7-3: monopolistic competition and...
TRANSCRIPT
7-3: Monopolistic Competition and Oligopolies
Notes
Learning Target
• 1. I will demonstrate my understanding of the characteristics of monopolistically competitive firms and oligopolies.
Monopolistic Competition
• Monopolistic competition: when many sellers offer similar, but not standardized products
• Example: Think of the market for t-shirts (they come in all styles and brands)
Characteristics of Monopolistic Competition
• 1. Many producers/sellers: meaningful competition exists
• Example: there are many restaurants where you can buy a hamburger (Chili’s, McDonalds, Applebee's, TGI Friday's, Burger King, etc.)
Characteristics of Monopolistic Competition
• 2. Differentiated products: firms seek to distinguish their goods and services from those of other firms, even when the goods are close substitutes
• Example: “Toothpaste that will leave your breath fresher”
Characteristics of Monopolistic Competition
• 3. Few barriers to entry: start-up costs are relatively low and this allows many firms to enter the market
• Example: multiple t-shirt companies enter the market
Characteristics of Monopolistic Competition
• 4. Some control over prices: firms have to be careful not to raise prices too high otherwise consumers might substitute other goods
• Example: Coke raises its price and consumers start buying Pepsi
Characteristics of Monopolistic Competition
• Monopolistic competitive firms use nonprice competition to compete with rival firms
• Nonprice competition is using product differentiation and advertising to attract customers
Characteristics of Monopolistic Competition
• This can be done in several ways:
• A firm may seek to distinguish their particular brand based on unique characteristics (color, design, look, smell, touch)
• A producer might emphasize their service as a way of charging a higher price
Characteristics of Monopolistic Competition
• A firm might have a convenient location that is attractive to customers
• A firm might point to its image/status to attract customers
• Goods are “all natural” or item is more fashionable
Oligopolies
• Oligopoly: market structure in which only a few sellers offer a similar product
• Generally a result of economies of scale (costs decrease as more goods are produced)
• Competition does exist
Characteristics of Oligopolies
• 1. Few producers: a small number of firms control the market
• An industry is considered an oligopoly if the 4 top producers together supply more than 60% of total output
Characteristics of Oligopolies
• 2. Similar products: goods are generally the same, with minor variations
• Examples: cereal, light bulbs, kitchen appliances, and soft drinks
• May also sell standardized products (such as steel)
Characteristics of Oligopolies
• 3. High barriers to entry: it is difficult for firms to break in the market and compete
• Existing companies may take advantage of economies of scale and it would be expensive for a microchip company to compete with a large firm
Oligopolies Acting As Monopolies
• In some cases, oligopolies actual behave like monopolies
• Firms might try to control prices and other, smaller firms, may follow suit
• Firms might try to control the market through collusion, or making pricing agreements
• This is illegal
Oligopolies Acting As Monopolies
• A cartel is an organization of producers established to set production and price levels for a product
• OPEC is a well-known cartel that consists of 12 countries that agree to set quotas on oilproduction and exports
• This is an example of the potentially harmful effects of an oligopoly
7-4: Regulation and Deregulation Today
NOTES
Promoting Competition
• Regulation: set of rules or laws designed to control business behavior to promote competition and protect consumers
Antitrust Legislation
• Antitrust legislation: laws that define monopolies and give government the power to control them and break them up
Trust
• Trust: when a group of firms are combined to reduce competition in an industry
• Example: Standard Oil Company (controlled 90% of the market)
Merger
• Merger: when 2 firms join together to become 1
• If a merger will eliminate competition it will be denied by the government
Enforcing Antitrust Legislation
• The FTC and the Department of Justice are responsible for enforcing antitrust laws
• Mergers that allow companies to dominate a particular industry are not permitted
• The goal is not to allow companies to reduce competition
• What would happen if the two largest cell phone companies tried to merge?
Unfair Business Practices
• Price fixing: when businesses work together to set prices of competing products
• Market allocation: when competing businesses negotiate to divide up a market (could be by region)
• Predatory pricing: setting low prices to drive small producers of the same good out of business
Deregulation
• Deregulation: reducing or removing government control of a business
• Results in lower prices for consumers and more competition
• Example: airline industry was deregulated in 1978