market structure business firm organization and competition

7/28/2019 Market Structure Business Firm Organization and Competition

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Competition, Market Structure and

Business Firm Organization

In the American Economy, we are primarily a

Market System, but we do not have a puremarket.

Since our market system is not pure, we know it

is a mixed system. The mix includes aspects ofthe Command system.

The term Market Structure refers to thesedifferent mixed versions of the market. The

markets for different classes of products behavedifferently, so there is a broad range of possible

market organization.


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Market Structure

We rank different market structures

according to the degree of competition

present.

The least competitive structures are the

different forms of monopoly.


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Market Structure

Pure Monopoly is the most restrictive form.

There are four requirements for a Pure Monopoly.

1. One seller


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Market Structure



1. One seller

2. Good with no close substitute


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Market Structure



1. One seller


3. Seller controls the supply


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Market Structure



1. One seller


3. Seller controls the supply

4. Seller controls the price


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Market Structure



1. One seller


3. Seller controls the supply4. Seller controls the price

Pure Monopoly does not exist in the real world, butthere are different forms of monopolies that do

occur.


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Market Structure

Natural (regulated) monopoly- Businesses that would naturally tend to become a

monopoly if they were allowed to compete.


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Market Structure

Natural (regulated) monopoly-Businesses that would naturally tend to become a

monopoly if they were allowed to compete.

-Typically, these are utilities, airports, refineriesand other large, complicated firms with expensive

investments in infrastructure.


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Market Structure

Natural (regulated) monopoly

-Businesses that would naturally tend to become amonopoly if they were allowed to compete.

-Typically, these are utilities, airports, refineries

and other large, complicated firms with expensiveinvestments in infrastructure.

-To protect consumers, State and Federal

governments regulate the prices charged by thesefirms, in exchange for allowing them to operate as

monopolies.


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Market Structure


Geographic (regional) monopoly


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Market Structure


Geographic (regional) monopoly- A business that has a monopoly in a limited geographic

area.


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Market Structure


Geographic (regional) monopoly-A business that has a monopoly in a limited geographic

area.

-Can be due to geography (on an island, in the mountains,

etc) or due to business arrangements (exclusive contracts,

distribution territories).


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Market Structure


Geographic (regional) monopolyGovernment monopoly


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Market Structure



-A business that the government wishes to run without

competition.

-Legislation is passed forbidding competition.


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Market Structure



-A business that the government wishes to run without

competition.

-Legislation is passed forbidding competition.

-Examples include the US Post Office, Air Traffic Control,

Federal Reserve.


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Market Structure



Technological monopoly


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Market Structure

Natural (regulated) monopolyGeographic (regional) monopoly

Government monopoly

Technological monopoly-Monopolies granted by the government to protect the

rights of those who invent, create, compose, design or

otherwise contribute original work to be sold.

-- Technological monopolies take three forms, all issuedand controlled by the US government.


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Market Structure

Technological monopolies

1. Patents

A patent is government protection that gives the right toexclude others from making, using, offering for sale, or selling

the invention.

1) Utility patents may be granted to anyone who invents or discovers

any new and useful process, machine, article of manufacture, orcomposition of matter, or any new and useful improvement thereof;

2) Design patents may be granted to anyone who invents a new,original, and ornamental design for an article of manufacture; and

3) Plant patents may be granted to anyone who invents or discoversand asexually reproduces any distinct and new variety of plant.


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Market Structure

Technological monopolies

1. Patents Patents are issued by the US Patent and Trademark

Office. If the office determines that an invention is

sufficiently original and commercially viable, then it

issues a patent that confers the patent s to thatinvention for 20 years.

Once a patent is issued, the patentee must enforce the

patent without aid of the USPTO.


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Market StructureTechnological monopolies

1. Patents

2. Copyrights

-Copyrights are registered by the Copyright Office of the

Library of Congress.

- Copyright protection granted to creators of originalworks of authorship including literary, dramatic,

musical, artistic, and certain other intellectual works,

both published and unpublished.


