Market Structures [How many sellers in each industry] Competition.

Market Structures [How many sellers in each industry] Competition

Monopoly Oligopoly Technological Monopoly “Patent” Ex: Rubik’s Cube Government Monopoly Owned & operated by G Ex: U.S. Mail State Highways Natural Monopoly Competition would be chaotic. It is natural to give it to one co. Ex: Utilities Geographic Monopoly Only seller in a specific area Example: Remote Store Greyhound Forney High Basic Cable Rate Cable TV WasteManagementTXU U.S. Mail Rubik’s Rubik’sCubeCube Rubik’s Rubik’sCubeCube Monopoly [ mono(1) poly (seller)] Control over price: Total Product: unique Ex: Comcast Cable TV Monopolistic C ompetition [Element of monopoly with “product differentiation”] Many [25-75] sellers Control over price: Some Ex: Blue Jeans “ Price Makers ” Market [buyer & seller]Structures [How many sellers] Oligopoly Oliogo (few) poly (seller) [A few control 70% of market Differentiated O ligopoly Differentiated Products Autos & Sneakers Pure Oligopoly Identical Products (steel) Control over price: Fair Amount Differentiated or Identical Perfect Competition Very many [100s] of sellers Control over price: None Products: Identical (Agricultural & fishery) P erfect C ompetition M ono polistic Competit ion Oligopoly Pure Monopoly Control over Price Most Competitive Mon opolistic Competition Perfect Competition DART Price Taker Blue Jeans Barber Shops Beauty Shops Reebok [undifferentiated] Duopoly

Monopoly – the “power of one” Monopoly [mono(1) poly (seller)] C ontrol over price: Total Product: unique Ex: Comcast Cable TV T echnological M onopoly “Patent” Ex: Rubik’s Cube Government Monopoly Owned & operated by G Ex: U.S. Mail State Highways Natural Monopoly Competition would be chaotic. It is natural to give it to one co. Ex: Utilities Cable TV Geographic Monopoly Only seller in a specific area Example: Remote Store DART “Price Makers” Greyhound Forney High Basic Cable Rate Cable TV WasteManagement TXU U.S.Mail Rubik’sRubik’sCubeCubeRubik’sRubik’sCubeCube DART

The“invisible hand” is omnipotent.

Market Structure Vocabulary

U.S. States Sue Big Music over Price-Fixing price-fixing lawsuit5 major recording labels This price-fixing lawsuit against the 5 major recording labels increased the price of CDs charged that they increased the price of CDs in violation of tens of millions antitrust laws. “Because of these conspiracies, tens of millions of consumers paid inflated prices to buy CDs consumers paid inflated prices to buy CDs of artists including Santana, Whitney Houston, Madonna and Eric Clapton.” The FTC 40 billion estimated that the recording companies policies[$40 billion industry] $480 million more forced U.S. consumers to pay as much as $480 million more than they should have for CDs and other music over the last three years. Auto body shops Auto body shops sued paint companies, including Sherwin-Williams, for fixing prices on paint, primer and fillers. Four major toy manufacturers Four major toy manufacturers (Hasbro, Little Tykes, Mattel, & Toys R’Us) fix pricesToys R’Us were sued for conspiring to fix prices of toys. Toys R’Us was accused illegal agreement of brokering an illegal agreement with toy manufacturers to not sell their most popular productswarehouse clubs their most popular products to the warehouse clubs.

245 ads per day The average child sees 245 ads per day. They 30,000 commercials in 1 year see around 30,000 commercials in 1 year. By age 3 mil. commercials 65, on average, we see 3 mil. commercials, which 3 years of non-stop commercials is like watching 3 years of non-stop commercials. 1.4 1.6 4.0

4 Competition economic rivalry 4 Competition – economic rivalry among businesses. 5 Market Structure degree of competition 5 Market Structure – degree of competition among firms operating in the same market (autos). Perfect C ompetition undifferentiated products 3 Perfect C ompetition – has a very large number of sellers (hundreds or thousands) of the same product (any agriculture or fishery product). They are all selling the same undifferentiated products (oranges).

Four Market Conditions Necessary For Perfect Competition 6Alarge 6A 1. Very large number of sellers (hundreds or thousands). Each seller will have only a small share of the market. B identical B 2. Similar or identical products (sweet corn/brocolli/eggs) which means there is no reason for non-price competition. C Easy C 3. Easy entry and exit into the market. DAbsence D 4. Absence of price controls ( too many sellers & consumers ). Perfect Competition and Price No one firm controls price No one firm controls price. Lowering price would lower profits as consumers would buy similar substitutes. Prices are set by the market rather “price takers.” than by the firms. These firms are “price takers.”

1. Jeans 2. Shampoo 3. Cologne 4. Perfume What Is The Best? 5. Aspirin 6. Razor 7. Gas 8. Ice cream 9. Toothpaste 10. Batteries “perceived” Some of these differences are “perceived” “real”. rather than “real”.

