the supply chain.
So even at the consumer level where it's reaching the consumer, we still find some of that. And so that's kind of what we're looking at. Start to get you thinking about that.
So. One other question, thinking about the lab. So we ran this lab looking at oligopolies and cartels with seed companies.
Is competition beneficial? So do we want more monopolistically competitive firms? So why do we want competition? What did we see if there was a cartel or collusion in the market that moved us more toward a monopoly?
For consumers, what does that mean? Higher prices and less product. you'll pay more for it. And so consumers benefit from competition. Why?
Lower prices, more available product too. Okay. And choice. What about from a producer standpoint? Well, forces that improves efficiency.
So you don't waste as much in a more competitive market and it allows more firms to come into the market as well. Provides opportunity. Where monopolies and oligopolies, it's really hard. They actively go after companies that try to enter the market. How do software companies do that for new companies?
They buy them out. And so they eliminate them or they integrate them and take over that part of the market. And we'll talk about those.
So let's move back to perfect competition. So when we talk about perfect competition. We mean the following things.
There's a large number of buyers and sellers. All the products are essentially the same. There's freedom of entry and exit and perfect information in the sense that you can get it if you want to find it.
Perfect competition tends to be, from an economist's point of view, an ideal. And I think that is even debatable. But we tend to see it as...
more we look at as the ideal because we want competition in the market. So and this comes back to another comment, perfectly competitive markets are what we call efficient, which provides certain benefits to the market. And I want to talk about these. Going backwards, sorry. So the first one is a large number of buyers and sellers.
So this assumption means there is competition in the market. So prices, in essence, are constant for these people. It's the aggregate behavior, supply and demand, that determines not any individual or consumer.
So no firm is large enough to have market power. The idea is, what does this mean? Well, if you're a firm and you raise your prices, we just go to the next firm.
You go out of business. You really quick revert back because you don't have market power. Okay.
And so you'll just, there's easily almost all companies are, if not perfect, very close to perfect substitutes. So under perfect competition, this means output prices are fixed. You're a price taker, which is what we've been assuming to this point.
The second assumption is homogeneous products. In essence, all the products sold are seen as the same or identical. Hence, they're all perfect substitutes.
It doesn't matter which one you as a consumer get, you just want one. No buyer, in essence, we can't tell the difference between different products. If someone has a different color, everyone probably makes that different color.
In essence, they're in essence identical, okay, in a perfectly competitive market. The third assumption is freedom of entry and exit. In essence, in this market, and this is an important one, there's no barriers to entry. And so firms can come and go as they need to. There's no financial barriers or large upfront costs, government regulations, or physical obstacles that prevent them from coming in.
And so people can start up businesses and compete if they choose to. And they can choose to close shop if they want to and go to another venture. This differentiates a lot of markets.
This is probably one of the big ones why we like perfect competition as from an e-com point of view. Because all the other markets have barriers to entry. It's not free. There's a cost.
For example, power plants take a large amount of financial capital. and government licensing to operate. It takes anywhere from three to five years to get the permits to build the plan. And then it's another 10 to maybe 40 billion in investment. And so believe me, there's not a lot of people looking to build a power plant.
You could build our entire campus for that and probably more. We could literally tear down every building and probably rebuild it. I think MBAP was only three or four billion for a state-of-the-art facility with a power plant. They have their own power plant. There's perfect information.
All firms have the needed information to make decisions. This doesn't mean it's at your fingertips. It means you can go get it.
There might be a cost to it, but it's available. Okay. And so you can find out pricing for inputs and outputs, what you need to produce, all the licensing regulations and so on. It's not a secret.
You might have to do your homework, which if you're going to open a business, I highly recommend you do. But it's there. OK. And so you can get that.
You do it on your own or hire someone to help you with that. That's a can come at a cost. And so.
you can get the information you need to make good decisions. So perfectly competitive firms have some desirable properties. We mentioned we like competition between firms because it results in market efficiency.
And what do we mean by that? So for economics, or if you're in engineering, we always define efficiency when we say it. Efficiency is a characteristic of competitive markets, indicating that goods and services are produced at the lowest cost and consumers pay the lowest possible prices. And so we have a very specific meaning when we look at this.
So in a perfectly competitive market, we're interested in how is this actually achieved? So why does this occur? Perfectly competitive firms produce where marginal revenue equals...
the market price, which is equal to marginal cost. So firms at the end of the day end up charging the cost of production for their last unit produced. So in essence, prices are driven down to marginal, the lowest marginal cost to maximize profit.
