Four Market Conditions Necessary For Perfect Competition 6Alarge 6A 1. Very large number of sellers (hundreds or thousands). Each seller will have only a small share of the market. B identical B 2. Similar or identical products (sweet corn/brocolli/eggs) which means there is no reason for non-price competition. C Easy C 3. Easy entry and exit into the market. DAbsence D 4. Absence of price controls ( too many sellers & consumers ). Perfect Competition and Price No one firm controls price No one firm controls price. Lowering price would lower profits as consumers would buy similar substitutes. Prices are set by the market rather price takers. than by the firms. These firms are price takers.
decrease competition Sellers try to decrease competition by making their products different from the others. Since each firm product unique, attempts to make its product unique, element of monopoly, there is an element of monopoly, monopolistic competition t hus monopolistic competition. Product differentiation Product differentiation, when it is successful, enables establish a kind of monopoly a firm to establish a kind of monopoly so that loyal customers will prefer it rather than buy from the monopolize a small portion competition. [They try to monopolize a small portion of the market.]
Examples of Monopolistic Competition Blue JeansGrocery StoresCandy Bars Dry CleanersRock ConcertsPizza Shoe StoresCassette playersChicken ToothpasteBook StoresSoaps and detergents RestaurantsVacuum CleanersFurniture Stores BarbershopsBeauty ParlorsEcon Textbook Cos Econ,Econ Econ
Monopoly – the power of one Monopoly [mono(1) poly (seller)] C ontrol over price: Total Product: unique Ex: Comcast Cable TV T echnological M onopoly Patent Ex: Rubiks Cube Government Monopoly Owned & operated by G Ex: U.S. Mail State Highways Natural Monopoly Competition would be chaotic. It is natural to give it to one co. Ex: Utilities Cable TV Geographic Monopoly Only seller in a specific area Example: Remote Store DART Price Makers Greyhound Forney High Basic Cable Rate Cable TV WasteManagement TXU U.S.Mail Rubiks Cube Cable TV DART
___ 1. Rubiks Cube ___ 2. Telecable Cable TV in Pilot Point ___ 3. TXU Gas ___ 4. The Last Chance Gas Station ___ 5. La Vernia High School ___ 6. Constructing a state highway between Dallas and Austin ___ 7. Heelings combo athletic shoe & one-wheel skate ___ 8. Only one man living in an isolated Trailer Park with 50 women
1. Dart – bus service (supported by taxes) 2. Postal Service (U.S. mail) 3. Construction on a state highway (supported by gasoline taxes) 4. Waste Management (privately owned) 5. Bell Helicopter producing patented V-22 Osprey 6. Polaroid Instamatic (patent) 7. Remote Drugstore in Podunk, TX Privately owned Remote store
Number of firms Products differentiated or homogeneous Price a decision variable Free entry Distinguished byExamples Perfect competition Very Many HomogeneousNoYes Price competition only Wheat farmer Textile firm Monopoly One A single, unique product YesNo Still constrained by market demand Public utility Patented Drug Monopolistic competition ManyDifferentiated Yes, but limited Yes Price and quality competition Restaurants Hand soap Oligopoly FewEitherYesLimitedStrategic behavior Automobiles Aluminum Not every industry fits neatly into one of these categories; however, this is a useful framework for thinking about industry structure and behavior.
Perfect CompetitionMonopolistic Competition OligopolyMonopoly Number of firms Variety of goods Control over prices Barriers to entry Examples Chapter 7 of your book will help with the chart.
