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Competition, Market Structure and Business Firm Organization In the American Economy, we are primarily a Market System, but we do not have a pure market.

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Presentation on theme: "Competition, Market Structure and Business Firm Organization In the American Economy, we are primarily a Market System, but we do not have a pure market."— Presentation transcript:

1 Competition, Market Structure and Business Firm Organization In the American Economy, we are primarily a Market System, but we do not have a pure market. Since our market system is not pure, we know it is a mixed system. The mix includes aspects of the Command system. The term Market Structure refers these different mixed versions of the market. The markets for different classes of products behave differently, so there is a broad range of possible market organization.

2 Market Structure We rank different market structures according to the degree of competition present. The least competitive structures are the different forms of monopoly.

3 Market Structure Pure Monopoly is the most restrictive form. There are four requirements for a Pure Monopoly. 1.One seller

4 Market Structure Pure Monopoly is the most restrictive form. There are four requirements for a Pure Monopoly. 1.One seller 2.Good with no close substitute

5 Market Structure Pure Monopoly is the most restrictive form. There are four requirements for a Pure Monopoly. 1.One seller 2.Good with no close substitute 3.Seller controls the supply

6 Market Structure Pure Monopoly is the most restrictive form. There are four requirements for a Pure Monopoly. 1.One seller 2.Good with no close substitute 3.Seller controls the supply 4.Seller controls the price

7 Market Structure Pure Monopoly is the most restrictive form. There are four requirements for a Pure Monopoly. 1.One seller 2.Good with no close substitute 3.Seller controls the supply 4.Seller controls the price Pure Monopoly does not exist in the real world, but there are different forms of monopolies that do occur.

8 Market Structure Natural (regulated) monopoly - Businesses that would naturally tend to become a monopoly if they were allowed to compete.

9 Market Structure Natural (regulated) monopoly -Businesses that would naturally tend to become a monopoly if they were allowed to compete. -Typically, these are utilities, airports, refineries and other large, complicated firms with expensive investments in infrastructure.

10 Market Structure Natural (regulated) monopoly -Businesses that would naturally tend to become a monopoly if they were allowed to compete. -Typically, these are utilities, airports, refineries and other large, complicated firms with expensive investments in infrastructure. -To protect consumers, State and Federal governments regulate the prices charged by these firms, in exchange for allowing them to operate as monopolies.

11 Market Structure Natural (regulated) monopoly Geographic (regional) monopoly

12 Market Structure Natural (regulated) monopoly Geographic (regional) monopoly - A business that has a monopoly in a limited geographic area.

13 Market Structure Natural (regulated) monopoly Geographic (regional) monopoly -A business that has a monopoly in a limited geographic area. -Can be due to geography (on an island, in the mountains, etc) or due to business arrangements (exclusive contracts, distribution territories).

14 Market Structure Natural (regulated) monopoly Geographic (regional) monopoly Government monopoly

15 Market Structure Natural (regulated) monopoly Geographic (regional) monopoly Government monopoly -A business that the government wishes to run without competition. -Legislation is passed forbidding competition.

16 Market Structure Natural (regulated) monopoly Geographic (regional) monopoly Government monopoly -A business that the government wishes to run without competition. -Legislation is passed forbidding competition. -Examples include the US Post Office, Air Traffic Control, Federal Reserve.

17 Market Structure Natural (regulated) monopoly Geographic (regional) monopoly Government monopoly Technological monopoly

18 Market Structure Natural (regulated) monopoly Geographic (regional) monopoly Government monopoly Technological monopoly -Monopolies granted by the government to protect the rights of those who invent, create, compose, design or otherwise contribute original work to be sold. -- Technological monopolies take three forms, all issued and controlled by the US government.

19 Market Structure Technological monopolies 1.Patents A patent is government protection that gives the right to exclude others from making, using, offering for sale, or selling the invention. 1) Utility patents may be granted to anyone who invents or discovers any new and useful process, machine, article of manufacture, or composition of matter, or any new and useful improvement thereof; 2) Design patents may be granted to anyone who invents a new, original, and ornamental design for an article of manufacture; and 3) Plant patents may be granted to anyone who invents or discovers and asexually reproduces any distinct and new variety of plant.