Differentiation may be perceived rather than real differentiation is perceived 250 participantsFour cans of identical beer four different brands of beer interesting result at least one of the beers was unfit for human consumption. [Differentiation may be perceived rather than real] To show that some differentiation is perceived rather than real, blind taste tests on beer were conducted on 250 participants. Four cans of identical beer with different labels were presented to the subjects as four different brands of beer. In the end, all of the subjects believed that the brands of beer were different and that they could tell the difference between them. Another interesting result came out of the taste test – most of the participants commented that at least one of the beers was unfit for human consumption. Tastes Great. Not fit for human consumption Is A Beer A Beer?

20 Monopolistic Competition 25-75 most common market structure 20 Monopolistic Competition – fairly large number (25-75) of sellers competing to sell slightly differentiated products. Product differentiation (real or imaginary) is vital. This is the most common market structure. decrease competition Sellers try to decrease competition by making their products different from the others. Since each firm product unique, attempts to make its product unique, unique “element of monopoly”, unique, there is an “element of monopoly”, monopolistic competition t hus monopolistic competition. Product differentiation Product differentiation, when it is successful, enables “establish a kind of monopoly” a firm to “establish a kind of monopoly” so that loyal customers will prefer it rather than buy from the monopolize a small portion competition. [They try to monopolize a small portion of the market.]

21differentiated 21 Even virtually identical products may be differentiated by brand name, packaging,design by brand name, packaging, or design but they are still similar similar. They have all the conditions of perfect competition “differentiation.” except for product “differentiation.” 22“nonprice” 22 They use “nonprice” methods of competition such as advertisingimproved service advertising and improved service to increase sales. Reputation Reputation is important [builds loyalty]. Most manufactured goods are made by only a few producers.

Market Conditions F or Monopolistic Competition 4 Market Conditions F or Monopolistic Competition 1.25-75 buyers 1.25-75 buyers and sellers must exist. Firms act independently but no single firm is large enough to change the supply or price of a good. similarproduct 2. The products are similar but they emphasize product differentiation differentiation (differences among products). This is the one separates monopolistic competition from perfect thing that separates monopolistic competition from perfect competition competition. differences may be real imaginary The differences may be real or imaginary ( a refrigerator with Aspirin plastic or metal trays). Aspirin, by federal law, has to have certain chemicals but people believe highly advertised aspirin Revlon157 shades of lipstick41pink is better. Revlon offers 157 shades of lipstick – 41 are pink. Buyers must be well informed about differences 3. Buyers must be well informed about differences in products. informative and competitive Monopolistic competitors rely on informative and competitiveadvertising. Easy to enter or exit 4. Easy to enter or exit the industry. Few restrictions exist.

Monopolistic Competition Monopolistic Competition [element of monopoly [differentiation uniqueness] so called monopolistic competition] This is the most common market structure – over 99% of all firms. Examples of Monopolistic Competition Blue JeansGrocery StoresCandy Bars Dry CleanersRock ConcertsPizza Shoe StoresCassette playersChicken ToothpasteBook StoresSoaps and detergents RestaurantsVacuum CleanersFurniture Stores BarbershopsBeauty ParlorsEcon Textbook Co’s “Econ,Econ” “Econ”

Other Monopolistic Competition Examples Janitorial ServicesPest Control Air ConditioningAlcohol Treatment Centers Auto DealersCarpet Cleaning KarateFingernail Saloons Body ShopsUpholstery Cleaners Pet ShopsTire Companies Electrical ContractorsMasonry Contractors Window CleanersDry Wall Contractors DermatologistsParty Suppliers Copying Dog Grooming LocksmithsAccountants

Monopolistic Competition and Price 23 some control differentiationcreates buyer loyalty Non-price competition increase is too much buyers will switch Monopolistic Competition and Price 23 There is some control over price because differentiation creates buyer loyalty [jeans]. Non-price competition is used to control price. Developing brand name loyalty will enable a firm to marginally increase price without losing customers. If the increase is too much, buyers will switch to a competitor’s product. The “Real World” “real world” The “real world” of competition involves monopolistic competition99% monopolistic competition & oligopolies. Over 99% monopolistic competitors of all firms are monopolistic competitors. However, few thousand oligopolies a few thousand oligopolies produce most of the products in the U.S. So, our big firms are oligopolists smaller firms are monopolistic competitors and our smaller firms are monopolistic competitors.

Monopolistic Competition Cost Curves Monopolistic Competition Cost Curves [ Like beauty, product differentiation is in the eye of the beholder] [“One turkey farmer tries to convince you that his naked turkeys are better than someone else’s naked turkeys.”] What are you really buying when you go to a fancy restaurant? Surely not just a meal. Undoubtedly, you’ll order something on Big Maclarge fries a somewhat higher culinary plane than a Big Mac, a large fries, Cokeworth $80 and a Coke, but is that meal worth $80? It is when it is served waiter with a phony French Accentflowers on by a waiter with a phony French Accent, there are flowers on the tablenice linen table clothcandlelightsoft music the table, a nice linen table cloth, candlelight, soft music, a solicitous maitre d’restored 17 th solicitous maitre d’, and the restaurant is a restored 17 th century carriage house century carriage house.

