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Chapter Introduction
Section 1: Perfect Competition
Section 2: Monopoly, Oligopoly, Monopolistic Competition
Section 3: Government Policies Toward Completion
Visual Summary
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Think about the products that you buy most frequently. Are they produced by just one company, or do you have choices about where to buy the items? In this chapter, read to learn how competition—or the lack of it—determines the prices you pay.
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Section Preview
In this section, you will learn about perfect competition and how this market structure benefits consumers.
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A. A
B. B
Can you name some reasons that competition is important for consumers?
A. Yes
B. No
A B
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Market Structure and Perfect Competition
Market structure refers to the extent of competition within particular markets.
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Market Structure and Perfect Competition (cont.)
• Businesses are categorized by market structure or the amount of competition they face.
View: Comparing Market Structures
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– Perfect competition (also known as pure competition)
– Monopolistic competition
– Oligopoly
– Monopoly
Market Structure and Perfect Competition (cont.)
• The four basic market structures in the American economy are:
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– A large market
– A nearly identical product
– Easy entry and exit to the market
– Easily obtainable market information
– Independence of sellers and buyers
Market Structure and Perfect Competition (cont.)
• Five conditions must be met for perfect competition (pure) to take place:
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• True perfect competition is rarely seen.
• The ability of consumers to obtain information is key to sustaining competition.
Market Structure and Perfect Competition (cont.)
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A. A
B. B
C. C
D. D A B C D
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Under which type of market would the most competition exist?
A. Monopoly
B. Oligopoly
C. Monopolistic competition
D. Perfect Competition
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Agriculture as an Example
Agriculture markets come close to a perfectly competitive market structure.
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Agriculture as an Example (cont.)
• No single wheat farmer has any great influence on wheat prices.
• The market price for wheat is determined by the interaction of supply and demand, and individual wheat farmers have to accept the market price.
• People’s demand for wheat is relatively inelastic.
View: A Classic Example
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• Supply is highly dependent on conditions over which farmers have little or no control.
• The intense competition in a perfectly competitive industry forces the price down to one that just covers the costs of production plus a small profit.
• All inputs are used in the most advantageous way possible allowing an efficient allocation of productive resources.
Agriculture as an Example (cont.)
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A. A
B. B
The wheat market fulfills all five of the conditions needed to create perfect competition.
A. True
B. False
A B
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Section Preview
In this section, you will learn about three types of imperfect market structures: monopoly, oligopoly, and monopolistic competition.
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• monopoly
• barriers to entry
• economies of scale
• patent
• copyright
• oligopoly
• product differentiation
• cartel
• monopolistic competition
Content Vocabulary
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Monopoly
A monopoly exists when a single seller controls the supply of a good or service and largely determines its price.
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Monopoly (cont.)
• The most extreme form of imperfect competition is a pure monopoly.
• In a pure monopoly, a single seller controls the supply of the good or service and thus determines its price.
• A monopolist can raise prices, but cannot charge outrageous prices.
View: A Monopoly Market Structure
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• A monopoly is protected by barriers to entry.
• The cost of getting started (“excessive money capital costs”) can be a barrier.
Monopoly (cont.)
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• The four types of monopolies are:
– Natural—the government grants exclusive rights to companies that provide things like utilities, bus service, and cable TV.
Monopoly (cont.)
• The larger size of these gives them economies of scale.
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– Geographic—the setting of this business is isolated and the potential for profits is small, so other businesses don’t enter the market.
– Technological—if you invent something, you are capable of having this type of monopoly over your invention.
Monopoly (cont.)
• Patent
• Copyright
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– Government—this monopoly is held by the government itself.
Monopoly (cont.)
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A. A
B. B
C. C
D. D A B C D
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The postal service would fall under which type of monopoly?
A. Natural
B. Geographic
C. Technological
D. Government
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Oligopoly
An oligopoly exists when an industry is dominated by a few suppliers that exercise some control over price.
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Oligopoly (cont.)
• An oligopoly is an industry dominated by several suppliers who exercise some control over price.
• Oligopolists engage in nonprice competition.
• The price you pay is based on product differentiation in addition to supply and demand.
View: An Oligopoly Market Structure
View: Oligopolies
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Oligopoly (cont.)
• With so few firms in an oligopoly, whatever one does, the others will follow.
• If competing firms secretly agree to raise prices or to divide the market, they are performing an illegal act called collusion.
• One significant form of collusion is the cartel.
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A. A
B. B
C. C
D. D A B C D
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Which two aspects make oligopolies safer than monopolies?