And then if a firm charges a higher price, hey, we just go to the next company. And so if they go higher than that price, if they raise their prices, we go to the next company, their sales go to zero. And in essence, there's no incentive to do that. OK, and so there's an incentive to actually meet the profit maximizing condition and pay attention to that price and make sure you produce up to the point where MR equals MC.
Free entry and exit allow for firms to enter a market where profits can be made and to exit when profits are negative or where losses are experienced. This ensures because of reentry and exit. So the first one makes sure, hey, you're subject to the market price.
There's no market power. The second one ensures that there is no market power. Firms can come and go as they please.
So as long as there's a profit potential, firms will enter the market and take that profit until there is no more to be made. And then they exit. And when it comes back, they come back.
And so no firms hold market power. And so resources flow in and out of perfectly competitive markets freely. And so one of the important parts, and this is a real critical aspect of efficiency is resources flow to their highest return use. Perfectly competitive firms don't waste resources. That costs money.
That costs you profit. And because you take the prices given and you have no influence on pricing, advertising that doesn't make sense, what you really have control in is your costs. And so you do not waste product.
And hence, we get the lowest prices, the highest efficiency, least waste, and most access and most benefit to consumers. And so what does this mean for perfectly competitive firms? How should they strategize to be profitable?
Remember, perfectly competitive firms are price takers. So no market power means, well, they can't do anything to alleviate the price in the market when it fluctuates. So this motivates them to put those resources to that highest return use, minimize waste, and get out as much as you can.
OK? And so to maximize profits, they don't want to waste resources. So for a perfectly competitive firm, maximizing profits is essentially equivalent to minimizing costs.
They're almost exactly the same for these, or in essence for us, identical. That is the same mode. If you say maximize profit for this firm, minimizing costs gets you the same answer because revenues are fixed. for them because the price is fixed.
So the best strategies for them are to adopt new technologies and innovations that help lower costs and improve production process, lower their marginal costs, somehow renegotiate contracts to lower their costs, and not waste resources. Don't waste your inputs. Buy only what you need, and if you have extra, find a use for it. Squeeze out what you can. And so you want to lower costs of production.
Farmers tend to fall in one of two boats. They tend to be cost minimizers or profit maximizers. If you're marketing your products, you're probably a profit maximizer.
If you're not and selling a lot of your product on the spot market, you're pretty much taking what you get. You're a cost minimizer. And we find both in agriculture for crop producers and livestock producers.
And that mix changes over time. And so we see some of that behavior even in agriculture, especially at the producer level, kind of at the farm and ranch level. And so what about the other op?
So if we think perfect competition is our ideal because we're getting the highest return to our resources. Right. We're benefiting consumers and producers overall the most.
What's the opposite? Well, you go to the other end of the spectrum, you see a monopoly. A monopoly is a market with a single firm. And the other characteristic is why they're able to keep that is there are no substitutes for their product or close substitutes.
They are the only producer. There's a substitute. They're not a monopoly. OK.
And there's significant barriers to entry. Either they're natural and we'll see that, or they're put up by the monopoly themselves. Monopolies and oligopolies can be very, very aggressive against new competitors. And they're not necessarily nice at all.
It's not nice aggressive behavior either. So monopolists produce goods with no close substitutes, meaning we don't have any other markets. The interesting thing is most monopolies have only lasted about 50 years.
Then they lose their monopoly. We haven't had a lot of companies that held a monopoly for a very long time. 50 years is half a lifespan, but that's about it. can't keep their market share. A lot of monopolies, in essence, get lazy about keeping track of the market, thinking they're not going to lose it, and then they end up losing it.
So monopolists are price makers. So monopolists have the ability to influence prices for both inputs and outputs directly. And so we say they have the most market power of any type of firm.
But one thing to remember is monopolists can't dictate the whole market. They can't just set any price they want. They are subject to consumer demand.
And what you find is when they start ignoring consumer demand, they get in trouble. And usually, by the time they figure that out, they've waited too long. This is what happened to AT&T. They waited too long. The government got tired of it and said, we're done.
But other competitors were complaining and stuff. People were complaining about it. For example, one of the things that I take for granted, most people do voicemail. You know, we've had voicemail since the 60s and the 70s, but it didn't come around until the 80s or 90s. I do stuff like when I grew up, they're like, ooh, call waiting.
You can put people on hold or caller ID. Those have existed since the 70s. A lot of those innovations were around.