D MR P1P1P1P1 ATC Price and Costs Q1Q1Q1Q1 Short-RunEconomicProfits Expect New Competitors in this industry. PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Quantity A1A1A1A1 MCMCMCMC “Yippee, an economic profit, good times ahead.” Profits are above costs

D MR P1P1P1P1 ATC Price and Costs Q1Q1Q1Q1 Short-RunEconomicProfits Expect New Competitors PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Quantity A1A1A1A1 MCMCMCMC “Yippee, an economic profit, good times ahead.” Profits are above costs New competition drives down the price level – leading to economic losses in the short run.

D MR MC P2P2P2P2 ATC Price and Costs Q2Q2Q2Q2 Short-RunEconomicLosses PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Quantity A2A2A2A2 Going out of business sale “I’ve got to stay upbeat, even though it is a SR economic loss.” Costs exceed the profits Many firms exit the industry

D MR MC P2P2P2P2 ATC Price and Costs Q2Q2Q2Q2 Short-RunEconomicLosses PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Quantity A2A2A2A2 Going out of business sale “I’ve got to stay upbeat, even though it is a SR economic loss.” Costs exceed the profits With economic losses, firms will exit the market – Stability occurs when economic profits are zero

D MR MC P 3 = A 3 ATC Price and Costs Q3Q3Q3Q3 PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Quantity Long-Run Equilibrium NormalProfitOnly

Oligopoly “the chosen few” 24 Oligopoly – “the chosen few” (3 or 4) firms control 70% of the market. Monopoly Monopoly – 1 firm industry (Cable TV) Duopoly Duopoly – 2 firm industry. (Coke & Pepsi) [P&G (47%) & Kim-Clark (30%) in diapers] “Oligo” “Oligo” – few in an industry. (“Big 3 or 4” or even “Big 5 or 6”) Two Types of Oligopolies Pure 25 Pure (Undifferentiated) Oligopoly – 3 or 4 producers identical product dominate the production of an identical product (steel, zinc, copper, aluminum, lead, cement, industrial alcohol) Differentiated Differentiated Oligopoly – 3 or 4 producers dominate the differentiated (similar) products production of differentiated (similar) products. [typewriters, tires, soap, cigarettes, refrigerators, cereals, TVs & autos]

Duopoly Duopoly – when 2 firms dominate an industry. Coke Classic 1. Coke Classic 2. Pepsi Cola 3. Diet Coke 4. Mountain Dew 5. Diet Pepsi Coke products have 43 % of the market and Pepsi products have 32 %. Pepsi’s first commercial in 1939 became so popular, it became a hit record and was played in jukeboxes. A 12-ounce bottle sold For a nickel. Here it is. 6. Sprite 7. Dr. Pepper 8. Caffeine Free Diet Coke 9. Diet Dr Pepper 10. Sierra Mist

Oligopoly Examples Oligopoly Examples Autos Autos – “Big 3” – GM, Ford, Daimler-Chrysler-Benz Athletic Shoes Athletic Shoes–“Big 4”– Nike, Reebok, N ew B alance, Adidas, [Nike made $10 billion in 2004] Beer Beer – “Big 3” – A nheuser- B usch, Miller, & Coors Cereals Cereals – “Big 3” – Q uaker Oats, General Mills, & Kelloggs TV Networks TV Networks – “Big 4” – NBC, CBS, ABC & Fox There are also oligopolies in chewing gum, light bulbs, typewriters, photocopiers, and sewing machines. Shox Shox is Nike’s latest hot seller. I t is modeled on a 10,000 year old sandal discovered in an Oregon cave. Market Share of Phone Sales Nokia 34% Siemens 7% Motorola 16% L.G.T elecom 7% Samsung 11% Sony 6% Big 3 Subscribers[mil.] CingularWireless VerizonWireless SprintNextel 51.6 M 47.4 M 40.4 M

Four Market Conditions For Oligopolies few sellers control over 70% identical or differentiated Advertising Product informationeasily available informative advertisement huge barriers to entry three major barrierstechnological knowledge, money, & brand name loyalty $3 billion subcompacts Entrydifficultpatents Four Market Conditions For Oligopolies 1. A few sellers control over 70% of market. 2. Firms offer identical or differentiated products (real or imaginary). Advertising important. 3. Product information must be easily available. They use informative advertisement (price, quality, and special features) to introduce new products. 4. There are huge barriers to entry into the industry. The three major barriers are technological knowledge, money, & brand name loyalty. In 1980, it cost Ford $3 billion to equip a factory that would produce two new subcompacts. Entry is difficult because many have patents or own essential raw materials. This makes it difficult for new firms to try to compete. Oligopoly and Price control price to some degreecreating Oligopolies control price to some degree by creating brand name loyaltynon-price competition brand name loyalty and using non-price competition.

Collusion formal price agreement 27 Collusion – a formal price agreement among competitors. illegal This is illegal because it presents a danger to free competition. email illegal Even one email from one manager to another is illegal. Price Leadership one firmlargest 26 Price Leadership – when one firm, usually the largest most powerfuloffers a new product and most powerful in the industry, offers a new product at a certain price certain price. The others then follow because they fear a price war or because they would be better off financially by doing so. “follow the leader”. In other words, oligopolists play the game, “follow the leader”. legalunlike collusion Price leadership is legal (unlike collusion) because it does not involve any agreement among competitors. If the competition does not follow the leader’s price, the leading firm may be forced to change its price and fall in line with the prices of the competition.