A. Stable prices and easy entry
B. More variety and less advertising
C. Stable prices andmore variety
D. Less advertising and stable prices
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Monopolistic Competition
Monopolistic competition exists when a large number of sellers offer similar but slightly different products, and each firm has some control over price.
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Monopolistic Competition (cont.)
• The most common form of market structure in the U.S. is monopolistic competition.
• The major difference between monopolistic competition and an oligopoly is in the number of sellers of a product.
• Competitive advertising is key in this type of market.
View: Market Structure of Monopolistic Competition
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A. A
B. B
C. C
How is monopolistic competition different from an oligopoly?
A B C
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Section Preview
In this section, you will learn about steps the government has taken to regulate business practices.
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• interlocking directorate
• antitrust legislation
• merger
• conglomerate
• deregulation
Content Vocabulary
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A. A
B. B
C. C
Do you feel that the government should intervene in issues concerning competition?
A. Always
B. Sometimes
C. Never
A B C
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Antitrust Legislation and Mergers
The goal of antitrust legislation is to encourage competition in the economy and to prevent unfair trade practices.
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Antitrust Legislation and Mergers (cont.)
• The practice of creating interlocking directorates was perfected by John D. Rockefeller at the end of the 19th century.
• His monopoly over the oil business led Congress to pass the Sherman Antitrust Act in 1890.
• This law sought to protect trade and commerce against unlawful restraint and monopoly.
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• The Sherman Antitrust Act was important antitrust legislation.
Antitrust Legislation and Mergers (cont.)
• The Clayton Act of 1914 sharpened the previous antitrust law, prohibiting or limiting a number of very specific business practices that lessened competition substantially.
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• Most antitrust legislation deals with restricting the harmful effects of mergers.
Antitrust Legislation and Mergers (cont.)
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• Three kinds of mergers exist:
– Horizontal—corporations that merge are in the same business.
– Vertical—corporations involved in a “chain” of supply merge.
– Conglomerate—a large corporation merges with smaller corporations dealing in unrelated businesses.
Antitrust Legislation and Mergers (cont.)
View: Mergers
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A. A
B. B
C. C
If an oil refinery merges with a chain of gas stations, which kind of merger would this be?
A. Horizontal
B. Vertical
C. Conglomerate
A B C
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Government Regulation
The aim of government regulatory agencies is to promote efficiency, competition, fairness, and safety.
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Government Regulation (cont.)
• The government uses direct regulation of business pricing and product quality in addition to antitrust laws to foster a competitive atmosphere.
• Many industries were deregulated in the 1980s and 1990s since government regulations had actually decreased the amount of competition in the economy.
View: Federal Regulatory Agencies
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A. A
B. B
C. C
Look at the cartoon on page 249. What specifically is the cartoonist implying about deregulation with this cartoon?
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Of the four basic market structures, perfect competition and monopolies are rare, while monopolistic competition and oligopolies are much more common.
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The level of competitiveness in a particular market is determined by several factors.
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Government regulatory agencies seek to promote efficiency, competition, fairness, and safety.
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Economic Concepts Transparencies
Transparency 9 Competition andMarket structure
Select a transparency to view.
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market structure: the extent to which competition prevails in particular markets
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perfect competition: market situation in which there are numerous buyers and sellers, and no single buyer or seller can affect price
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monopoly: market situation in which a single supplier makes up an entire industry for a good or service with no close substitutes
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barriers to entry: obstacles to competition that prevent others from entering a market
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economies of scale: low production costs resulting from the large size of output
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patent: exclusive right to make, use, or sell an invention for a specified number of years
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copyright: exclusive right to sell, publish, or reproduce creative works for a specified number of years
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oligopoly: industry dominated by a few suppliers who exercise some control over price
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product differentiation: manufacturers’ use of minor differences in quality and features to try to differentiate between similar goods and services
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cartel: arrangement among groups of industrial businesses to reduce international competition by controlling the price, production, and distribution of goods
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monopolistic competition: market situation in which a large number of sellers offer similar but slightly different products and in which each has some control over price
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interlocking directorate: a board of directors, the majority of whose members also serve as the board of directors of a competing corporation
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antitrust legislation: federal and state laws passed to prevent new monopolies from forming and to break up those that already exist
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merger: the legal combination of two or more companies that become one corporation
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conglomerate: large corporation made up of smaller corporations dealing in unrelated businesses (Must be involved in at least four or more unrelated businesses.)
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deregulation: reduction of government regulation and control over business activity
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