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Chapter 11: How Businesses Compete
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Chapter 11: How Businesses Compete

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  • 1. ECONOMICS CHAPTER 11 How Businesses Compete
  • 2. Competition & Coordination
    • Competition
    • Businesses for consumers;
    • Consumers for goods & svcs (remember scarcity?)
    • Coordination
    • In US, within a free-market system
    • It’s all voluntary!
    • Everyone can benefit from coordination! (Remember circular flow)
  • 3. Market Structure
    • Characteristics of a market in which a firm competes
    • Important Elements:
      • Number of Firms
      • Ability to set price
      • Product Differentiation
      • Ease of Entry
      • See p. 181 - REALLY important Chart!
  • 4. Pure Price Competition
    • Number of Firms?
    • Ability to set price?
    • Product Differentiation?
    • Ease of Entry?
  • 5. Pure Price Competition (aka Pure Competition)
    • Number of Firms: Many
    • Ability to set Price: None - You take what you can get - Price-Taker
    • Product Differentiation: None
    • Ease of Entry: Relatively Easy
    • Complete Info. about Product
    • Example: Agriculture goods
  • 6. Monopolistic Competition
    • Number of Firms?
    • Ability to set price?
    • Product Differentiation?
    • Ease of Entry?
  • 7. Monopolistic Competition
    • Number of Firms: Many
    • Ability to set Price: Limited - Many Substitutes
    • Product Differentiation: Yes - to specific market demands
      • Sprint
      • Verizon
      • AT&T
      • T-Mobile
      • Boost
    • Ease of Entry: Relatively Easy
    • Example: Cell Phones
    • Other Examples?
  • 8. Monopolistic Competition:
    • Businesses offer similar (not identical) products, distributors/vendors are usually small & many
      • Because each product is different, biz can increase or decrease price to alter sales
      • Occurs w/ many biz selling similar items; easy to enter/exit; competition is fierce & biz needs to create a "niche" for product
        • Differentiation: uniqueness of goods are emphasized (Big Mac vs. Western Double Bacon Cheeseburger)
        • Customer Service: price of product many increase or decrease depending on how it is sold (full service is more expensive than self serve)
        • Warranties & Support : paying to protect the life of produce costs more
        • Prestige : paying for "good" label product costs more
  • 9. Oligopoly
    • Number of Firms?
    • Ability to set price?
    • Product Differentiation?
    • Ease of Entry?
  • 10. Oligopoly
    • Number of Firms: Few Large Bus.
    • Ability to set Price: Yes - but need to be consistent with competitors!
    • Product Differentiation: Necessary
    • Ease of Entry: Difficult - Expensive
    • Example: Automobiles
    • Concentration Ratio: % of sales controlled by top 4 companies
    • For Oligopoly, top 4 > 60% of sales
  • 11. Oligopoly:
    • Fierce competition between 3 - 5 large businesses
      • Advertisement used to create attraction to product
      • Easier to influence price (though companies working together to increase price is illegal in the US--”Collusion” & “Price Fixing”)
      • Obstacles to successful collusion:
        • Price: tough to force companies to sell @ higher price when they can sell more @ lower prices
        • Production: companies must all agree which will sell more or less to push up price
        • Enforcement: as market price increases, it's tough to keep all from producing more @ higher price
        • New Entrants: as prices increase, it encourages others to enter market. Oligopoly tries to prevent this, by offering complex, expensive products or services.
  • 12. Monopoly
    • Number of Firms?
    • Ability to set price?
    • Product Differentiation?
    • Ease of Entry?
  • 13. Monopoly
    • Number of Firms: One
    • Ability to set Price: Yes - you’re only one!
    • Product Differentiation: No
    • Ease of Entry: Very Difficult - Expensive
    • Example: Public Utilities (electricity, water)
    • Types of Monopolies:
      • Natural: Utilities (water, electricity, phone, cable)
      • Gov’t License: vendors at stadium, Paseo del Pasado
      • Patents, Copyrights © , Trademarks TM
  • 14. Monopoly
    • Patents: gives inventors of new products exclusive right to offer good or svcs for 17 years
        • Can sell or give away "intellectual property"
        • Encourages creation of substitutes
        • Pharmaceutical & electronic companies are some of biggest beneficiaries
      • Copyright: exclusive right to reproduce or sell original writing, artwork or music
        • Lasts lifetime of the creator + 50 years
      • Trademark: protects ownership of designs, names, symbols associated w/ a product, svcs or company
        • Competitors can't use (even similar); i.e., Coke
  • 15. How well did these companies do in creating their “look?”
  • 16. Brands
    • All
    • Bubblicious
    • Campbell’s
    • Dawn
    • Eggo
    • Frito-Lay
    • Gatorade
    • Hebrew National
    • Icee
    • Jell-o
    • Kool-Aid
    • Lysol
    • M & M’s
    • Nilla Wafers
    • Oreo
    • Pez
    • Q-Tips
    • Reese’s
    • Starburst
    • Tide
    • Uncle Ben’s
    • V-8
    • Wisk
    • Xtra (laundry detergent)
    • York
    • Zest
  • 17. Mergers
    • Combining resources from multiple places to improve and increase production
    • Reasons to merge:
      • Spread risk of company by adding product lines
      • Bigger is better; size matters because you can do more
      • Provide better management to absorbed company
      • Reduce cost by gaining assets (marketing & transportation facilities)
  • 18. Three Types of Mergers:
    • Vertical Merger:
      • Merger of companies involved in different steps of production process
        • i.e., Disney (entertainment producer) & ABC/Cap City (distribution company)
    • Horizontal Merger
      • companies who do the same thing
        • i.e., Exxon & Mobile (both oil companies)
    • Conglomerate Merger
      • Companies who are not in the same biz
      • RJ Reynolds (cigarettes) & Nabisco (food)
  • 19. Marketing:
    • Process of bringing together producers and consumers
    • In addition to advertising, marketing = buying, selling, transporting, storing, product planning, research, customer service, insuring, etc.
      • An entire industry exists related to bringing buyers and sellers together
  • 20. Marketing
    • The 4 P's of Marketing:
      • Product: give customers what they want
      • Price: cover cost of producing, but keep it cheap enough to meet customer's interest
      • Promotion: getting info. to consumers through advertising, mailings & personal contact
      • Place: product must be in an accessible place (location, location, location!)