OLIGOPOLY BEHAVIOR A Game-Theory Overview HighLow HighLow Uptown’s Price Strategy RareAir’s Price Strategy $12$15 $12$6 $6$8 $15 B A D C

OLIGOPOLY BEHAVIOR A Game-Theory Overview HighLow HighLow Uptown’s Price Strategy RareAir’s Price Strategy B A D C $12$15$12$6 $6$8 $15 GreatestCombinedProfit

OLIGOPOLY BEHAVIOR A Game-Theory Overview HighLow HighLow Uptown’s Price Strategy RareAir’s Price Strategy B A D C $12$15 $6 $6$8 $15 IndependentActionsStimulateResponse

OLIGOPOLY BEHAVIOR A Game-Theory Overview HighLow HighLow Uptown’s Price Strategy RareAir’s Price Strategy B A D C $12$15 $12$6 $6$8 $8$15 Independent Actions Stimulate Response Gravitating to the Worst Case

OLIGOPOLY BEHAVIOR A Game-Theory Overview HighLow HighLow Uptown’s Price Strategy RareAir’s Price Strategy B A D C $12$15$12$6 $6$8 $15 Collusion Invites a DifferentSolution

OLIGOPOLY BEHAVIOR A Game-Theory Overview High Low HighLow Uptown’s Price Strategy RareAir’s Price Strategy B A D C $12$15$12$6 $6$8 $15 Collusion Invites a DifferentSolution

OLIGOPOLY BEHAVIOR A Game-Theory Overview HighLow HighLow Uptown’s Price Strategy RareAir’s Price Strategy B A D C $12$15$12$6 $8 $15 But, the incentive to cheat is very real Collusion Invites a DifferentSolution

T he Prisoner’s Dilemma Strategic behavior Strategic behavior characterizes oligopoly. The most well-known prisoner’s dilemma example is the prisoner’s dilemma. 2 people have been arrested for a crime, evidenceis weak but the evidence against them is weak. both confess reduced sentence two If both confess, each will receive a reduced sentence of two yearsneither confesses they years in jail. The prisoners know that if neither confesses they will be clearedtwo will be cleared of all but a minor charge and will serve only two days in jail days in jail. The problem is that they do not know what deal the other is offered or if the other will take the deal. keeps the prisoners separated The sheriff keeps the prisoners separated and offers each a If one confesses, he can go free as long as only special deal. If one confesses, he can go free as long as only he confesses, other will get 10 or more years in prison he confesses, and the other will get 10 or more years in prison. not enough evidence to convict There is not enough evidence to convict eithertestimony of the otherlighter either without the testimony of the other. They can get a lighter sentenceconfess & testify against their partner in crime sentence if they confess & testify against their partner in crime.

The Prisoner’s Dilemma The options available are shown. Prisoner B’s options Prisoner B’s options are shown horizontal A’s along along the horizontal & A’s along the verticalupper left cell the vertical. In the upper left cell both confess is the result if both confess. loyal If the prisoners had been loyal to each, they would have received a much smaller penalty. Both chose to confesseach is worse off Both chose to confess so each is worse off than if each had known what the other was doing. In the contest of each made the best interdependence of the decisions, each made the best choice. lower leftB confesses but A does not upper In the lower left if B confesses but A does not. In the upper rightA confesses but B doesnot lower rightneither right, A confesses but B does not. In the lower right, neither confesses dominant strategyboth is to confess and confesses. The dominant strategy for both is to confess and to receive 2 years of jail time.

Price-fixing In 1996, Archer Daniels Midland Company, one of the country’s most influential corporations, guilty to criminal price-fixing pleaded guilty to criminal price-fixing charges fined $100 million and was fined $100 million. That fine was by largest ever far the largest ever obtained by the Justice Department in a price-fixing case. The charge Archer Danielsconspired to fix the was that Archer Daniels conspired to fix the prices of lysinefeed additive prices of lysine, a feed additive, and citric acid, used in a number of food products.

Price-Fixing Fines Vitamin Makers Hoffman La Roche40%$500 million fine BASF AG20%$225 million fine Rhone-Paulene15%Spilled the beans on co-conspirators $725 millionmassive Both had to pay a total fine of $725 million because of massive price-fixingbreakfast price-fixing that inflated the cost of everything from breakfast cereal to hamburgers cereal to hamburgers over the past decade. The suits were livestock farmers brought by livestock farmers and other purchasers of bulk pay illegally inflated vitamins who allege they were forced to pay illegally inflated pricesvitamin, prices. It hurt every American consumer who took a vitamin, drank a glass of milk, or had a bowl of cereal drank a glass of milk, or had a bowl of cereal.

What was the result of the MIT 1993 Price-Fixing Case? Eight Ivy League schools agreed stop colluding to stop colluding to fix prices, and MIT was found guilty of price fixing.

