This course offers an introduction to the functions of individual decision-makers—both consumers and producers—within the larger economic system. Emphasis is on the nature and functions of product markets, the theory of the firm under varying conditions of competition and monopoly, and the role of government in promoting efficiency in the economy. Most people make the incorrect assumption that economics is ONLY the study of money. My primary goal in this course is to shatter this belief. During this course, we will be addressing the above questions as well as many more relating to: -the environment -love and marriage -crime -labor markets -education -politics -sports -business My main goal is to show you the way economists think and how to use this analytical system to answer questions related not only to these and other important human issues, but to anything you end up doing with your life after this class. After all, as you will quickly find out, I believe that everything is economics!
2.1. Market Structures With Pricing Power
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From the course by University of Illinois at Urbana-Champaign
Microeconomics Principles
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From the lesson
Firms with Market Power
So, why is it that when you fly the person sitting next to you in the plane probably paid a different price for the ticket than what you paid for it? And why does Starbucks charge so much for its coffee even though you can buy coffee at Dunkin’ Donuts for almost half of that price? This module we are finishing our discussion of the firm by focusing on cases that should be more familiar to you than the perfect competition examples we have been using.
Meet the Instructors
Dr. José J. Vázquez-CognetClinical Professor
Department of Economics
So remember that question I asked you at the begin, at the beginning of last week?
Suppose you own a barbeque, sandwich place and a friend of yours tells you that you
should increase the price because, elasticity for your sandwich is inelastic
in your area. I remember that at that time we said that
we need to know the market structure in order to answer.
Well I'm going to pose to you the same question, I'm going to give you the type
of market structure. Suppose you actually own a barbecue
sandwich place, but the barbecue sandwich you sell is actually not something no one
else has been able to emulate. So it's a special barbecue sandwich.
Now a friend of yours comes and tells you that you should increase the price because
of elasticity for your sandwiches is inelastic in your area.
Should you increase the price? Well in that case, the market structure
makes a huge difference because if you are the only game in town, you actually will
be able to increase revenue by increasing the price.
Because you are, you are it. Right, so the, the elasticity in your area
is your elasticity of demand. So, this going to introduce us to the
marker structure and how critical marker structure is, what the type of industry
that you work, that you have your business, is for whether you know, you
have control over the price. And pricing is the critical issue here,
although there are other issues, so this is the one I'm going to focus on this
week. We're going to talk about market
structures in which the business has some degree of market power, and that means
they have some degree of control over the price.
The first part of the lesson I want to describe the specific characteristics.
Of the different type of market structures, that we're going to be talking
about this week. And we're going to be talking about mainly
three market structures that have some market power, with degrees of market
power. The first one is monopoly when there's one
extreme, and then we have kind of the middle ground or oligopoly, and then we
have another one called monopolistic competition.
They're, they're all the same in the se, in the fact that they have some degree of
market power in them, that means that they can actually control the price, they have
pricing power. But they are different in the degree of
pricing power to have and market power to have.
So I want to spend a, a few minutes at the beginning of the week explaining you the
main characteristics of, of, of, of them. Let's start with monopoly, now in order to
classify them as in the best question you can ask, and we started with this last
week. Is, how many sellers are there in the, in
the industry? And two, is the product they sell
differentiated? In other words, are they selling something
special, like the barbeque sandwich not one of us can make, or are they selling
someone, something everywhere, you know, very the same as someone else?
Corn or you know stocked in the trader market or so forth.
So, for monopoly, when you ask how many sellers, we, we say that a monopoly is a
situation where you have one seller, only one and they are, and that seller is the
game in town. And that seller is selling a unique good.
So examples of that are many surprisingly enough there's actually many examples of
that, I will in the second session, will talk about some of the reasons why that
will be. But some examples of that, that are close
to your public utilities. Public Utilities are usually controlled by
monopolies, right there's usually one water company in an area or one electric
utility in an area. So those things are usually controlled by
monopolies. It's one seller, and they're sell, selling
a unique thing, electricity phone, phone service, water service.
Now, another type of market search, is one in which you have a few sellers, not one,
not many but just a few. And the product could be either
differentiated or not, but it's somewhat differentiated.
And we call that an oligopoly. And again, this is very sketchy now to
define what really is, and when you only have one, and you're saying just have a
few. It's kind of different to say what is a
classic oligopoly. Well there's some ones that economies like
to use, and some others are airlines, the market for airlines when you have one or
two or three in a particular area. But also oil, where you have perhaps a, a
number amount of countries that can actually produce oil.
And they actually form a, what are called a cartel, which I'll talk a little bit
about when we talk about oligopoly. But those are considered kind of like
classic oligopolies. And then we have finally the type of
market structure that I think is the one most closer to you, which is called
monopolistic competition. And there's when you have many sellers
with a somewhat, differentiated product. And the degree of differentiation is going
to determine the market power they have. Examples of monopolistic competition are
most of the things you buy in stores. Retail phones TVs, clothing, some type of
food, coffee. All those things, restaurants, are in a
particular thing. Barbeque sandwiches is actually a very
good example of monopolistic competition. If fact, this a type of microstructure.
Mike, the owner of the restaurant think he is?
So let's hear what we have to say and we'll go back and close this session.
>> No, I don't feel like I have to be either lower or higher than anybody.
It's just, I think what works for the price that works for us, it works well.
I don't think, right now, I don't think there's anybody that does what we do,
exactly. I think we're a barbecue place, and we
also have a little bit of twist, and we're also we also sell a lot of the Kraft beer
and we do a lot of things differently. Our Barbeque I think is distinct among the
other barbeque places. I think we offer some things that they
don't. You know, table service being one of them
and so I think we have some, some room to move on that.
And people seem to come out and I think. We know, we don't, we're not trying to
gouge anybody, but we're trying to make sure that we get a fair return on our
investment ... >> So as you can see Mike thinks that he,
that he works in kind of a monopolistic competition type of situation.
We, we can't really say that he has a monopoly because I mean there are other
restaurant in the area. They in fact, I know that other
restaurants in the area are also selling barbecue sandwiches.
But he feels that he, he actually provides a special type of sandwich, not only the
sandwich itself is different, but also the ambiance and the type of environment that
he provides to the customers. So, so he works in a situation in which he
obviously, as he said, has some control over the price, but it's not because he
has a monopoly. It's really because there's many.
Many businesses selling, the same thing, but the, what they sell is somewhat
differentiated. Okay, so, we going to gravitate between
these three market structures. They're some things that are a special for
monopolists, special for oligopoly, special for monopolistic competition.
And we're going to focus on those special things at the end.
Particularly in the effect that each of those path for society, but we're going to
focus first on the things they have in common, which is the fact that they can
price. And that means that they face a
downward-sloping demand curve. Now before we do that I want to spend a
little bit of time telling you where the, source of the market power comes from for
those companies that have market power. So we'll do that in the next section, and
then we get more into the details of how they price.
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