20 Market Structure Technological monopolies 1.Patents Patents are issued by the US Patent and Trademark Office. If the office determines that an invention is sufficiently original and commercially viable, then it issues a patent that confers the patent s to that invention for 20 years. Once a patent is issued, the patentee must enforce the patent without aid of the USPTO.

21 Market Structure Technological monopolies 1.Patents 2.Copyrights - Copyrights are registered by the Copyright Office of the Library of Congress. -Copyright protection granted to creators of original works of authorship including literary, dramatic, musical, artistic, and certain other intellectual works, both published and unpublished.

22 Market Structure Technological monopolies 1.Patents 2.Copyrights - Copyrights are registered by the Copyright Office of the Library of Congress. -Copyright protection is granted to creators of original works of authorship including literary, dramatic, musical, artistic, and certain other intellectual works, both published and unpublished. -Copyright law generally gives the copyright owner the exclusive right to reproduce the copyrighted work, to prepare derivative works, to distribute copies, or to perform or display the work in public.

23 Market Structure Technological monopolies 1.Patents 2.Copyrights Author Owned Copyright (since 1978) – Life of creator plus 70 years. Corporate (anonymous, pseudonymous, works made for hire) 95 years from publication, or 120 years after creation, whichever is shorter Prior to 1923 – Expired Copyright can be renewed upon application and justification.

24 Market Structure Technological monopoly 1.Patents 2.Copyrights 3.Trademarks and Servicemarks- Trademark is a word, name, symbol, or device that is used to identify the producer of the goods and to distinguish them from the goods of others. Servicemark is the same as a trademark except that it identifies and distinguishes the source of a service rather than a product. Registered with the US Patent and Trademark Office

25 Market Structure Technological monopoly 1.Patents 2.Copyrights 3.Trademarks and Servicemarks- Trademarks do not expire, but can be lost through abandonment, dilution or common use. Abandonment occurs if a trademark has not been actively used for three years or more.

26 Market Structure Technological monopoly 1.Patents 2.Copyrights 3.Trademarks and Servicemarks- Trademarks do not expire, but can be lost through abandonment, dilution or common use. Dilution happens when competitors adopt very similar trademarks and the owner takes no action to defend their rights.

27 Market Structure Technological monopoly 1.Patents 2.Copyrights 3.Trademarks and Servicemarks- Trademarks do not expire, but can be lost through abandonment, dilution or common use. Common use refers to the trademarked name becoming a commonly used name for the product, so that competitors can claim the need to use that name to describe their product to customers.

28 Market Structure Monopsony

29 Market Structure Monopsony -A market with only one buyer.

30 Market Structure Monopsony -A market with only one buyer. -In a monopoly, a seller with no competition can dictate higher prices paid by competing buyers. -In a monopsony, a buyer with no competition can dictate the price charged by competing sellers. -Since price is not freely determined both situations are considered to be flawed markets.

31 Market Structure Oligopoly

32 Market Structure Oligopoly -A market with few sellers.

33 Market Structure Oligopoly -A market with few sellers. -There are so few sellers that the actions of one seller influence the actions of other sellers.

34 Market Structure Oligopoly -A market with few sellers. -There are so few sellers that the actions of one seller influence the actions of other sellers. -In an oligopoly, each seller feels that they are in such tight competition that they must respond to what their competitors do.

35 Market Structure Oligopsony -A market with few buyers. -There are so few buyers that the actions of one buyer influence the actions of other buyers.

36 Market Structure Oligopsony -A market with few buyers. -There are so few buyers that the actions of one buyer influence the actions of other buyers. -Oligopsony does not generally occur at the consumer level, but does sometimes occur at the producer level..

37 Market Structure Monopolistic Competition

38 Market Structure Monopolistic Competition -Competition between several different producers of similar (but not identical) products. The individual products are protected under the narrow monopolies created and protected by patents, copyrights and trademarks.

39 Market Structure Monopolistic Competition -Competition between several different producers of similar (but not identical) products. -Markets in monopolistic competition are characterized by the presence of … 1.brand names 2.non-price competition

40 Market Structure Pure Competition Theoretical market which involves the highest possible degree of competition. There are five requirements for a pure market.