Monopoly – the “power of one” Monopoly [mono(1) poly (seller)] C ontrol over price: Total Product: unique Ex: Comcast Cable TV T echnological M onopoly “Patent” Ex: Rubik’s Cube Government Monopoly Owned & operated by G Ex: U.S. Mail State Highways Natural Monopoly Competition would be chaotic. It is natural to give it to one co. Ex: Utilities Cable TV Geographic Monopoly Only seller in a specific area Example: Remote Store DART “Price Makers” Greyhound Forney High Basic Cable Rate Cable TV WasteManagement TXU U.S.Mail Rubik’sRubik’sCubeCubeRubik’sRubik’sCubeCube DART

Pure Monopoly one firm 7 Pure Monopoly – one firm industry [“monopolist”] Pure Monopoly’s Market Condition One firmonly seller 1. One firm is the only seller. Advertising promotes image. No close substitute 2. No close substitute goods are available. Prohibitivebarriers to entryHigh invest- 8 3. Prohibitive barriers to entry in the industry. High invest- ment coststechnological expertise ment costs and technological expertise prevent others from Legal restrictions entering the market. Legal restrictions make entry in government-supported monopolies nearly impossible. complete controlprice 4. Almost complete control of market price. much 9 Monopolist have much control over price because they are only sellerhigher price would hurt demandstate the only seller. A higher price would hurt demand. The state may control the price on some legal monopolies may control the price on some legal monopolies. These single makers suppliers are “price makers.”

Four Types of Legal Monopolies Natural Monopoly 11 1. Natural Monopoly – where competition would be chaoticnatural chaotic, it is natural to give the business to one firm. Imagine 5 different busses the confusion if 5 different busses raced each other to the corner to pick up a passenger. Competition impractical, inconvenientunworkable would be impractical, inconvenient, & unworkable. Public Utilitiesprivately 12 Examples: Public Utilities (electric & gas) – privately owned buses companies (buses -Continental Trailways) but regulated by the governmentCable TV government. Comcast Cable TV in Plano. The government monitors the natural monopolies monitors the natural monopolies to ensure that they provide quality service at reasonable rates. AT&T AT&T had a long-distance telephone natural monopoly for 75 years. Waste Management TXU Electric Greyhound

Ex’s are utility companies and cable TV Market where average costs are lowest when all output is produced by a single firm Natural Monopoly Where competition would be chaotic, therefore, it is natural to give the business to one firm They are privately owned, but regulated by the government

Government Monopoly 13 Government Monopoly – monopoly owned and operated by the government. natural [privately owned] The difference between natural [privately owned] government monopolies [government owned & government monopolies [government owned] is owned operated by any that these monopolies are owned operated by any level of government. interstate highway system, Examples would be interstate highway system, public libraries, public schools, Postal Service, & DART public libraries, public schools, Postal Service, & DART. In most cases, government monopolies deal with economic products needed for the public welfare but which people would not be provided adequately provide goods that by private industry. Most tend to provide goods that enhance the general welfare rather than seek profits enhance the general welfare rather than seek profits. Dart Pilot Point High [Local G] State G Federal G

Examples of Government Monopoly The G o vernment has control over:The G o vernment has control over: U.S. Mail, U.S. Mail, State highways, andState highways, and Public schools Public schools BryanAdams Another mugging at Bryan Adams

14Geographic Monopoly 14Geographic Monopoly – when a firm is the only seller of a good in a specific location.

“Last Chance Gas Station” The “Last Chance Gas Station” is the last one within general Store 50 miles of Mexico. A general Store in a remote area can’t community has a monopoly because the area can’t support two storesnot support two stores. Geographic monopolies are not guaranteed. guaranteed.

Examples of Geographic Monopoly “Last Chance Gas Station” A general store in the middle of nowhere Last Chance Gas

Technological Monopoly 14 4. Technological Monopoly – results from the inventionnew productpatent invention of a new product (patent) or when technology changes the way a good is produced. General Dynamics General Dynamics is the only defense contractor Trident Submarines with the technology to build Trident Submarines. patent 16 A patent gives an individual or firm exclusive right to produce, use or dispose of an invention or discovery for 20 years 20 years from the date of filing. obtain a patent To obtain a patent, you must go to the Patent research Office after doing research to make sure the patent has not already been patented. Then patent lawyer You hire a patent lawyer to file your patent. 18 months All of this takes about 18 months. The total cost for a patent$5,000 cost for a patent runs about $5,000. very expensivepatent 17 It is very expensive to wage a patent infringement suit$300,000. infringement suit, around $300,000. Polaroid’s camera patent patent prevailed $929 million & won $929 million. Polaroid had accused Kodak of infringing 7 instant photo on 7 instant photo patents10 patents & it took 10 years years to make it to the Supreme Court.