Economics Economics (college) Textbook Companies (over 50 of these and they are differentiated Blue Jean Blue Jean Companies (dozens and differentiated) Black eyed peas One seller Easiest to enter Very many Very many (100s) sellers Price takers Manysellers Many [25-75] sellers Price Maker Beauty Shop few control 70% A few control 70% of the market Nat Geog Natural, Geographic, Tech & Gov. Tech nological, & Gov. Nike, Reebok, New Balance Adidas Balance, and Adidas Homogeneous prod uct [Identical] Identicalor Identical (pure) or differentiated differentiated products Comcast Cable TV Price Leadership is used Polaroid Instamatic McDonalds, Wendys, Burger King and Burger King Product differ entiation gives an element of monopoly Oligopoly 1._______________________ 2._______________________ 3._______________________ 4._______________________ 5._______________________ Perfect Competition 1._______________________ 2._______________________ 3._______________________ 4._______________________ 5._______________________ Pure Monopoly 1._______________________ 2._______________________ 3._______________________ 4._______________________ 5._______________________ M onopolistic C ompetition 1._______________________ 2._______________________ 3._______________________ 4._______________________ 5._______________________ Market Structure Word Scramble [From the word scramble below, pick out the 5 correct answers for each market structure] * bold face type. * Write the bold face type. Name 1. ________________ Name 2.________________
Since the 1880s, the federal government had aided competition. To promote certain legal monopoliesallowed to exist efficiency, certain legal monopolies have been allowed to exist. Trustslegally formed combinations Trusts – legally formed combinations of corporations or companies. cutthroat competitionmergers In the latter half of the 1800s, cutthroat competition and mergers created trusts cartels in steel, meatpacking, oil, sugar, coal, and tobacco. They were actually large cartels. government passed laws to protect competition By the 1880s, the government passed laws to protect competition. Anti-trust legislation monitor and regulate big business Anti-trust legislation – designed to monitor and regulate big business, prevent monopoliesbreak up existing monopolies prevent monopolies and break up existing monopolies. Interstate Commerce Act-1887 ICC 1. Interstate Commerce Act-1887 – created the ICC to oversee railroad regulates railroadsmotor vehicles freight carriers rates. Today it regulates railroads, motor vehicles, & other freight carriers. Sherman Anti-trust Act-1890 cornerstone of anti-trust legislation. 2. Sherman Anti-trust Act-1890 – the cornerstone of anti-trust legislation. prohibited any agreementscontracts or conspiracies It prohibited any agreements, contracts or conspiracies that would restrain interstate tradecause monopolies to formprotected trade restrain interstate trade or cause monopolies to form. This act protected trade against unlawful restraint & monopoly1 st significant act against against unlawful restraint & monopoly. It was the 1 st significant act against monopolies monopolies. Later legislation defines the principles in this act. failure to define key termstrusts The Sherman Anti-trusts failure to define key terms such as trusts and restraintof tradesomewhat ineffective restraint of trade made it somewhat ineffective. It was not clear what was legal or illegal legal or illegal. This act also ran contrary to the economic theory of laissez-faire hands-offattitude of the past 100 years laissez-faire (hands-off by the government) attitude of the past 100 years.
investigate the structure and behavior of firms engaging in interstate commerce unfair behaviorissue cease-and-desist orders The Federal Trade Commission (FTC), created by Congress in 1914, was established to investigate the structure and behavior of firms engaging in interstate commerce, to determine what constitutes unlawful unfair behavior, and to issue cease-and-desist orders to those found in violation of antitrust law. penalties more severeThe penalties for violating antitrust laws have become more severe. Treble damages sustains injury or financial lossTreble damages are awards to any person or private company that sustains injury or financial loss because of an antitrust violation, which are three times the actual damages.
Progressive Era (1901-1920) Legislation (A Reform MindedEra) Progressive Era (1901-1920) Legislation (A Reform Minded Era) 1.Clayton Antitrust Act 1914illegal 1.Clayton Antitrust Act – 1914 spelled out specific illegal businesses practices businesses practices. It gave the government power against Ou tlawed price discrimination-charging customers monopolies. Ou tlawed price discrimination-charging customers different prices for the same product different prices for the same product – where it might lessencompetition lessen competition or lead to monopolies. Large retail outlets had gotten price breaks. The Clayton put some teeth into the Sherman Act by specifying what acts were in restraint. Federal Trade Commission Act 1914 Federal Trade Commission Act – 1914 – FTCunfair created the FTC to investigate charges of unfair methods of competition methods of competition. (false and misleading advertising) Robinson-Patman Act (Anti-price Discrimination Act) – 1936 strengthenedon price discrimination It strengthened the Clayton Act on price discrimination. It protected small retail b usinesses protected small retail b usinesses by prohibiting wholesalers from charging small retailers higher prices than they charged p rohibiting large retailers from setting large chain stores and by p rohibiting large retailers from setting artificially low pricesrebatesavailable to all artificially low prices. All rebates had to be available to all. Celler-Kefauver Act (Celller A nti-merger Act) –1950 prevented Celler-Kefauver Act (Celller A nti-merger Act) –1950– prevented mergers mergers and the purchase of competitors assets when such reduce competition acquisition would reduce competition. If you cut back on food intake [Had to discontinue this.]
By the Early 1890s, a number of businesses convicted were convicted under the Sherman Antitrust 1911 Act. In 1911, the Supreme Court declared Standard Oil Company that the Standard Oil Company was practicing unreasonable restraint of trade unreasonable restraint of trade and broken ordered that its 90% monopoly be broken up into 34 smaller companies up into 34 smaller companies. They became known as Exxon, Mobil, Chevron, Amoco, etc. American Tobacco Broken up were American Tobacco, Standard OilNorthern Securities Standard Oil, and Northern Securities. AT&Tmonopoly of local phone service AT&T was accused of using its monopoly of local phone service to exclude competitors from the related long-distance and telephone equipment markets. The two sides settled in 1982. spin off seven local phone companies They agreed to spin off seven local phone companies known Baby Bells. as the Baby Bells. American Tobaccopredatory pricing American Tobacco was charged with using predatory pricing [underselling others until they were driven out of business, then raising prices ] monopolize the cigarette business and other means to monopolize the cigarette business. It was split into 16 firms split into 16 firms like R.J. Reynolds & British American Tobacco.