41 Market Structure Pure Competition 1.Many Buyers and Sellers

42 Market Structure Pure Competition 1.Many Buyers and Sellers 2.No barriers to Entry or Exit

43 Market Structure Pure Competition 1.Many Buyers and Sellers 2.No barriers to Entry or Exit 3.No Government Intervention

44 Market Structure Pure Competition 1.Many Buyers and Sellers 2.No barriers to Entry or Exit 3.No Government Intervention 4.Homogenous Goods

45 Market Structure Pure Competition 1.Many Buyers and Sellers 2.No barriers to Entry or Exit 3.No Government Intervention 4.Homogenous Goods 5.Perfect Knowledge of the Market

46 Market Structure Pure Competition In a pure competition situation, price will be the only factor considered when deciding which products to buy.

47 Competition In the US economic system, we depend upon competition to provide us with the benefits of lower prices and higher quality. As consumers, competition is highly beneficial, but to producers, it requires harder work and less profit. As a result, producers have always tried to find ways to avoid competition.

48 Competition Historically, the oldest form of competition avoidance is Collusion.

49 Competition Historically, the oldest form of competition avoidance is Collusion. Collusion is simply an agreement between two or more firms to avoid competition. It can be a simple handshake agreement, or an extremely complex arrangement.

50 Competition Historically, the oldest form of competition avoidance is Collusion. The market systems of Europe were based on Collusion, including various Guilds, Leagues and Unions.

51 Competition When the US was formed, there were attempts to force competition. As early as 1792, there was a city ordinance in Philadelphia outlawing price fixing. This brought about the Covenant, which is simply a collusive agreement held in secret.

52 Competition With the advent of industrialization and mass production, new forms of competition avoidance are developed. The Cartel is a method of collusion involving dividing a market.

53 Competition In the post-Civil War era, the Trust developed as the highest form of anti-competitive organization. The Railroad industry was the first to be controlled by a trust, but eventually there would be dozens of trusts controlling almost all major industries.

54 Competition There are many different forms of trusts, but basically the trust takes advantage of the legal form of the corporation, wherein the ownership of a corporation is expressed in terms of stock. The corporation exists as a separate legal entity. No one owns a corporation, rather you own stock in a corporation. This structure allows the trust to exist.

55 Competition In its simplest form, a trust is a corporation that owns shares of stock in other corporations. This allows formerly competing companies to be controlled by a single trustee, who directs them as if he was running a monopoly.

56 Competition Anti-Trust Law Although states and localities had laws enforcing competition, the federal government maintained a laissez faire approach until 1890.

57 Competition Anti-Trust Law 1890 – Sherman Anti-Trust Act Collusive Oligopolies deemed to be in restraint of trade shall be illegal

58 Competition Anti-Trust Law 1890 – Sherman Anti-Trust Act Collusive Oligopolies deemed to be in restraint of trade shall be illegal The Sherman Act left open avenues for non- competitive behavior, including price- discrimination and interlocking directorates.

59 Competition Anti-Trust Law 1890 – Sherman Anti-Trust Act Clayton Amendment

60 Competition Anti-Trust Law 1890 – Sherman Anti-Trust Act Clayton Amendment The Clayton amendment closed loopholes in the Sherman act and specifically forbade price discrimination, interlocking directorates, and the use of the Sherman act to enjoin labor union activities.

61 Competition Anti-Trust Law 1890 – Sherman Anti-Trust Act Clayton Amendment Federal Trade Commission Act

62 Competition Anti-Trust Law 1890 – Sherman Anti-Trust Act Clayton Amendment Federal Trade Commission Act Passed as a companion to the Clayton act. Created the FTC and gave it authority to investigate, prosecute, and levy penalties in anti-trust cases.

63 Competition Anti-Trust Law 1890 – Sherman Anti-Trust Act Clayton Amendment Federal Trade Commission Act 1936 –Robinson-Patman Act

64 Competition Anti-Trust Law 1890 – Sherman Anti-Trust Act Clayton Amendment Federal Trade Commission Act 1936 –Robinson-Patman Act -Made price discrimination illegal at the producer level, as well as at the consumer level.

