Competition and Monopolies Chapter 9 Competition and Monopolies

Chapter 9 Section 1 Perfect Competition

Market Structure Market Structure: the extent to which competition prevails in particular markets Market structures are a way to categorize businesses by the amount of competition they face. Four basic market structures in the American economy are: perfect competition, monopolistic competition, oligopoly, and monopoly.

Conditions of Perfect Competition Perfect Competition: market situation in which there are numerous buyers and sellers, and no single buyer or seller can affect price

Conditions of Perfect Competition For perfect, or pure, competition to take place five conditions must be met: A Large Market: Numerous buyers and sellers must exist for the product. A Similar Product: The good or service being sold must be nearly identical Easy Entry and Exit: Sellers already in the market cannot prevent competition or entrance into the market. Easily Obtainable Information: Information about prices should be easily obtainable. Independence: The possibility of seller or buyers working together to control the price is almost nonexistent.

Agriculture as an Example The agriculture market is close to a perfectly competitive industry. No single farmer has control over price. Supply and demand determine price. Individual farmers have to accept the market price. Demand for agriculture is unique and inelastic.

Benefits to Society Price will drop to a level that benefits both consumer and entrepreneur. Economically efficient Resources are used in the most productive manner.

Monopoly, Oligopoly, Monopolistic Competition Chapter 9 Section 2 Monopoly, Oligopoly, Monopolistic Competition

Imperfect Competiton Most industries are a form of imperfect competition. There are 3 types of imperfect competition that differ in how much competition and control over price the seller has. These 3 types are: Monopoly Oligopoly Monopolistic

Monopoly Monopoly: market situation in which a single supplier makes up an entire industry for a good of service with no close substitutes Characteristics of Monopoly A Single Seller No Substitutes No Entry Almost Complete Control of Market Prices

Monopoly Barriers to Entry: obstacles to competition that prevent others from entering a market Potential barriers include: Laws preventing competing businesses from operating in an area where a company already provides services. The cost of starting a business, or excessive money capital costs, can prevent entry to the market. Ownership of raw materials can be a barrier.

Monopoly There are 4 types of pure Monopolies Natural Geographic Technological Government

Natural Monopolies Natural monopolies are providers of utilities, bus services, cable. They have economies of scale, producing the largest amount for the lowest cost. Economies of Scale: low production costs resulting from the large size of output Government has begun making moves to deregulate and allow more competition.

Geographic Monopolies Geographic monopolies are created due to geographic barriers for competition. Because the potential profits are so small, other businesses choose not to enter. These types of monopolies are declining, however, as competition arises from mail-order and Internet catalogs and delivery services.

Technological Monopolies Technological monopolies are the result of inventions that are patented and copyrighted. Patent: exclusive right to make, use, or sell an invention for a specified number of years (usually 20) Copyright: exclusive right to sell, publish, or reproduce creative works for a specified number of years (usually 70 years after the author dies)

Government Monopolies Government monopolies are similar to natural monopolies but held by the government The construction and maintenance of roads and bridges are the responsibility of local, state, and national government.

Oligopoly Oligopoly: industry dominated by a few suppliers who exercise some control over price Conditions of Oligopoly Domination by a Few Sellers Barriers to Entry Identical or Slightly Different Products Nonprice Competition Interdependence

Oligopoly Product Differentiation: manufacturers’ use of minor differences in quality and feature to try to differentiate between similar goods and services Competition is not based on price but product differentiation is based on consumer perception of the value of one over the other.

Oligopoly Interdependent Behavior With so few firms in an oligopoly, whatever one does the other are sure to follow. When one airline drops airfares, the others will follow and a price war ensues. This price war is good for consumers until an airline goes out of business and less competition forces higher prices.

Oligopoly Cartel: arrangement among groups of industrial businesses to reduce international competition by controlling the price, production, and distribution of goods Cartels collude to keep prices high for various products.

Monopolistic Competition Monopolistic Competition: market situation in which a large number of seller offer similar but slight different products and in which each has some control over price Conditions of Monopolistic Competition Numerous Sellers Relatively Easy Entry Differentiated Products Nonprice Competition Some Control Over Price

Monopolistic Competition Monopolistic Competition is the most common form of market structure in the US. Examples include brand-name items such as toothpaste, cosmetics, and designer clothes. Many of the characteristics of monopolistic competition are the same as those of an oligopoly but with a major difference in the number of sellers.

Monopolistic Competition Advertising Advertising tries to convince consumers of the superiority of a given product. Successful advertising enables companies to charge more than the market price for a product.

Government Polices Toward Competition Chapter 9 Section 3 Government Polices Toward Competition

Antitrust Legislation John D. Rockefeller monopolized the oil industry by creating interlocking directorates and putting Standard Oil people on boards of the competition. Interlocking Directorate: a board of directors, the majority of whose member also serve as the board of directors of a competing corporation Because the same group controlled both companies, it was less tempting for them to compete with one another.

Antitrust Legislation Sherman Antitrust Act Antitrust legislation preventing new monopolies or trusts from forming and broke up existing ones. Antitrust Legislation: federal and state laws passed to prevent new monopolies from forming and to break up those that already exist Clayton Act Sought to clarify the laws in Sherman Antitrust Act by prohibiting or limiting a specific number of business practices.

Mergers Most antirust legislation deals with restricting the harmful effects of mergers. Merger: a combined company that results when one corporation buys more than half the stock of another corporation and, this, controls the second corporation

Mergers There are 3 types of mergers Horizontal Vertical Conglomerate The merging of two corporations in the same business. Vertical The merging of two corporations in the same chain of supply. Conglomerate The merging of two corporations involved in at least four or more unrelated businesses.

Regulatory Agencies Government makes laws regarding business pricing and product quality and uses regulatory agencies to oversee that various industries and services obey these laws. Deregulation is when the government removes its regulations to increase competition. It was found that in trying to protect consumers from unfair practices, government regulations had actually decreased the amount of competition in the economy.