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1. Patents

2. Copyrights-Copyrights are registered by the Copyright Office of the

Library of Congress.

- Copyright protection is granted to creators of originalworks of authorship including literary, dramatic,

musical, artistic, and certain other intellectual works,both published and unpublished.

- Copyright law generally gives the copyright owner theexclusive right to reproduce the copyrighted work, toprepare derivative works, to distribute copies, or to

perform or display the work in public.


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1. Patents

2. CopyrightsAuthor Owned Copyright

(since 1978) Life of creator plus 70 years.

Corporate (anonymous, pseudonymous, works made for hire)95 years from publication, or

120 years after creation, whichever is shorter

Prior to 1923Expired

Copyright can be renewed upon application and justification.


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Market Structure


1. Patents

2. Copyrights

3. Trademarks and Servicemarks-

Trademark is a word, name, symbol, or device that isused to identify the producer of the goods and to

distinguish them from the goods of others. Servicemark is the same as a trademark except that it

identifies and distinguishes the source of a servicerather than a product.

Registered with the US Patent and Trademark Office


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Market Structure


1. Patents2. Copyrights


Trademarks do not expire, but can be lost throughabandonment, dilution or common use.

Abandonment occurs if a trademark has not been

actively used for three years or more.


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Market Structure




Trademarks do not expire, but can be lost throughabandonment, dilution or common use.

Dilution happens when competitors adopt very

similar trademarks and the owner takes no actionto defend their rights.


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Market Structure




Trademarks do not expire, but can be lost through

abandonment, dilution or common use.

Common use refers to the trademarked name

becoming a commonly used name for the product,so that competitors can claim the need to use that

name to describe their product to customers.


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Market Structure

Monopsony


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Market Structure

Monopsony

-A market with only one buyer.


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Market Structure

Monopsony

-A market with only one buyer.

-In a monopoly, a seller with no competition candictate higher prices paid by competing buyers.

-In a monopsony, a buyer with no competition can

dictate the price charged by competing sellers.-Since price is not freely determined both

situations are considered to be flawed markets.


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Market Structure

Oligopoly

k


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Market Structure

Oligopoly

-A market with few sellers.

k


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Market Structure

Oligopoly


-There are so few sellers that the actions of one

seller influence the actions of other sellers.

M k S


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Market Structure

Oligopoly


-There are so few sellers that the actions of one

seller influence the actions of other sellers.

-In an oligopoly, each seller feels that they are in

such tight competition that they must respond towhat their competitors do.

M k S


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Market Structure

Oligopsony

-A market with few buyers.

-There are so few buyers that the actions of one

buyer influence the actions of other buyers.

M k t St t


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Market Structure

Oligopsony

-A market with few buyers.

-There are so few buyers that the actions of one

buyer influence the actions of other buyers.

-Oligopsony does not generally occur at the

consumer level, but does sometimes occur at theproducer level.


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M k t St t


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Market Structure

Monopolistic Competition

-Competition between several different producers

of similar (but not identical) products.

The individual products are protected under the

narrow monopolies created and protected by

patents, copyrights and trademarks.

M k t St t


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Market Structure

Monopolistic Competition

-Competition between several different producers

of similar (but not identical) products.

-Markets in monopolistic competition are

characterized by the presence of

1. brand names

2. non-price competition

M k t St t


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Market Structure

Pure Competition

Theoretical market which involves the highest

possible degree of competition.

There are five requirements for a pure market.

Market Structure


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Market Structure

Pure Competition

1. Many Buyers and Sellers

Market Structure


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Market Structure

Pure Competition


2. No barriers to Entry or Exit

Market Structure


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Market Structure

Pure Competition



3. No Government Intervention

Market Structure


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Market Structure

Pure Competition



3. No Government Intervention4. Homogenous Goods

Market Structure


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Market Structure

Pure Competition



3. No Government Intervention4. Homogenous Goods

5. Perfect Knowledge of the Market

Market Structure


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Market Structure

Pure Competition

In a pure competition situation, price will be the

only factor considered when deciding which

products to buy.

