Learning Goal:Explain the five conditions of perfectcompetition.
IntroductionCompetition–one of the basic characteristics of our market economic system–is advantageous to consumers for several reasons. Having many competing suppliers of a product leads to a surplus and, thus, lower prices.
Market Structures Market structures are a way to categorize businesses by the amount of competition they face.
Markets that are eitherperfectly competitive orpure monopolies are rare.Most industries in theUnited States fit one of theother two forms.
What types of businesses face strong competition? Why?Businesses that have products that are invery high demand, businesses in whichstart-up costs are low, and businessesthat have world-wide markets. Examples:Restaurants, retail stores, Internet searchengines, software companies, computercompanies, car companies, etc.
Conditions of a Perfect Competition Many buyers and sellers. Similar products. Sellers in the market cannot prevent others from entering market, the initial investment costs are low, and the good/service is easy to learn to produce. Information about prices, quality, and sources is easy to get. Sellers or buyers cannot group together to control price. Supply and demand control the price.
Why is itdifficult forindustry toachieve perfectcompetition?
Agriculture as an ExampleThe 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 market price. Demand for agriculture is unique; inelastic.
Benefits to SocietyPrice will drop to a level that benefits both consumer and entrepreneur. Economic efficiency. Resources are used in most productive manner.
The can makehigher profitmargins if thereis lesscompetition.
At one time, the Soviet Union believed that powerful computers might one day solve the allocation problems of a command economy. Ironically, today many people believe that the Internet offers a market structure that expediently offers the benefits of perfect competition. What are the conditions of perfect competition?
Imperfect Competition Most industries are a form of imperfect competition. There are three types of imperfect competition that differ in how much competition and control over price the seller has.
MonopolyMost extreme form of imperfect competition A single seller controls the supply and price of product. No substitutes: no competitor offers good or service that closely replaces what monopoly sells. No entry: a competitor cannot enter the market due to government regulations, large initial investment, or ownership of raw materials.
Almost complete control of market price. Can raise prices with no fear of competition. Natural monopolies are providers of utilities, bus services, cable, and have economies of scale, producing the largest amount for the lowest cost. Geographic monopolies are created due to geographic barriers for competition.
Technological monopolies are the result of inventions that are patented and copyrighted. Government monopolies are similar to natural monopolies but held by the government. Monopolies are far less important than in the past, and don’t last as long.
Monopoly Review The United States has many laws preventing illegal practices within a monopoly. Why do you think this is so?
Dominated by several suppliers and a few sellers who control 70 to 80 percent of the market. Capital costs are high and it is difficult for new companies to enter market. Goods/services provided by the few sellers are nearly identical. Competition is not based on price but product differentiation is based on consumer perception of the value of one over the other.
All the companies are interdependent; change in one will affect the others. Interdependence can lead to price wars or the illegal act of collusion or teaming up to raise prices. Cartels are international groups that use collusion to seek monopoly power.
Figure 9.8Selected OligopoliesOligopoliesexist in anumber ofindustriesthroughoutthe UnitedStates.
Oligopoly Review Airlines are an example of an oligopoly. Explain how they use product differentiation and how they act interdependently. They talk about service, convenience, etc. If one cuts airfares, the others follow.
Numerous sellers Easy entry into market Differentiated product Nonprice competition Some price control by the seller Advertising tries to convince consumers of the superiority of given product, enabling companies to charge more than the market price for a product
Monopolistic CompetitionReview Have you ever been surprised by what some companies are able to charge for a product? Explain how this is possible with monopolistic competition.
While consumers are free to buycompeting products, themonopolistic competition putsconsumer in position ofcomparing products on basisother than price. Consumers aremore likely to buy certain items forvery high prices based onadvertising, value, and reputationthan they would if they werestrictly buying based on price.
What are the four characteristicsof a pure monopoly?The four characteristics are:single seller, no substitutes, noentry into market, and control overprice.
What characteristics of an oligopolyallow it to have a limited control overprice?domination by a few sellers,substantial barriers to entryinto market, similar products,product differentiation, andinterdependent behavior
Objectives– What is the difference between interlocking directorates and mergers? – What is the purpose of federal regulatory agencies? – How has some regulation hurt consumers?
IntroductionHistorically, one of the goals of government in the United States has been to encourage competition in the economy. Hence the government created federal laws and regulatory agencies—including the Federal Trade Commission, that attempt to force monopolies to act more competitively.
Remember when?President Theodore Roosevelt was known as a trustbuster because he worked to break up monopolies. He also created regulations for the food industry after people learned that the army had been sold beef that had been embalmed. Mergers may reduce competition. Why are some mergers allowed while others are not?
Rockefeller monopolized the oil industry by creating interlocking directorates and putting Standard Oil people on boards of the competition. Sherman Antitrust Act (1890) prevented new monopolies or trusts from forming and broke up existing ones.
Clayton Act (1914) sought to clarify the laws in Sherman Antitrust Act by prohibiting or limiting a specific number of business practices. Federal government must determine whether merging of two companies will significantly lessen competition.
Many people feel that the break up ofBell Telephone’s monopoly (nowknown as AT&T and the baby bells)hurt the consumer. Are government rules restrictingmonopolies always good? If not, how do you think the lawsshould be changed so that they arebetter for American consumers?
Horizontal merger is the merging of two corporations in the same business. Vertical merger is merging of two corporations in same chain of supply. Conglomerates are the merging of two corporations involved in at least four or more unrelated businesses.
Which type of monopoly might be themost likely to hurt the consumer? Explain your reasoning.
Possible responses: Horizontalbecause the merged company willhave eliminated somecompetition, giving it more powerwithin the business. Verticalbecause the newly mergedcompany will control a greaterportion of the industry as a whole.Conglomerate because these arevery large companies with millions(billions) of dollars and they willgain even more control over themarket as a whole.
Government makes laws Deregulation is when regarding business pricing the government and product quality and removes its uses regulatory agencies to regulations to oversee that various increase industries and services obey competition. these laws.
Why do you think there are so manydifferent regulatory agencies?
The economy is very large andspecialized. Each agency can bemore knowledgeable about itsown specialty. In this way,regulations should be morerealistic for the given industry andshould best help the consumer.
What is the difference betweeninterlocking directorates and mergers?With an interlocking directorate,some members of the boards ofdirectors of different corporationsare the same. With a merger, twocorporations join together.
How has some regulation hurtconsumers?Some government regulationshave decreased the amount ofcompetition in the economy.