65 Competition Anti-Trust Law 1890 – Sherman Anti-Trust Act Clayton Amendment Federal Trade Commission Act 1936 –Robinson-Patman Act 1950-Celler-Kefauver Anti-Merger Act

66 Competition Anti-Trust Law 1890 – Sherman Anti-Trust Act Clayton Amendment Federal Trade Commission Act 1936 –Robinson-Patman Act 1950-Celler-Kefauver Anti-Merger Act Forbade mergers that would …substantially lessen competition or tend to create a monopoly

67 Business Firm Organization and Competition Of all the different businesses in our system, there are three basic forms of organization. These different forms are defined according to how their ownership is expressed. Each of the three has its own set of advantages and disadvantages.

68 Business Firm Organization and Competition The simplest form of business organization is the Sole Proprietorship. A Sole Proprietorship is a business firm that is wholly owned by one person. Most Common Form (74%) Earns the smallest share of revenue (11%)

69 Business Firm Organization and Competition Advantages of the Proprietorship 1.Easiest form to organize or to dissolve.

70 Business Firm Organization and Competition Advantages of the Proprietorship 1.Easiest form to organize or to dissolve. 2.No division of responsibility.(Be your own boss)

71 Business Firm Organization and Competition Advantages of the Proprietorship 1.Easiest form to organize or to dissolve. 2.No division of responsibility.(Be your own boss) 3.No division of profits.

72 Business Firm Organization and Competition Disdvantages of the Proprietorship 1.No Division of Responsibility.

73 Business Firm Organization and Competition Disdvantages of the Proprietorship 1.No Division of Responsibility. 2.Limited Life

74 Business Firm Organization and Competition Disdvantages of the Proprietorship 1.No Division of Responsibility. 2.Limited Life 3.Unlimited Liability.

75 Business Firm Organization and Competition Disdvantages of the Proprietorship 1.No Division of Responsibility. 2.Limited Life. 3.Unlimited Liability. 4.Limited sources for funding.

76 Business Firm Organization and Competition Partnership A Partnership is a business firm that is wholly owned by two or more people. Least Common Form (9%) Earns more revenue than proprietorships (16%)

77 Business Firm Organization and Competition Advantages of the Partnership 1.Division of responsibility.

78 Business Firm Organization and Competition Advantages of the Partnership 1.Division of responsibility 2.Multiplication of sources for funds.

79 Business Firm Organization and Competition Disdvantages of the Partnership 1.Division of Responsibility.

80 Business Firm Organization and Competition Disdvantages of the Partnership 1.Division of Responsibility. 2.Moderately Difficult to Organize.

81 Business Firm Organization and Competition Disdvantages of the Partnership 1.Division of Responsibility. 2.Moderately Difficult to Organize. 3.Division of Profits.

82 Business Firm Organization and Competition Disdvantages of the Partnership 1.Division of Responsibility. 2.Moderately Difficult to Organize. 3.Division of Profits. 4.Limited Life.

83 Business Firm Organization and Competition Disdvantages of the Partnership 1.Division of Responsibility. 2.Moderately Difficult to Organize. 3.Division of Profits. 4.Limited Life. 5.Unlimited Liability.

84 Business Firm Organization and Competition Disdvantages of the Partnership 1.Division of Responsibility. 2.Moderately Difficult to Organize. 3.Division of Profits. 4.Limited Life. 5.Unlimited Liability. 6.Still limited sources for funding.

85 Business Firm Organization and Competition Corporation A corporation is a business firm whose ownership is expressed in terms of shares of stock. 17% of three main types of businesses Earns largest share of revenue of three main types (72%)

86 Business Firm Organization and Competition Corporation A corporation is a business firm whose ownership is expressed in terms of shares of stock. 17% of three main types of businesses Earns largest share of revenue of three main types (72%)

87 Business Firm Organization and Competition Corporation Shareholders do not own a corporation, rather they own stock in a corporation. Corporations must be chartered by the government of the State where their operations are based. The corporation is a separate legal entity from its shareholders. It is considered an artificial person.

88 Business Firm Organization and Competition Corporation Shareholders do not own a corporation, but they direct its actions through voting rights. Most stock carries one vote per share towards a Board of Directors.

