1. Competition and Monopolies
Chapter 9
Competition and Monopolies

2. Chapter 9 Section 1
Perfect Competition

3. 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.

4. 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

5. 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.

6. 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.

7. 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.

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

9. 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

10. 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

11. 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.

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

13. 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.

14. 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.

15. 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)

16. 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.

17. 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

18. 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.

19. 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.

20. 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.

21. 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

22. 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.

23. 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.

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

25. 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.

26. 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.

27. 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

28. 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.

29. 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.