Fiscal Year Fiscal YearApplications Filed 1985 116,427 1986 121,611 1987 126,407 1988 137,069 1989 151,331 1990 163,571 1991 167,715 1992 172,539 1993 174,553 1994 186,123 1995 221,304 1996 191,116 1997 220,773 1998 240,090 1999 261,041 2000 293,244 2001 326,081 2002 333,688 2003 333,452 2004 355,527 2005 384,228 Patents Filed Each Year

Heeling Richardson’s Heeling won a patent- infringement lawsuit against Skechers which had to stop shipment of its 3Wheelers 3Wheelers shoes. The dispute was over the combo athletic shoe and one-wheel skate that allows the walk and roll wearer to both walk and roll. SunshineDrox Sunshine agreed to change its Drox character so it doughboyPillsbury will look less like a doughboy and Pillsbury agreed dough not to pursue a lawsuit, which saves dough. Drox

18 Copyright 18 Copyright – gives the author or artist the publishsellproduce exclusive right to publish, sell or produce his work for his life + 50 years. So, copyrights protect written works of art. Top-Earning Dead Celebrities 1. Kurt Cobain$508. Ray Charles$10 2. Elvis Presley$429. Marilyn Monroe $8 3. Charles Schulz$3510. Johnny Cash $8 4. John Lennon$2411. J.R.R. Tolkien $7 5. Albert Einstein$2012. G eorge H arrison $7 6. Andy Warhol$1913. Bob Marley $7 7. T heodor G eisel (Dr. Seuss) $1014. Jerry Garcia $5

http://www.nucleusinc.com/animation.php

Around 266,000 total knee replace- ments & 160,000 artificial hip implants will be done this year.

Competition and the Market Structure

The Government’s Record Of Regulating The Economy This is a Senate O f the Monopolists B y the Monopolists F or the Monopolists

Antitrust Legislation Since the 1880s, the federal government had aided competition. To promote certain legal monopoliesallowed to exist efficiency, certain legal monopolies have been allowed to exist. Trustslegally formed combinations Trusts – legally formed combinations of corporations or companies. cutthroat competitionmergers In the latter half of the 1800s, cutthroat competition and mergers created trusts cartels in steel, meatpacking, oil, sugar, coal, and tobacco. They were actually large cartels. government passed laws to protect competition By the 1880s, the government passed laws to protect competition. Anti-trust legislation monitor and regulate big business Anti-trust legislation – designed to monitor and regulate big business, prevent monopoliesbreak up existing monopolies prevent monopolies and break up existing monopolies. Interstate Commerce Act-1887 ICC 1. Interstate Commerce Act-1887 – created the ICC to oversee railroad regulates railroadsmotor vehicles freight carriers rates. Today it regulates railroads, motor vehicles, & other freight carriers. Sherman Anti-trust Act-1890 “cornerstone of anti-trust legislation.” 2. Sherman Anti-trust Act-1890 – the “cornerstone of anti-trust legislation.” prohibited any agreementscontracts or conspiracies It prohibited any agreements, contracts or conspiracies that would restrain interstate tradecause monopolies to formprotected trade restrain interstate trade or cause monopolies to form. This act protected trade against unlawful restraint & monopoly1 st significant act against against unlawful restraint & monopoly. It was the 1 st significant act against monopolies monopolies. Later legislation defines the principles in this act. failure to define key terms“trusts” The Sherman Anti-trust’s failure to define key terms such as “trusts” and “restraintof trade”somewhat ineffective “restraint of trade” made it somewhat ineffective. It was not clear what was legal or illegal legal or illegal. This act also ran contrary to the economic theory of laissez-faire hands-offattitude of the past 100 years laissez-faire (hands-off by the government) attitude of the past 100 years. 28 29 30

Progressive Era (1901-1920) Legislation (A Reform MindedEra) Progressive Era (1901-1920) Legislation (A Reform Minded Era) 1.Clayton Antitrust Act 1914illegal 1.Clayton Antitrust Act – 1914 spelled out specific illegal businesses practices businesses practices. It gave the government power against outlawed price discrimination-charging customers monopolies. It outlawed price discrimination-charging customers different prices for the same productlessen different prices for the same product – where it might lessen competition competition or lead to monopolies. Large retail outlets had gotten price breaks. The Clayton put some teeth into the Sherman Act by specifying what acts were in restraint. Federal Trade Commission Act 1914 Federal Trade Commission Act – 1914 – created the FTCunfair methods of competition FTC to investigate charges of unfair methods of competition. (false and misleading advertising) Robinson-Patman Act (Anti-price Discrimination Act) – 1936 strengthenedon price discrimination It strengthened the Clayton Act on price discrimination. It protected small retail businesses protected small retail businesses by prohibiting wholesalers from charging small retailers higher prices than they charged prohibiting large retailers from setting large chain stores and by prohibiting large retailers from setting artificially low pricesrebatesavailable to all artificially low prices. All rebates had to be available to all. Celler-Kefauver Act (Celller Anti-merger Act) –1950 prevented Celler-Kefauver Act (Celller Anti-merger Act) –1950 – prevented mergers mergers and the purchase of competitor’s assets when such reduce competition acquisition would reduce competition.

