2. Competition, Market Structures, and the Role of Government

3. Market Structures What is the primary aim/goal of businesses? To maximize profits What is competition? Striving against others to reach an objective

4. 4 Types of Market Structure 1.Pure/Perfect Competition –Large number of buyers and sellers –Identical product –Well informed buyers and sellers More CompetitionLess Competition

5. Pure/Perfecct Competition Many buyer/sellers + Identical Products

6. Monopolistic Competition Meets all condition of perfect competition except for identical products. –Product differentiation Monopolistic competitors use nonprice competition –Advertising, giveaways, or other promotions More CompetitionLess Competition

7. Monopolistic Competition Same as pure competition except for product differentiation Gap Levis Lucky

8. Monopolistic Competition Are these shampoos/conditioners different? Pantene $14.50Frederic Fekkai $54

9. Monopolistic Competition Are these mascaras different? Maybelline Sisley $4$43

10. Oligopoly A few very large sellers dominate the industry Oligopolists act independently by lowering prices soon after the first seller announces the cut Collusion: formally agree to set prices Engage in price wars More CompetitionLess Competition

11. Oligopoly IpodZune

12. Oligopoly Few producers control supply and price

13. Coca-Cola Classic Coca-Cola classic Sprite Dasani Barq's Dannon Nestea Rockstar Evian Fanta Fresca Minute Maid Mr. Pibb Powerade Seagrams Ginger Ale & Mixers TAB

14. Pepsi-co Aquafina Pepsi Mountain Dew Sierra Mist Sobe Lipton Brisk Tea MUG Root Beer Slice Gatorade Dole Juice Tropicana

15. Cadbury Schweppes 7 Up Canada Dry Clamato Dr Pepper Hawaiian Punch Mott's Orangina Snapple

16. Toyota Scion Lexus

17. Chrysler Jeep Dodge

18. General Motors Chevrolet Buick Pontiac GMC Saturn Hummer SAAB Cadillac

19. Monopoly Only one seller of a particular product Few monopolies

20. Monopoly More CompetitionLess Competition One seller dominates the market with no close substitutes

21. Monopoly Natural Monopoly - efficient production by a single supplier

22. Monopoly Geographic Monopoly - small town

23. Monopoly 1.Technological Monopoly - new invention –Patent: exclusive right for 17 years Segway

24. Monopoly 1.Technological Monopoly - new invention –Copyright: lifetime + 50 years This telecast is copyrighted by the NFL for the private use of our audience. Any other use of this telecast or of any pictures, descriptions, or accounts of the game without the NFL’s consent, is prohibited.

25. Monopoly 1.Government Monopoly - government owned businesses

26. A.Antitrust (anti-monopoly) laws 1.Sherman Act of 1890 2.Clayton Act of 1914 3.Federal Trade Commission Act -- Monopolists tend to produce less and charge more. -- Regulatory Agencies control economic behavior (Dept of Justice, Fed Trade Comm) -- Sherman Act outlawed collusive price fixing and monopolies. -- Strengthened the Sherman Act. -- FTC, with Justice Dept., to investigate unfair competitive practices.

27. Sherman Antitrust Act 1890 – used in early 19000’s First government law to limit monopolies Gave federal gov’t power to investigate trusts and companies suspected of violating the Act “Antitrust” really means “competition law” Outlaws monopolies

28. Trusts DEF: A combination of firms or corporations formed by a legal agreement  Especially in order to reduce competition  Standard Trust – came after Standard Oil

29. Clayton Antitrust Act 1914 Strengthened Sherman Act Prohibit “anticompetitive practices” –Mergers/Acquisitions that lessen competition –One person being a director of competing companies

30. B.Cases 1.Standard Oil case (1911) – broke-up. 2.U.S. Steel case (1920) – ‘rule of reason’ by Supreme Court that unreasonably restrain trade. John D. Rockefeller controlled nearly all trade for oil and gas. The Supreme Court used the Sherman Act to break up Standard Oil into 34 companies.

31. Other cases…

32. In an out-of-court settlement, AT&T divested itself into 22 regional phone-operating companies in 1982. AT&T’s deal to buy T-Mobile USA for $39 billion is shaping up to be a heated regulatory battle. It would create the nation’s largest cellular carrier. Lawmakers are already denouncing the deal, saying it will reduce competition in an already consolidated industry.

33. Countries with Antitrust Laws shown in red

34. C.Mergers 1.Horizontal 2.Vertical 3.Conglomerate -- Horizontal: merger of two competitors that sell similar products in the same geographic market. Examples are Chase & Chemical Bank, Exxon & Mobile. -- Vertical: firms at different stages of production process. Examples are PepsiCo with Pizza Hut, Taco Bell, and KFC. -- Conglomerate: not horizontal or vertical, different firms in different geographic areas.

35. Effectiveness of Antitrust Laws Automobiles Blue Jeans Types of Mergers Autos Glass Blue Jeans Denim Fabric A C BD EF Z Y X W VU T Horizontal Merger Conglomerate Merger Vertical Merger -- Most Vertical mergers are approved by regulators.

36. Top 10 M&A deals worldwide by value (in mil. USD) from 2000 to 2010: Ran k YearPurchaserPurchasedTransaction value (in mil. USD) 12000Fusion: America Online Inc. (AOL) [23][24] Time Warner164,747 22000Glaxo Wellcome Plc.SmithKline Beecham Plc.75,961 32004Royal Dutch Petroleum Co.Shell Transport & Trading Co74,559 42006AT&T Inc. [25][26] BellSouth Corporation72,671 52001Comcast CorporationAT&T Broadband & Internet Svcs72,041 62009Pfizer Inc.Wyeth68,000 72000Spin-off: Nortel Networks Corporation59,974 82002Pfizer Inc.Pharmacia Corporation59,515 92004JP Morgan Chase & Co [27] Bank One Corp58,761 102009Technofist Inc.Goldspark IT Solution PVT LTD, IncN/A 112008Inbev Inc.Anheuser-Busch Companies, Inc52,000