1. Chapter 7 Firms, Competition and the Market

2. In Canada consumers generally rely on private businesses to produce goods and services that meet our needs and wants. In Canada consumers generally rely on private businesses to produce goods and services that meet our needs and wants. Businesses in the same industry compete with one another Businesses in the same industry compete with one another Market – a group of buyers and sellers of particular goods and services Market – a group of buyers and sellers of particular goods and services Competition = accountability to consumers Competition = accountability to consumers

3. Competition leads to lower prices Competition leads to lower prices Non-price competition – when businesses compete on anything but the price Non-price competition – when businesses compete on anything but the price Level of quality Level of quality Warranty Warranty Service Service Location Location convenience convenience

4. Product differentiation Product differentiation How does one firms product differ from another? How does one firms product differ from another? Product quality Product quality Services Services Location and accessibility Location and accessibility Promotion and packaging Promotion and packaging

5. Market Structure What factors influence what is produced, how much is produced and for whom it is produced? What factors influence what is produced, how much is produced and for whom it is produced?

6. 5 factors help determine the market structure 5 factors help determine the market structure 1. Number and size of firms 2. The degree in which competitors’ products are similar 3. How much control over price businesses have 4. How easy can a business enter the market 5. The amount of non-price competition

7. The 4 Basic Market Structures 1. Perfect Competition 2. Monopolistic Competition 3. Oligopoly 4. Monopoly

8. Many producersOne Producer Perfect competition Monopoly monopolistic Oligopoly competition competition

9. Perfect Competition Perfect Competition Perfect Competition Defined by many producers with a uniform product Defined by many producers with a uniform product

10. Perfect Competition Continued Many buyers and sellers Many buyers and sellers All firms sell the same product All firms sell the same product Must accept price Must accept price Success depends on cost management Success depends on cost management Efficient use of resources will yield profit Efficient use of resources will yield profit Easy to enter and exit the market (few to no barriers) Easy to enter and exit the market (few to no barriers) Little no-price competition Little no-price competition Large profits can have a negative impact in perfect competition. Profits attract producers which drive up supply ultimately reducing market prices. This benefits consumers as competitive pressures drive down prices for consumers and yield enough profits to make it worthwhile for producers to keep producing. Large profits can have a negative impact in perfect competition. Profits attract producers which drive up supply ultimately reducing market prices. This benefits consumers as competitive pressures drive down prices for consumers and yield enough profits to make it worthwhile for producers to keep producing.

11. True perfect competition does not exist True perfect competition does not exist There will always be startup costs There will always be startup costs non-price competition will always exist non-price competition will always exist Best examples of perfect competition Best examples of perfect competition Wheat farmers Wheat farmers

12. Monopolistic Competition Monopolistic Competition Occurs when there is product differentiation and numerous businesses in the market (ex. restaurants, shoe companies, clothing companies) Occurs when there is product differentiation and numerous businesses in the market (ex. restaurants, shoe companies, clothing companies)

13. Monopolistic Competition Monopolistic Competition Large number of competing businesses Large number of competing businesses Businesses sell similar but not identical products/services (no perfect substitute) Businesses sell similar but not identical products/services (no perfect substitute) Individual firms are large enough to influence the entire market Individual firms are large enough to influence the entire market Non-price competition is significant Non-price competition is significant Is prevalent in service and retail stores Is prevalent in service and retail stores

14. Oligopoly Oligopoly A market dominated primarily by a few firms A market dominated primarily by a few firms (Ex. Examples: Indigo-Chapters, Canadian Banks, Canadian Wireless Companies) (Ex. Examples: Indigo-Chapters, Canadian Banks, Canadian Wireless Companies)

15. Oligopoly Oligopoly Market is dominated by a few firms Market is dominated by a few firms Firms may produce similar or noticeably different products Firms may produce similar or noticeably different products Hard to enter the market (barriers) Hard to enter the market (barriers) Non-price competition exists Non-price competition exists

16. Collusion Collusion A secret agreement among firms to set prices, limit output or eliminate/reduce competition. A secret agreement among firms to set prices, limit output or eliminate/reduce competition. It’s illegal in Canada and the U.S It’s illegal in Canada and the U.S Collusion can lead to the formation of cartels Collusion can lead to the formation of cartels A cartel is an arrangement (usually secretive) among independent corporations in the same industry to control distribution, to set prices, to reduce competition, and sometimes to share technical expertise. A cartel is an arrangement (usually secretive) among independent corporations in the same industry to control distribution, to set prices, to reduce competition, and sometimes to share technical expertise. Cartels are illegal in Canada and the US Cartels are illegal in Canada and the US Oil Petroleum for Exporting Countries (OPEC) Oil Petroleum for Exporting Countries (OPEC)

