Competition and Market Structures

Perfect Competition

Market Structure  Characterized by the degree of competition among business in the same industry  Types of Competition:  Pure Competition  Monopolistic Competition  Oligopoly  Monopoly

Perfect (Pure) Competition  When a large number of buyers and sellers exchange identical products under five conditions 1) There should be a large number of buyers and sellers 2) The products should be identical 3) Buyers and sellers should act independently 4) Buyers and sellers should be well-informed 5) Buyers and sellers should be free to enter, conduct, or get out of business

Perfect Competition  Under a Perfect Competition  Supply and demand set the equilibrium price  Each firms sets a level of output that will maximize its profits at that price  Imperfect Competition  Refers to market structures that lack one or more of the five conditions

Monopolistic Competition  Meets all conditions of perfect competition except for identical products  Use product differentiation  Real or imagined differences between competing products in the same industry  Use non-price competition  Advertising, giveaways, promotional campaigns  Sell within a narrow price range to try to raise the price = profit maximization

Oligopoly  A few large businesses dominate an industry  When one business makes a move, the others usually follow  Ex: a price war…cuts in airline ticket  Sometimes results in collusion or price- fixing which is illegal  Collusion: formal agreement to set prices  Price-Fixing: charge the same

Monopoly  One seller of a product that has no close substitutes  Natural Monopoly  Geographic Monopoly  Technological Monopoly  Government Monopoly

Natural Monopoly  More efficient for only one business to produce the goods  Ex: Marta, Water co.  Government gives permission

Geographic Monopoly  No other business chooses to compete in that area  Ex: small town drugstore  Professional sports teams

Technological Monopoly  Results from new discoveries and inventions.  The government grants these monopolies through the issue of patents and copyrights  Patents: inventions  Copyrights: publish

Government Monopoly  Involves products people need that private industry might not adequately provide

Vocabulary 1. Perfect competition 2. Non-price competition 3. Oligopoly 4. Collusion 5. Economies of scale A. Market structure in which a few very large sellers dominate the industry B. Market situation in which a large number of well-informed and independent buyers and sellers exchange identical products C. The use of advertising, giveaways, and other promotional campaigns to convince buyers one product is better than another D. A situation in which the average cost of production fails as the firm gets larger E. A formal agreement to set prices or to otherwise behave in a cooperative manner

Market Failures

► Four conditions needed ► Adequate competition must exist ► Buyers and sellers must be well-informed; opportunities in the market ► Resources must be free to move from one industry to another ► Prices must reasonably reflect the cost of production, including rewards ► Failure occurs when these are altered

Inadequate Competition  Decrease of mergers and acquisitions  Inefficient resource allocation = no incentive to use resources carefully  Reduced output = monopoly can retain high prices by limiting supply  Large business can exert its economic power over politics

Inadequate Competition  Failures on the Demand side are harder to correct than failures on the Supply side  Supply side:  No competition exists if a monopolist dominates  Demand Side  Buyers can be found but….how many want hydroelectric dams, space shuttles, etc…

Inadequate Information  Consumers, businesspeople, and government officials must have adequate information about market conditions  Information  Easy to find in want ads, sale prices in newspaper  If difficult to find = market failure

Resource Immobility  Occurs when land, capital, labor, and entrepreneurs stay with in a market  Returns are slow  Remain unemployed  Resources will not or cannot move to a better market  The existing market does not always function efficiently

Externalities  Unintended side effects  Negative  Harm, cost, or inconveniences suffered by a third party  Positive  Benefits received by someone who had nothing to do with the activity that created the benefit  Market failures  Market prices that buyers and sellers pay do not reflect the cost and/or benefits of the action

Public Goods  Products that everyone consumes  Use by one individual does not diminish the satisfaction or value to others  Uncrowded highways, flood control measures, national defense, police and fire protection  Market is successful in satisfying individual wants and needs; fails to satisfy them on a collective basis  Government usually has to supply them

Vocabulary Review 1. Market failure 2. Externality 3. Negative externality 4. Positive externality 5. Public goods A. An unintended side effect that either benefits or harms an uninvolved third party B. An unwanted harm, cost, or inconvenience suffered by a third party because of actions by others C. Products that are collectively consumed by everyone D. A benefit received by third party that had nothing to do with the activity that generated the benefit E. Occurs when any one of the four conditions necessary for a competitive free enterprise economy is significantly altered

The Role of Government

Antitrust Legislation  Trust: legally formed combinations of corporations or companies  Antitrust laws prevent or break up monopolies, preventing failures due to inadequate competition

Federal Trade Commission  Competition in the market is protected by the government through antitrust legislation and the creation of the Federal Trade Commission.  Federal Trade Commission: has the authority to stop any unfair business practices that reduce or limit competition

Antitrust Legislation  1890: Sherman Antitrust Act:1 st law against monopolies  1914: Clayton Antitrust Act: outlawed price discrimination  1914: The Federal Trade Commission: empowered to issues cease and desist orders, requiring companies to stop unfair business practices  1936: Robinson-Patman Act: outlawed special discounts to some customers

Government Regulation  Goal is to set the same level price and service that would exist if a monopolistic business existed under competition  Use: tax system to regulate businesses with negative externalities  Prevents market failures

Public Disclosure  Requires businesses to reveal information about  Products  Services to Public:  Banks, corporations, lending institutions  Provides information to prevent market failures  “Truth in Advertising” laws (false claims)

Indirect Disclosure  Government support of the internet  Availability of Gov’t documents  Businesses post information

Modified Free Enterprise  Government intervention to encourage  competition,  Prevent monopolies  Regulate industry  Fulfill the need for public goods

Modified Free Enterprise  Today’s US Economy  Mixed of different market structures  Different business organization  Varying degrees of government regulation

Vocabulary Review 1. Trust 2. Clayton Antitrust Act 3. Price Discrimination 4. Robinson-Patman Act 5. Cease and desist order A. Strengthened previous legislation regarding price discrimination B. Built on Sherman Antitrust Act by extending government powers against monopolies C. An FTC ruling requiring a company to stop an unfair business practice D. Legally formed combinations of corporations or companies E. Practice of charging customers different prices for the same product