19 OligopoliesThere are a few large sellers that control the production of the good or service.There are only a few large sellers.Sellers offer identical or similar products.Other sellers cannot enter the market easily.
20 Oligopolies: Few large sellers A market (industry) is considered an oligopoly when three or four firms control 70% of the market’s total output.
21 Oligopolies: Identical or similar products Each seller has a large share of the overall sales in the market.So much at stake – less likely to take risks.Not offering new products.
22 Oligopolies: Difficult entry and exit in the market New sellers cannot easily enter the market.Big start-up costsGovt. regulationConsumer loyalty to established products
23 Oligopolies at work: legal and efforts to control prices. Nonprice competition to differentiate the products.Efforts of Kelloggs, General Mills, and Post (80% of the market) create numerous brand names to look like they compete.
24 Oligopolies at work: legal means to control price Interdependent Pricing: Base prices on the pricing actions of competitors.Not only similar products – but similar prices.
25 Price leadership The most common form of interdependent pricing. Largest sellers “set” the price of the product and the competitors follow.Control the price of the product.Oligopolies and Monopolies are Price Setters – not price takers as in perfect competition / monopolistic competition.
26 What happens when competing companies don’t follow along in oligopolies? PRICE WAR!
27 Price Wars: Opportunity Benefits: prices can benefit consumer Opportunity Costs: Sellers lose money and if the price war is on for long – might be forced out of the market.Unemployment upEven less competition in the market
28 Oligopolies Dark Side: COLLUSION Sellers secretly agree to set production levels and prices for their products.ILLEGAL!Oligopoly behaves like a monopoly.Higher prices and lower quality for consumer.
29 Oligopolies Dark Side: Cartels Sellers openly organize a system of price setting and market sharing.Illegal in the US.
30 Infamous Cartels De Beers Diamonds OPEC Creates scarcity by buying and stockpiling stones from other producers.OPECBeen to the gas pump lately?
31 The good news about cartels Often unstable and short lived.Greed makes members break ranks and try to sell more.Price wars break out.
32 The ultimate bad guy: Monopolies There is a single sellerNo close substitute goods are availableOther sellers cannot enter the market easilyPrices UP and quality of products DOWN because NO COMPETITION!
33 Types of Monopolies Natural Geographic Technological REMEMBER: Economies of ScaleGeographicTechnologicalPatents: seller gets 17 year monopolyCopyright protects written works and artGovernment: Public goods
34 Monopolies at WorkMonopoly markets have a great deal of control over prices.
35 Three Things Limit Monopoly Control Over Setting Prices Consumer DemandPotential CompetitionGovernment Regulation
36 Market RegulationGovernment was laissez-faire with business until close to the 20th century.
37 The Era of Big Business Rockefeller, Carnegie, JP Morgan- Smaller companies were forced out of business or taken over by bigger businesses.TRUSTS = Big Business
38 Antitrust Legislation – Govt. takes on Big Business Sherman Antitrust Act (1890) said govt. could monitor and regulate big business.Used to break up Standard Oil’s monopoly in 1911.Today the company is called EXXON of EXXON MOBIL.
39 Clayton Antitrust Act(1914) – prohibited specific unfair business practices.Price DiscriminationOffering different prices to different customers under the same circumstances.
40 Federal Trade Commission Since 1914 – the government’s “police” who investigate business.