89 Business Firm Organization and Competition Stockholders vote for a Board of Directors

90 Business Firm Organization and Competition Stockholders vote for a Board of Directors The Board of Directors select (hire) Officers.

91 Business Firm Organization and Competition Stockholders vote for a Board of Directors The Board of Directors select (hire) Officers. Who oversee the day-to-day operations.

92 Business Firm Organization and Competition Stockholders vote for a Board of Directors The Board of Directors select (hire) Officers. Who oversee the day-to-day operations. In order to earn profits

93 Business Firm Organization and Competition Stockholders vote for a Board of Directors The Board of Directors select (hire) Officers. Who oversee the day-to-day operations. In order to earn profits Which are paid out to the stockholders as dividends.

94 Business Firm Organization and Competition Advantages of the Corporation 1.Limited Liability

95 Business Firm Organization and Competition Advantages of the Corporation 1.Limited Liability 2.Unlimited Life (and Ease of Transfer)

96 Business Firm Organization and Competition Advantages of the Corporation 1.Limited Liability 2.Unlimited Life (and Ease of Transfer) 3.Tax Advantages

97 Business Firm Organization and Competition Advantages of the Corporation 1.Limited Liability 2.Unlimited Life (and Ease of Transfer) 3.Tax Advantages 4.Two new sources for funding

98 Business Firm Organization and Competition Two new sources for Funding 1. Stock -selling equity 2. Bonds – issuing debt

99 Business Firm Organization and Competition 1.Stock -selling equity Equity means ownership When you sell stock, you are giving away part of the ownership, or control of your company. The buyer does not gain any real property but they gain voting rights towards the management of your company.

100 Business Firm Organization and Competition 1.Stock -selling equity Stock can be common or preferred. Common Stock has voting rights, but is last in line to claim assets. Preferred Stock is first in line for payment, but usually has no voting rights.

101 Business Firm Organization and Competition Sales of stock require the approval of the Securities and Exchange Commission (SEC), a Federal regulatory agency. Stock may be sold on an exchange where the company is listed and brokers who have the right to represent customers can arrange sales and purchases. It can also be sold on the over-the-counter (OTC) market, where sales are made directly from owner to buyer. Brokers who are members of NASDAQ (National Association of Securities Dealers Automated Quotation System) facilitate these trades.

102 Business Firm Organization and Competition 2. Bonds – issuing debt Sale of bonds is also regulated by the SEC. Bonds are essentially IOUs. Two main types: Coupon Bonds - $1000 face value, ten year term, simple interest paid annually Zero-Coupon Bonds - Sold at discount, ten year term, accrues compound interest monthly until face value is reached.

103 Business Firm Organization and Competition Disadvantages of the Corporation 1.Most difficult to organize or dissolve

104 Business Firm Organization and Competition Disadvantages of the Corporation 1.Most difficult to organize or dissolve 2.Separation of ownership and control

105 Business Firm Organization and Competition Disadvantages of the Corporation 1.Most difficult to organize or dissolve 2.Separation of ownership and control 3.Double Taxation

106 Business Firm Organization and Competition Disadvantages of the Corporation 1.Most difficult to organize or dissolve 2.Separation of ownership and control 3.Double Taxation 4.Greatest potential division of profits

107 Business Firm Organization and Competition Special Cases 1.Cooperatives An association of individuals who join together to perform a business function. a)Producer Co-ops b)Consumer Co-ops

108 Business Firm Organization and Competition Special Cases 1. Cooperatives a)Producer Co-ops b)Consumer Co-ops 2. Non-Profit Corporation

109 Business Firm Organization and Competition Special Cases 1. Cooperatives a)Producer Co-ops b)Consumer Co-ops 2. Non-Profit Corporation 3. S corporation

110 Business Firm Organization and Competition Special Cases 1. Cooperatives a)Producer Co-ops b)Consumer Co-ops 2. Non-Profit Corporation 3. S corporation 4. Limited Partnership

111 Business Firm Organization and Competition Special Cases 1. Cooperatives a)Producer Co-ops b)Consumer Co-ops 2. Non-Profit Corporation 3. S corporation 4. Limited Partnership 5. Limited Liability Company (LLC)


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