3. Introduction
Competition–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.
4. Market Structures
Market structures are a way to
categorize businesses by the
amount of competition they face.
5. Markets that are either
perfectly competitive or
pure monopolies are rare.
Most industries in the
United States fit one of the
other two forms.
6. What types of businesses face
strong competition? Why?
Businesses that have products that are in
very high demand, businesses in which
start-up costs are low, and businesses
that have world-wide markets. Examples:
Restaurants, retail stores, Internet search
engines, software companies, computer
companies, car companies, etc.
7. 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.
10. 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 market
price.
Demand for agriculture is unique; inelastic.
11. Benefits to Society
Price will drop to a level that benefits both
consumer and entrepreneur.
Economic efficiency.
Resources are used in most productive
manner.
14. 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?
17. 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.
18. Monopoly
Most 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
19. 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.
20.
21. 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.
22. Monopoly Review
The United States has many laws
preventing illegal practices within a
monopoly.
Why do you think this is so?
23. 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.
24.
25. 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.
27. 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.
28. 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
29. Monopolistic Competition
Review
Have you ever been surprised by what
some companies are able to charge for
a product?
Explain how this is possible with
monopolistic competition.
30. While consumers are free to buy
competing products, the
monopolistic competition puts
consumer in position of
comparing products on basis
other than price. Consumers are
more likely to buy certain items for
very high prices based on
advertising, value, and reputation
than they would if they were
strictly buying based on price.
31. What are the four characteristics
of a pure monopoly?
The four characteristics are:
single seller, no substitutes, no
entry into market, and control over
price.
32.
33. What characteristics of an oligopoly
allow it to have a limited control over
price?
domination by a few
sellers, substantial barriers to
entry into market, similar
products, product
differentiation, and
interdependent behavior
34.
35. Objectives
– What is the difference between
interlocking directorates and mergers?
– What is the purpose of federal
regulatory agencies?
– How has some regulation hurt
consumers?
36. Introduction
Historically, 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.
37. 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?
38. 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.
39. 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.
40. Many people feel that the break up of
Bell Telephone’s monopoly (now
known as AT&T and the baby bells)
hurt the consumer.
Are government rules restricting
monopolies always good?
If not, how do you think the laws
should be changed so that they are
better for American consumers?
41. 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.
43. Which type of monopoly might be the
most likely to hurt the consumer?
Explain your reasoning.
44. Possible responses: Horizontal
because the merged company will
have eliminated some
competition, giving it more power
within the business. Vertical
because the newly merged
company will control a greater
portion of the industry as a whole.
Conglomerate because these are
very large companies with millions
(billions) of dollars and they will
gain even more control over the
market as a whole.
45. 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.
46. Why do you think there are so many
different regulatory agencies?
47. The economy is very large and
specialized. Each agency can be
more knowledgeable about its
own specialty. In this
way, regulations should be more
realistic for the given industry and
should best help the consumer.
48. What is the difference between
interlocking directorates and mergers?
With an interlocking
directorate, some members of the
boards of directors of different
corporations are the same. With a
merger, two corporations join
together.
49. How has some regulation hurt
consumers?
Some government regulations
have decreased the amount of
competition in the economy.