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Competition

In the US economic system, we depend upon

competition to provide us with the benefitsof lower prices and higher quality.

As consumers, competition is highlybeneficial, but to producers, it requires

harder work and less profit.

As a result, producers have always tried tofind ways to avoid competition.

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Competition

Historically, the oldest form of competition

avoidance is Collusion.

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Competition



Collusion is simply an agreement between

two or more firms to avoid competition.

It can be a simple handshake agreement, or

an extremely complex arrangement.

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Competition



The market systems

of Europe werebased

on Collusion,

includingvarious Guilds,

Leagues and Unions.

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Competition

When the US was formed, there wereattempts to force competition. As early as

1792, there was a city ordinance in

Philadelphia outlawing price fixing.

This brought about the Covenant, which is

simply a collusive agreement held in secret.

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Competition

With the advent of industrialization and mass

production, new forms of competitionavoidance are developed.

The Cartel is a method of collusion involving

dividing a market.

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Competition

In the post-Civil War era, the Trust developed

as the highest form of anti-competitiveorganization.

The Railroad industry was the first to be

controlled by a trust, but eventually there

would be dozens of trusts controlling almost

all major industries.

Competition


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Competition

There are many different forms of trusts, but

basically the trust takes advantage of thelegal form of the corporation, wherein theownership of a corporation is expressed interms of stock. The corporation exists as a

separate legal entity. No one owns acorporation, rather you own stock in a

corporation.

This structure allows the trust to exist.

Competition


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Competition

In its simplest form, a trust is a corporation that

owns shares of stock in other corporations.

This allows formerly competing companies to be

controlled by a single trustee, who directs them

as if he was running a monopoly.

Competition


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Competition

Anti-Trust Law

Although states and localities had laws

enforcing competition, the federal

government maintained a laissez faire

approach until 1890.

Competition


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Competition

Anti-Trust Law

1890 Sherman Anti-Trust Act

Collusive Oligopolies deemed to be in

restraint of trade shall be illegal

Competition


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Competition

Anti-Trust Law


Collusive Oligopolies deemed to be in

restraint of trade shall be illegal

The Sherman Act left open avenues for non-

competitive behavior, including price-discrimination and interlocking directorates.

Competition


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Competition

Anti-Trust Law


1914- Clayton Amendment

Competition


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Competition

Anti-Trust Law



The Clayton amendment closed loopholes inthe Sherman act and specifically forbade

price discrimination, interlocking directorates,

and the use of the Sherman act to enjoinlabor union activities.

Competition


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Competition

Anti-Trust Law



1914- Federal Trade Commission Act

Competition


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Competition

Anti-Trust Law




Passed as a companion to the Clayton act.Created the FTC and gave it authority to

investigate, prosecute, and levy penalties inanti-trust cases.

Competition


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Competition

Anti-Trust Law




1936Robinson-Patman Act

Competition


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Competition

Anti-Trust Law





-Made price discrimination illegal at the

producer level, as well as at the consumerlevel.

Competition


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Competition

Anti-Trust Law





1950-Celler-Kefauver Anti-Merger Act

Competition


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Competition

Anti-Trust Law





1950-Celler-Kefauver Anti-Merger Act

Forbade mergers that would substantially

lessen competition or tend to create amonopoly

Business Firm Organization and Competition


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Business Firm Legal entity created for the

purpose of selling or distributing goods andservices.

Of all the different businesses in our system,

there are three basic forms of organization.These different forms are defined according to

how their ownership is expressed.

Each of the three has its own set of advantagesand disadvantages.



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The simplest form of business organization is the

Sole Proprietorship.

