Competition and monopolies Chapter 9

Market Structure The extent to which competition prevails in particular markets. There are four market structures in the American economy. Perfect competition, monopolistic competition, oligopoly, and monopoly Pg 232

Perfect Competition Market situation in which there are numerous buyers and sellers, and no single buyer or seller can affect price There are many farmers selling corn, and there are many buyers such as other farmers, ethanol plants, and other edible and non-edible markets

Pure Competition 1. A large market – numerous buys and sellers must exist for the product 2. A nearly identical product – the goods or services being sold must be nearly the same 3. Easy entry and exit – sellers already in the market cannot prevent competition, or entrance into the market. In addition, the initial costs of investment are small, and the good or service is easy to learn to produce 4. Easily obtainable information – Information about prices, quality, and sources of supply is easy for both buys and sellers to obtain 5. Independence – the possibility of sellers or buyers working together to control the price is almost nonexistent

What makes perfect competition hard? The internet Globalization The automobile, railroad, and other transportation advances Small towns, cities

Perfect competition is good for society Low prices No huge profits for sellers and consumers are only paying for what went into the production. Land, labor, capital, entrepreneurship. Agriculture is a good example, maybe the closest we have…

Imperfect competition Monopoly – a market situation in which a single supplier makes up an entire industry for a good or service with no close substitutes Do not have to worry about raising prices (somewhat), losing business, or decreasing quality (somewhat) because there is no other person selling that product, service, or good. Why can’t other sellers get into business?

Barriers to Entry Obstacles to competition that prevent others from entering a market. State laws, excessive start up costs, ect… Economies of scale – low production costs resulting from the large size of output

4 Types of Monopolies Natural monopolies – government grants exclusive rights to companies such as cable, bus service, utilities. Similar to …. Government monopolies – held by government itself. Postal service, maintenance and construction contractors

4 Types of Monopolies Geographic monopolies – rural. One business is enough so other competitors do not try to enter the market and compete. Why are there fewer geographic monopolies now?? Technology monopolies – government grants a PATENT for exclusive right to make, use, or sell an invention for a specified number of years. Government can also offer a COPYRIGHT which is exclusive right to sell, publish, or reproduce creative works for a specified number of years. Why don’t these last as long as the patent or copyright?????

Monopolies John D. Rockefeller – Standard Oil Andrew Carnegie – U.S. Steel - Videos De Beers – Diamonds Bill Gates and Microsoft – Computer software Monsanto – Agriculture Seed (Roundup Ready) (extremely interesting)

Monopolies

Oligopoly Industry dominated by a few suppliers who exercise some control over price

Oligopoly Not as harmful as a monopoly, but not as good as perfect competition Consumers pay more than a pure competition market, but not as much as a monopolistic market Product differentiation – manufacturers’ use of minor differences in quality and features to try to differentiate between similar goods and services Read Product differentiation on pg 240

Oligopoly Whatever one firm does, the other is likely to follow Airlines, gas stations, ??? Although this is initially good for consumers, with so few businesses in the market, one could drop out and raise prices in the long run Cartel – arrangement among groups of industrial businesses to reduce international competition by controlling the price, production, and distribution of goods OIL

Oligopoly Cartel is type of collusion which is illegal This is because they are seeking monopolistic control AT&T, Verizon, T-Mobile, Sprint-Nextel are an example of a oligopoly in wireless phone sales Boeing and Airbus have a duopoly in the airliner market

Monopolistic Competition Market situation in which a large number of sellers offer similar but slightly different products and in which each has some control over price Advertising is huge in a monopolistic competition “Name Brands” - expensive but quality Kellogg, Malt-O-Meal; Nike, Starter; GM, Ford, Dodge

Government Policies Toward Competition Read the Issues in the News on pg 245 Interlocking directorates – a board of directors, the majority of whose members also serve as the board of directors of a competing corporation John D. Rockefeller. Read pg 246

Antitrust legislation Federal and state laws passed to prevent new monopolies from forming and to break up those that already exist Sherman Antitrust Act in 1890 – Famous law trying to weaken Rockefeller, Carnegie, and Vanderbilt This is called trust busting - Video

Big Business Merger – the legal combination of two or more companies that become one corporation Horizontal and Vertical - monopoly and tickle

Conglomerate Large corporation made up of smaller corporations dealing in unrelated businesses Food, clothing, shampoo, farming, …. Proctor & Gamble Pg 247 has good visual examples

Government Regulation Meat industry, car industry, airliner industry, Food and Drug Act 1906, Progressive Era and the New Deal Deregulation – reduction of government regulation and control over business activity 1980s and 1990s – conservative movement and Reaganomics – reduce government regulation, reduce government spending, reduce taxes, control money supply to reduce inflation Read pages 248 and 249 and tell me what you think