By the Early 1890s, a number of businesses convicted were convicted under the Sherman Antitrust Act. In 1911, the Supreme Court declared Standard Oil Company that the Standard Oil Company was practicing unreasonable “restraint of trade” unreasonable “restraint of trade” and broken ordered that its 90% monopoly be broken up into 34 smaller companies up into 34 smaller companies. They became known as Exxon, Mobil, Chevron, Amoco, etc. American Tobacco Broken up were American Tobacco, Standard OilNorthern Securities Standard Oil, and Northern Securities. AT&Tmonopoly of local phone service AT&T was accused of using its monopoly of local phone service to exclude competitors from the related long-distance and telephone equipment markets. The two sides settled in 1982. spin off seven local phone companies They agreed to spin off seven local phone companies known “Baby Bells.” as the “Baby Bells.” American Tobaccopredatory pricing American Tobacco was charged with using predatory pricing [underselling others until they were driven out of business, then raising prices ] monopolize the cigarette business and other means to monopolize the cigarette business. It was split into 16 firms split into 16 firms like R.J. Reynolds & British American Tobacco.

And What About Microsoft? Should They Be Broken Up Into The “Baby Bills”? Microsoft was accused of forcing computer makers to install its browser [Internet Explorer] as a condition of licensing Windows.

Economies of Scale 31. Economies of Scale [“economies of mass production”] Exist when firms are large enough to take advantage of mass production techniques. Or, “Why it may cost only a little more to produce twice as much.” Fixed cost don’t change Variable costs may not change much if workers were under- worked and the oven was not being used to capacity.

Third-Party Costs and Benefits (Externalities) Externalities Third-Party Costs and Benefits (Externalities) [Externalities are the effects of production (pollution) or consumption ( smoking) of a product on people external (3 rd parties) to the transaction] The transaction above (buying donuts from Shipley’s) doesn’t affect a third party. Shipley’s Donuts, the supplier is happy. Shipley’s and the consumer bear all the costs and benefits. A third party external to the buyer and seller is not impacted. If a third party is affected in a negative way, it is called a negative negative externality. If a third party is affected in a positive positive way, it is called a positive externality. ConsumerSupplier 32 33 34

External Cost [Negative Externality] Third Party external cost Here, we have an external cost of production. The seller and consumer have happy faces. The consumer receives the product and pays the seller. The consumer thinks this vol- untary transaction is worthwhile. The seller’s happy face reflects his satisfaction at the price for the product. third partyso sad that she is crying However, the third party is so sad that she is crying negative externality because of a negative externality. [Think cancer from downstream toxic waste because a company wants to save money ] Examples are pollution, smoking, litterbugs, drunk drivers, cost robbers, and aircraft noise. All are a cost because they cause dirtier air, polluted water, more accidents dirtier air, polluted water, more accidents, and more policemen, etc. “A noisy stereo next door Another example: “A noisy stereo next door prevents you from studying “economics.” Product(cigs) SupplierConsumer Wife becomes impotentHurts asthma

external benefitthird Here, we have an external benefit of production. The third partyhappy face party has a happy face because he benefits from a transaction even though he paid none of the costs of producing the product. Examplesvery large dog Examples: If your neighbor buys a very large dog, frighten burglarsdam It may frighten burglars from your house too. A dam built to generate electric power built to generate electric power would also benefit flood controllake for recreation in flood control and as a lake for recreation. It would fishing, swimmingboating also help in fishing, swimming, and boating. The classic educationmore example is education. It means the government collects more taxes from college gradsless crime taxes from college grads. There is less crime and therefore less demand for policemen less demand for policemen. External Benefit [Positive Externality] Third Party Education Consumer Less crime, fewer police, lower taxes Supplier(A&M)

Let’s Look Some Ways Failure To Finish High School Affect Us Poverty9%below the poverty level Poverty – 9% of people live below the poverty level but 22 % without a high school education 22 % of those without a high school education live in poverty. Public assistance Public assistance – 140,000 welfare recipients in Texas 2 millionprisons were high school dropouts. 2 million are in U.S. prisons 80%below a 7 th grade level and 80% read below a 7 th grade level. Prisons – 100,000 Prisons – 100,000 of 151,000 Texas prisoners didn’t finish high 50,000functionally illiterate school and 50,000 of the 100,000 were functionally illiterate. Unemployment Unemployment – When unemployment was 4%, it was 1% for college grads and 7.1% for high school dropouts. Lost earning power Lost earning power – Average salary for dropouts: $19,000; For high school grads: $27,000; & for college grads: $44,000. If they hadn’t dropped out…630,000 dropouts If they hadn’t dropped out… - The 630,000 dropouts in the $8,000 less D-FW area earn $8,000 less than a high school graduate. In theory, if those 630,000 had a diploma, the D-FW area would $5 billion more have had about $5 billion more in income. It cost $ 8,000 a year to get a student thru public high school, it costs $ 34,000 for a year in prison. So, we can educate now or – incarcerate later. So, we can educate now or – incarcerate later. Some public schools in the inter-city are feeder schools for prisons.