A Sole Proprietorship is a business firm that is

wholly owned by one person.Most Common Form (74%)

Earns the smallest share of revenue (11%)



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Advantages of the Proprietorship

1. Easiest form to organize or to dissolve.



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2. No division of responsibility.(Be your own boss)



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2. No division of responsibility.(Be your own boss)

3. No division of profits.



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Disdvantages of the Proprietorship

1. No Division of Responsibility.



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2. Limited Life



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2. Limited Life

3. Unlimited Liability.



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g p



2. Limited Life.


4. Limited sources for funding.



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g p

Partnership

A Partnership is a business firm that is wholly

owned by two or more people.

Least Common Form (9%)Earns more revenue than proprietorships (16%)



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g p

Advantages of the Partnership

1. Division of responsibility.



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g p

Advantages of the Partnership

1. Division of responsibility

2. Multiplication of sources for funds.



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g p

Disdvantages of the Partnership

1. Division of Responsibility.



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g p



2. Moderately Difficult to Organize.



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g p




3. Division of Profits.



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g p




3. Division of Profits.4. Limited Life.



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6. Still limited sources for funding.



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Corporation

A corporation is a business firm whose

ownership is expressed in terms of shares of

stock.

17% of three main types of businesses

Earns largest share of revenue of three main

types (72%)



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Corporation

A corporation is a business firm whose ownership is

expressed in terms of shares of stock.

17% of three main types of businessesEarns largest share of revenue of three main types

(72%)



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Corporation

Shareholders do not own a corporation, ratherthey own stock in a corporation.

Corporations must be chartered by the

government of the State where their operationsare based.

The corporation is a separate legal entity from

its shareholders. It is considered an

artificial person.



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Corporation

Shareholders do not own a corporation, butthey direct its actions through voting rights.

Most stock carries one vote per share towards aBoard of Directors.



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Stockholders vote for a Board of Directors



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Stockholders vote for a Board of DirectorsThe Board of Directors select (hire) Officers.



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Who oversee the day-to-day operations.



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In order to earn profits



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In order to earn profitsWhich are paid out to the stockholders as

dividends.



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Advantages of the Corporation

1. Limited Liability



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2. Unlimited Life (and Ease of Transfer)



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3. Tax Advantages



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3. Tax Advantages4. Two new sources for funding



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Two new sources for Funding

1. Stock -selling equity

2. Bonds issuing debt


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1. Stock -selling equityStock can be common or preferred.

Common Stock has voting rights, but is last in

line to claim assets.Preferred Stock is first in line for payment, but

usually has no voting rights.



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Sales of stock require the approval of the SecuritiesExchange Commission (SEC), a Federal

regulatory agency.Stock may be sold on an exchange where the

company is listed and brokers who have theright to represent customers can arrange sales

and purchases.It can also be sold on the over-the-counter (OTC)

market, where sales are made directly from ownerto buyer. Brokers who are members of NASDAQ

(National Association of Securities DealersAutomated Quotation System) facilitate these

trades.



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2. Bonds issuing debt

Sale of bonds is also regulated by the SEC.Bonds are essentially IOUs.

Two main types:

Coupon Bonds - $1000 face value, ten year term,simple interest paid annually

Zero-Coupon Bonds - Sold at discount, ten year

term, accrues compound interest monthly untilface value is reached.



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Disadvantages of the Corporation

1. Most difficult to organize or dissolve



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2. Separation of ownership and control



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3. Double Taxation



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3. Double Taxation4. Greatest potential division of profits



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Special Cases

1. CooperativesAn association of individuals who join together to

perform a business function.

a) Producer Co-ops

b) Consumer Co-ops



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Special Cases

1. Cooperatives

a) Producer Co-ops

b) Consumer Co-ops

2. Non-Profit Corporation



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Special Cases

1. Cooperatives

a) Producer Co-ops

b) Consumer Co-ops


3. S corporation



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Special Cases

1. Cooperatives

a) Producer Co-ops

b) Consumer Co-ops


3. S corporation

4. Limited Partnership



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Special Cases

1. Cooperatives

a) Producer Co-ops

b) Consumer Co-ops


3. S corporation

4. Limited Partnership

5. Limited Liability Company (LLC)

market structure business firm organization and competition

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