AT&T just never put them out. Or cordless phones. Hey, all the phones until the 70s were the rotary dials with the long cords.
I remember having the one that would reach around. I saw the phone hutch in my house where the single phone would have been. Attached to the wall, wired into the wall.
And those kind of went away. Late 70s, early 80s. We saw a big switch. So why do monopolies exist? The first one is large fixed costs.
These are financial barriers. For example, and we mentioned this one, power plants. It's just a massive amount of investment. These types of monopolies that have these huge fixed costs to set up shop are called natural monopolies. It's just too much money for more than one firm to come in and do business.
Okay. And so these firms charge... price is greater than their marginal cost because their biggest costs are their fixed costs. Most power plants, it's not the electricity production that's their largest cost, it's paying back their investors. And so they want to produce more and more energy to get that average fixed cost as low as possible.
Another one is locational monopolies. These monopolies exist because a firm has access to unique location. I just did here.
This is like a golf course. And these actually exist golf courses that exist on peninsulas. So they have water on three sides.
No one will ever get that location again. And so for them, they hold a monopoly for that kind of golf experience. And so there's locational monopolies. It's just. They happen to get it because of the unique location or the aspects of that location.
Another one is patents. So patents on technologies and new products allow, we grant patents to companies to allow them to act as monopolies. The primary motivation is to recover, one, develop the market and recover their research and development costs.
For example, these can last up to 17 years. Monsanto had a patent on Roundup that allowed them to produce this product for 17 years and without any competition, right? What's the generic brand of Roundup called? It's Glyphosate, right? And I can tell you once that patent ended, every company that makes pesticides launched Glyphosate, their own products.
They were waiting for that day. And Roundup, obviously, went to Santo Prado to see if they could extend it. They failed. And Liposate came out.
Interestingly, Roundup is still a better product than generic Liposate, usually. But it is a lot more expensive, too. OK, we see a lot of this in the pharmaceutical industry. And in there, the patents are really small, like three to six months for a patent.
Because for our new. drugs. They don't want them. They're really expensive when they come out. The problem is get generics out quicker so they're at lower cost.
And so part of this is to recoup the high R&D. And a lot of this debated, there's a lot of debate on how long patents should be and what rights they should grant to companies. There's government franchises. So there are times the government is deemed... an industry of national security or we're trying to develop it.
And so the government franchises where the government steps in and provides sole provision for a company to provide a service. And this is how AT&T came about. The government built the infrastructure for our telephone network. They still do.
And so they set up AT&T. That was the company. And it ran as a governmental entity and then later as a private company. And in the 70s, they broke it up.
Governors are like, we created you, we can break you up too. And they did. And so this happens quite a bit.
We did it with railroads in this country. We've offered it for other resources that we thought were critical, like steel and oil. And so we've had different monopolies over time. Who owns all the infrastructure?
Who fixes all the infrastructure for telephones around the country? It's still AT&T. They're the ones who do all of the fixing. They're the ones still responsible for our phone infrastructure.
And so they're the ones who still keep track of that. Monopolies also have what we call network externalities. So when the value of a product to a consumer increases with the number of consumers who use it, we get network externalities. For example, the large number of people using a software application such as Microsoft Office or Windows.
The greater opportunity they have to share files, it builds reliability and locks in that software as the primary software. And when Microsoft tried to have Internet Explorer be the actual only browser that they would support, they got taken to court to be a monopoly because of this. And they lost. They backed off before any settlement, made a settlement before anything ever came out of it. Basically, what they said is we're going to break your company into.
That was the solution. Another one is control of a key resource. So give me one more minute. And so the control of a resource is basically you have, you're the one, you have control of a resource and you can block all other entities from getting it.
For example, before the 1940s, the Aluminum Company of America had the rights to mine aluminum. Almost exclusively across the globe in every country. They held the governmental contracts in all countries. And so when you compare monopolies and perfect competition, you see their differences. It's one producer versus a lot.
No close substitutes to perfect substitutes. High barriers to entry. All those different things that create monopolies are barriers versus freedom of entry and exit. Unavailability of information. Monopolies do not share nicely.
They usually have to be forced. Monsanto is a good example. the tobacco companies and all the lawsuits about info versus perfect information.
OK. And so there's all these differences that happen between these two. And so on Wednesday, real quick, we're going to have a you will have another.
We're going to learn about monopolies. I will not be here on Wednesday. There will be a guest lecturer doing the lecture for me that day. Otherwise, if you need a lab, there's one up here. We will see you on Wednesday or in lab.