1. Competition and Monopolies
Chapter 7

2. Competition and Market Structures
Chapter 7 Section 1
Competition and Market Structures
1700’s – Laissez – faire economics introduced (limited government)
Market structure – the nature and degree of competition among firms doing business in the same industry
4 Major Market Structures
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly

3. Perfect Competition
Market structured characterized by a large number of well informed independent buyers and sellers who exchange identical products.
Theoretical situation (no need to advertise)
Conditions necessary:
Large number of buyers and sellers
Identical products
Buyers and sellers act independently
Well informed
free to enter, conduct or get out of business
Ex. – perfect competiton rarely exist – “farmer’s market” is the closest example

4. Price will drop to a level that will benefit consumer and suppliers
Perfect Competition
Benefits for society:
Price will drop to a level that will benefit consumer and suppliers
Economic Efficiency
Resources are used in most productive manner
No need to advertise – which keeps cost low for consumers

5. Imperfect Competition
Most Industries are a form of imperfect competition. They lack one or more of the necessary conditions of a perfect competition.
There are three types of imperfect competitions:
Monopoly
Oligopoly
Monopolistic Competition

6. Monopolistic Competition
Market structure that has all conditions of perfect competition except for identical products
Product Differentiation
Real or perceived differences between competing products
Nonprice Competition
The use of advertising, giveaways or other promotions to convince buyers to purchase their products
Advertising tries to convince consumers of the superiority of given product, enabling companies to charge more than market price for product

7. Oligopoly
A market structure in which a few large sellers dominate the industry – further from perfect competition than monopolistic competition
All companies are interdependent; change in one will affect the others
Competition is not solely based on price but product differentiation (service, convenience, new feature, etc.)
Collusion – formal agreement to set specific prices (sellers cooperate on price they charge. A.k.a. – price-fixing (illegal)
Inter dependence can lead to price wars or illegal act of “teaming up” to raise prices – (ex. –cartels)
Best examples – Airline industry; fast food; automobile

8. Monopoly Most extreme form of imperfect competition
Single seller controls the supply and price of product (ex. – closest example - local cable companies)
No entry: a competitor cannot enter the market due to government regulation, large initial investment, or ownership of raw materials
Almost complete control of market price
Can raise prices with no fear of competition
4 Major Types of Monopolies:
Natural Monopolies – cost of production is minimized by having a single firm produce the product
providers of telephone lines, cable T.V. (economies of scale)
Geography Monopolies – are created due to geographic barriers for competition (very small town – only one gas station) ex. Wesco?
Technological Monopolies – are results of inventions that are patented and copyrighted
Government Monopolies – similar to natural monopolies but held by government – water supply, weapons-grade uranium

9. Market Structures

10. Chapter 7 Section 2
Market Failures
Market Failures – occurs whenever one of the conditions necessary for competitive markets does not exist
Inadequate Competition
Mergers and acquisitions
Legal monopolies are highly regulated by government

11. Inadequate Information
Knowledge of a product is essential for both buyers and sellers
Resource Immobility
Resources, capital, human labor do not mobilize to highest profit areas
Natural disasters
Public Goods
Public Goods – collectively consumed by all people
National security, highways
No market pressure to create more or less (legislation)
Externalities
Negative externality (noise from expanded airport)
Positive externality (jobs created by extended airport)

12. The Role of Government Maintain Competition Anti-trust Legislation
Chapter 7 Section 3
The Role of Government
Maintain Competition
Anti-trust Legislation
Trust – combination of firms designed to restrict competition or control price
Sherman Antitrust Legislation (1890) – 1st significant law against monopolies
Clayton Act (1914) – outlawed price discrimination
Federal Trade Commission Act – authority to issue cease and desist order

13. Improve Economic Efficiency
Promote transparency
Public disclosure – requirement that businesses reveal certain information to public
(SEC) Securities and Exchange Commission – stock disclosure
Provide public goods
Public goods are not always financially rewarding
Government provides museums, highways, libraries
Modified Free Enterprise
Congress has passed laws that restrict large companies from taking over small companies
Government “interventions” – “Stimulus Package”