17. http://cnettv.cnet.com/doj-announces-suit- against-apple-publishers-over-e/9742-1_53- 50123006.html?tag=mncol;txt http://cnettv.cnet.com/doj-announces-suit- against-apple-publishers-over-e/9742-1_53- 50123006.html?tag=mncol;txt http://calgary.ctv.ca/servlet/an/local/CTVNew s/20120321/bc_steele_gas_price_fixing_120321 /20120321/?hub=CalgaryHome http://calgary.ctv.ca/servlet/an/local/CTVNew s/20120321/bc_steele_gas_price_fixing_120321 /20120321/?hub=CalgaryHome

18. Monopoly Monopoly Where one firm has complete control of the entire market. Where one firm has complete control of the entire market. Ex. NFL, NBA, Canada Post, LCBO, Canada Post Ex. NFL, NBA, Canada Post, LCBO, Canada Post

19. Monopolies Monopoly Monopoly A Market completely dominiated by one business A Market completely dominiated by one business Unique product with no substitutes Unique product with no substitutes They set the price They set the price Significant barriers to entry Significant barriers to entry Non-price competition doesn’t occur Non-price competition doesn’t occur Local monopolies can exist (Cogeco – Kingston) Local monopolies can exist (Cogeco – Kingston)

20. Natural Monopoly Natural Monopoly Exists when products with high costs are more efficiently produced by 1 large company rather than more smaller firms. Ex. Hydro, Enbridge, City of Ottawa Water and Sewer Services (public services) Exists when products with high costs are more efficiently produced by 1 large company rather than more smaller firms. Ex. Hydro, Enbridge, City of Ottawa Water and Sewer Services (public services)

21. Characteristics Perfect Competition Monopolistic Competition OligopolyMonopoly 1. Number and size of firms in the market Large number of firms Many firms but not large size Few firms but large in size One large firm 2. Degree of product similarity in the market Identical Product differentiation (in quality, packaging, marketing, etc.) Some product differentiation Unique 3. A firm’s control over price No control; a price taker Some control; a price influencer Significant control; informal collective pricing Total control, price maker 4. Ease with which firms can enter or leave the market No barriers Some barriers Many barriers Almost total exclusion 5. Amount of non-price competition Little (location sometimes) Some (product, quality, advertising, packaging) Considerable (packaging, advertising, brand name) Not much

22. HW Read page 152-157 Read page 152-157 Answer questions on page 160 – Check Your Understanding Answer questions on page 160 – Check Your Understanding #2, 3, 4, 5 #2, 3, 4, 5

23. #2) Price taker vs. Price maker #2) Price taker vs. Price maker Price taker – is a firm that has little influence over price. It is usually one of many small suppliers that offer a similar product Price taker – is a firm that has little influence over price. It is usually one of many small suppliers that offer a similar product Price maker- is a firm that sells a products that is, in some way, considered unique. It may have an advantage of location or patent protection. If the product is a necessity with few or no substitutes that firm will also be a price taker Price maker- is a firm that sells a products that is, in some way, considered unique. It may have an advantage of location or patent protection. If the product is a necessity with few or no substitutes that firm will also be a price taker

24. #3 How does the market discourage even a monopolist from charging the highest price #3 How does the market discourage even a monopolist from charging the highest price Even monopolists are subject to the law of demand. The quantity purchased will vary inversely with the price charged. Monopolists can raise the price, but this increase will cost them sales as consumers switch to close substitutes or do without. Even monopolists are subject to the law of demand. The quantity purchased will vary inversely with the price charged. Monopolists can raise the price, but this increase will cost them sales as consumers switch to close substitutes or do without.

25. #4 Make a list of ways in which firms engage in non-price competition #4 Make a list of ways in which firms engage in non-price competition Quality Quality Warranties Warranties Location Location Convenience Convenience What else? What else?

26. #5 Compare and contrast the market structures of #5 Compare and contrast the market structures of (a) monopoly and monopolistic competition (a) monopoly and monopolistic competition (b) monopolistic competition and oligopoly (b) monopolistic competition and oligopoly See Table from notes See Table from notes