The G.I. Bill The G.I. Bill [“If you think education is expensive, try ignorance.” – Derok Bok of Harvard] 328,841 Americans In 1950, 328,841 Americans graduated from the country’s colleges – three times greater than the number of graduates just a decade earlier. Before the G.I. Bill, a college education was the exclusive 5% experience of children of affluent parents. Only 5% of Amer- 28%. icans over 25 had completed college. Today, it is about 28%. Harvard President James Conant was adamant in his opposition. He expressed concern that the arrival of veterans would lower academic standards inevitably lower academic standards. He feared that the vets “educational hobo jungles.” would turn American colleges into “educational hobo jungles.” Later, Conant admitted his error and called veterans on his “the most mature and most promising students campus “the most mature and most promising students Harvard has ever had.” 7.8 million veterans Some 7.8 million veterans, about half of those eligible, enrolled in a school or job-training program. The cost of the G.I. Bill was around $14.5 billionreturned7 times over $14.5 billion but it has been returned at least 7 times over to the increased tax revenues. It produced U.S. Treasury in the form of increased tax revenues. It produced 450,000 engineers, 240,000 accountants, 230,000 teachers, 97,000 scientists, 67,000 doctors, 122,000 dentists and – by the early 1960s - One half of the membership of the U.S. Congress.

Changes Educational Attainment U.S. Adult Population 1950 1960 1970 1980 1990 2000 100 80 60 40 20 0 College Graduates or More High School Graduates or More ACCOUNTING FOR GROWTH Source: U.S. Census Bureau Percent of U.S. Population

30% of America’s high school students will leave without graduating. How will they compete in the global economy? 4-17-2006 35% of whites graduate from college, but only 17 % of blacks and 11% for Hispanics, and 61% for Asians. 31% of women graduate from college, for men it is only 26%. [5% in 1945] 96% of Asians graduate from high school, 93% for whites, 88% for blacks, & 62% for Hispanics

Who is Smarter? Men or Women For every 100,000 men who graduate college,For every 100,000 men who graduate college, There are 133,000 women who graduate.There are 133,000 women who graduate. There are 2.7 million in prison.There are 2.7 million in prison. Only 7% of them are women.Only 7% of them are women. Perhaps women are smarter at getting away with crime.Perhaps women are smarter at getting away with crime. OK, women must be smarter.OK, women must be smarter.

BenefitsCosts So, What Should We Do About Benefits and Costs “If we subsidize, we get more; And if we tax, We get less.”

The End

Economics Economics (college) Textbook Companies (over 50 of these and they are differentiated Blue Jean Blue Jean Companies (dozens and differentiated) Black eyed peas One seller Easiest to enter Very many Very many (100’s) sellers Price takers Manysellers Many [25-75] sellers Price Maker Beauty Shop few control 70% A few control 70% of the market Nat Geog Natural, Geographic, Tech & Gov. Tech nological, & Gov. Nike, Reebok, New Balance Adidas Balance, and Adidas Homogeneous prod uct [Identical] Identicalor Identical (pure) or differentiated differentiated products Comcast Cable TV Price Leadership is used Polaroid Instamatic McDonald’s, Wendy’s, Burger King and Burger King Product differ entiation gives an element of monopoly Oligopoly 1._______________________ 2._______________________ 3._______________________ 4._______________________ 5._______________________ Perfect Competition 1._______________________ 2._______________________ 3._______________________ 4._______________________ 5._______________________ Pure Monopoly 1._______________________ 2._______________________ 3._______________________ 4._______________________ 5._______________________ M onopolistic C ompetition 1._______________________ 2._______________________ 3._______________________ 4._______________________ 5._______________________ Market Structure Word Scramble [From the word scramble below, pick out the 5 correct answers for each market structure] * bold face type. * Write the bold face type. Name 1. ________________ Name 2.________________

Oligopoly 1. Few control 70% 2. N ike, Reebok, N.Bal., & Adidas 3. Identical or differentiated 4. Price Leadership 5. M c D ’s, W endy’s, & Burger King. Perfect Competition 1. Easiest to enter 2. Homogeneous product 3. Very many sellers 4. Price Takers 5. Black eyed peas Pure Monopoly 1. Nat, Geog, Tech, & Gov. 2. Polaroid Instamatic 3. One seller 4. Comcast Cable TV 5. Price Maker Monopolistic Competition 1. Product differentiation 2. Many sellers 3. Econ Textbook Co’s 4. Blue jean companies 5. Beauty Shop Economics Economics (college) Textbook Companies (over 50 of these and they are differentiated Blue Jean Blue Jean Companies (dozens and differentiated) Black eyed peas One seller Easiest to enter Very many Very many (100’s) sellers Price takers Manysellers Many [25-75] sellers Price Maker Beauty Shop few control 70% A few control 70% of the market Nat Geog Natural, Geographic, Tech & Gov. Tech nological, & Gov. Nike, Reebok, New Balance Adidas Balance, and Adidas Homogeneous prod uct [Identical] Identicalor Identical (pure) or differentiated differentiated products Comcast Cable TV Price Leadership is used Polaroid Instamatic McDonald’s, Wendy’s, Burger King and Burger King Product differ entiation gives an element of monopoly Market Structure Word Scramble [From the word scramble below, pick out the 5 correct answers for each market structure] * bold face type. * Write the bold face type. Name 1. ________________ Name 2.________________Answers

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Market Structures [How many sellers in each industry] Competition.

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