CHAPTER 9Competition and

Monopolies

CHAPTER 9SECTION 1Perfect Competition

Market Structure

Market Structure: the extent to which competition prevails in particular markets

Market structures are a way to categorize businesses by the amount of competition they face.

Four basic market structures in the American economy are: perfect competition, monopolistic competition, oligopoly, and monopoly.

Conditions of Perfect Competition

Perfect Competition: market situation in which there are numerous buyers and sellers, and no single buyer or seller can affect price

Conditions of Perfect Competition

For perfect, or pure, competition to take place five conditions must be met: A Large Market: Numerous buyers and sellers must

exist for the product. A Similar Product: The good or service being sold

must be nearly identical Easy Entry and Exit: Sellers already in the market

cannot prevent competition or entrance into the market.

Easily Obtainable Information: Information about prices should be easily obtainable.

Independence: The possibility of seller or buyers working together to control the price is almost nonexistent.

Agriculture as an Example

The agriculture market is close to a perfectly competitive industry. No single farmer has control over price. Supply and demand determine price. Individual farmers have to accept the market

price. Demand for agriculture is unique and

inelastic.

Benefits to Society

Price will drop to a level that benefits both consumer and entrepreneur.

Economically efficient

Resources are used in the most productive manner.

CHAPTER 9SECTION 2

Monopoly, Oligopoly, Monopolistic Competition

Imperfect Competiton

Most industries are a form of imperfect competition.

There are 3 types of imperfect competition that differ in how much competition and control over price the seller has.

These 3 types are: Monopoly Oligopoly Monopolistic

Monopoly

Monopoly: market situation in which a single supplier makes up an entire industry for a good of service with no close substitutes

Characteristics of Monopoly A Single Seller No Substitutes No Entry Almost Complete Control of Market Prices

Monopoly

Barriers to Entry: obstacles to competition that prevent others from entering a market

Potential barriers include: Laws preventing competing businesses from

operating in an area where a company already provides services.

The cost of starting a business, or excessive money capital costs, can prevent entry to the market.

Ownership of raw materials can be a barrier.

Monopoly

There are 4 types of pure Monopolies Natural

Geographic

Technological

Government

Natural Monopolies

Natural monopolies are providers of utilities, bus services, cable.

They have economies of scale, producing the largest amount for the lowest cost. Economies of Scale: low production costs

resulting from the large size of output

Government has begun making moves to deregulate and allow more competition.

Geographic Monopolies

Geographic monopolies are created due to geographic barriers for competition.

Because the potential profits are so small, other businesses choose not to enter.

These types of monopolies are declining, however, as competition arises from mail-order and Internet catalogs and delivery services.

Technological Monopolies

Technological monopolies are the result of inventions that are patented and copyrighted.

Patent: exclusive right to make, use, or sell an invention for a specified number of years (usually 20)

Copyright: exclusive right to sell, publish, or reproduce creative works for a specified number of years (usually 70 years after the author dies)

Government Monopolies

Government monopolies are similar to natural monopolies but held by the government

The construction and maintenance of roads and bridges are the responsibility of local, state, and national government.

Oligopoly

Oligopoly: industry dominated by a few suppliers who exercise some control over price

Conditions of Oligopoly Domination by a Few Sellers Barriers to Entry Identical or Slightly Different Products Nonprice Competition Interdependence

Oligopoly

Product Differentiation: manufacturers’ use of minor differences in quality and feature to try to differentiate between similar goods and services

Competition is not based on price but product differentiation is based on consumer perception of the value of one over the other.

Oligopoly

Interdependent Behavior With so few firms in an oligopoly, whatever

one does the other are sure to follow. When one airline drops airfares, the others will

follow and a price war ensues. This price war is good for consumers until an

airline goes out of business and less competition forces higher prices.

Oligopoly

Cartel: arrangement among groups of industrial businesses to reduce international competition by controlling the price, production, and distribution of goods

Cartels collude to keep prices high for various products.

Monopolistic Competition

Monopolistic Competition: market situation in which a large number of seller offer similar but slight different products and in which each has some control over price

Conditions of Monopolistic Competition Numerous Sellers Relatively Easy Entry Differentiated Products Nonprice Competition Some Control Over Price

Monopolistic Competition

Monopolistic Competition is the most common form of market structure in the US.

Examples include brand-name items such as toothpaste, cosmetics, and designer clothes.

Many of the characteristics of monopolistic competition are the same as those of an oligopoly but with a major difference in the number of sellers.

Monopolistic Competition

Advertising

Advertising tries to convince consumers of the superiority of a given product.

Successful advertising enables companies to charge more than the market price for a product.

CHAPTER 9SECTION 3Government Polices Toward Competition

Antitrust Legislation

John D. Rockefeller monopolized the oil industry by creating interlocking directorates and putting Standard Oil people on boards of the competition. Interlocking Directorate: a board of directors,

the majority of whose member also serve as the board of directors of a competing corporation

Because the same group controlled both companies, it was less tempting for them to compete with one another.

Antitrust Legislation

Sherman Antitrust Act Antitrust legislation preventing new

monopolies or trusts from forming and broke up existing ones.

Antitrust Legislation: federal and state laws passed to prevent new monopolies from forming and to break up those that already exist

Clayton Act Sought to clarify the laws in Sherman Antitrust

Act by prohibiting or limiting a specific number of business practices.

Mergers

Most antirust legislation deals with restricting the harmful effects of mergers.

Merger: a combined company that results when one corporation buys more than half the stock of another corporation and, this, controls the second corporation

Mergers

There are 3 types of mergers Horizontal

The merging of two corporations in the same business.

Vertical The merging of two corporations in the same

chain of supply.

Conglomerate The merging of two corporations involved in at

least four or more unrelated businesses.

Regulatory Agencies

Government makes laws regarding business pricing and product quality and uses regulatory agencies to oversee that various industries and services obey these laws.

Deregulation is when the government removes its regulations to increase competition. It was found that in trying to protect consumers

from unfair practices, government regulations had actually decreased the amount of competition in the economy.