Prior 1900s - Laissez-faire – “hands off” govt. should not interfere with commerce Change? – Industrial Revolution – some intervention needed Today, Modified Free Enterprise Economy with limited govt. intervention. As a result, markets classified via conditions that prevail – COMP. ?’s: How many buyers & sellers? How large are they? Do either have influence over price? How much comp. b/t firms? Kind of product? Easy or difficult to enter mkt.?
Market structure – depends on nature & degree of comp. in same industry 4 types: Perfect (pure) Comp. (Imperfect Comp.) Monopolistic Comp. Oligopoly Monopoly
- ideal scenario 5 criteria (conditions) 1. lg. # of buyers & sellers w/no real power to influence P 2. identical product 3. b &sellers act independently 4. b & sellers are well informed 5. freedom of entry/exit into the mkt.
Price Taker – market forces set the price of the product Near examples: produce at jockey lot – “truck farming” NaCl
*** Differentiated Products!!!*** (real or imagined) Large market = non-price competition, ADVERTISING -slogans -name-brand recognition / consumer loyalty -packaging As a result, products usually sell w/in a narrow P range. Little control over mkt.
…”if the firm convinces consumers that its product is better, it can charge a higher price. If it cannot, … the firm cannot charge as much.” Ex: toothpaste, toothbrushes, cereal, razors, breakfast bars, jeans, sneakers, etc….
Few very large sellers dominate the industry. Barriers to entry (cost of getting started, advertising costs, patents/copyrights May or may not have a differentiated product. (auto vs. steel) Non-price comp. Name brand recognition ADVERTISING even more imp. here Ex: Pepsi vs. Coke, McD vs. BK vs. Wendy’s, airline industry, package delivery, long distance phone co., etc….
BIG impact on P *Sometimes, collusion – formal agreement to set prices…ex. is price fixing – agreeing to charge the same or similar P for a product. ILLEGAL!!! *Sometimes, price wars occur -.99 menu However, in the long-run, P usually tend to be higher than the other 2 types of comp.
Only one seller/firm Unique product – no substitutes No entry * barriers -cost -legal (utilities) -ownership of raw materials (DeBeers – diamonds)
1. Natural M. – costs are minimized by having one producer 2. Geographic M. – natural course of competition – Location 3. Govt. M. – USPO 4. Technological M. – patents/copyrights
Justifications -economy of scale Problems -denies benefits of competition -misallocation of resources -political power and influence Controls -govt restraints and regulations -consumer resistance
INADEQUATE COMP. (usually the result of mergers/acquisitions) - inefficient use of res. - artificial shortages = higher P - economic & pol. power ex: bus. requests for tax breaks - supply side, possible collusion - demand side, not enough buyers
Inadequate Info. - all parts of the economy must be well- informed – consumers, bus. people, & govt officials; otherwise, possible misallocation of resources Resource Immobility - not using F. of P. to fullest potential - within the PPF ex. when companies close leaving L unemployed
Externalities (unintended side effect that benefits or harms a 3 rd party not involved in the activity it caused) - positive ext. – benefit - negative ext. – harm, cost, or inconvenience therefore, failures occur b/c the costs/ben. aren’t reflected in the mkt. P that buyers/sellers pay for the original product
Public Goods – products that are collectively consumed by everyone ex. Police, Natl Defense - free mkts fail to meet collective needs therefore, govt provides them for us….
Anti-Trust Legislation Sherman Anti-Trust Act – “protect trade & commerce against unlawful restraint & monopoly” 1914 – Clayton Anti-Trust Act – strengthened Sherman Act and outlawed price discrimination 1914 – Federal Trade Commission Act – set up the FTC – gave authority to issue cease and desist order 1936 – Robinson-Patman Act – strengthened Clayton Act, especially price discrimination
Regulation - Fed. Regulatory Agencies – p.180 fig. 7.4 Internalizing Externalities - Govt can tax companies to prevent mkt. failures due to neg. externalities Public Disclosure – requires that bus. reveal info. to public - prevents mkt. failures due to inadeq. information…even “truth in advertising” laws - even indirectly promoted the internet
Thus… MODIFIED FREE ENTERPRISE ECONOMY - encourages comp. - prevents monopolies - regulates monopolies we allow - fulfills needs for public goods