ECONOMICS CHAPTER 11 How Businesses Compete
Competition & Coordination <ul><li>Competition  </li></ul><ul><li>Businesses for consumers;  </li></ul><ul><li>Consumers f...
Market Structure <ul><li>Characteristics of a market in which a firm competes </li></ul><ul><li>Important Elements: </li><...
Pure Price Competition <ul><li>Number of Firms? </li></ul><ul><li>Ability to set price? </li></ul><ul><li>Product Differen...
Pure Price Competition  (aka Pure Competition) <ul><li>Number of Firms:  Many </li></ul><ul><li>Ability to set Price:  Non...
Monopolistic Competition <ul><li>Number of Firms? </li></ul><ul><li>Ability to set price? </li></ul><ul><li>Product Differ...
Monopolistic Competition <ul><li>Number of Firms:  Many </li></ul><ul><li>Ability to set Price:  Limited - Many Substitute...
Monopolistic Competition: <ul><li>Businesses offer similar (not identical) products, distributors/vendors are usually smal...
Oligopoly <ul><li>Number of Firms? </li></ul><ul><li>Ability to set price? </li></ul><ul><li>Product Differentiation? </li...
Oligopoly <ul><li>Number of Firms:  Few Large Bus. </li></ul><ul><li>Ability to set Price:  Yes - but need to be consisten...
Oligopoly:   <ul><li>Fierce competition between 3 - 5 large businesses </li></ul><ul><ul><li>Advertisement  used to create...
Monopoly <ul><li>Number of Firms? </li></ul><ul><li>Ability to set price? </li></ul><ul><li>Product Differentiation? </li>...
Monopoly <ul><li>Number of Firms:  One </li></ul><ul><li>Ability to set Price:  Yes - you’re only one! </li></ul><ul><li>P...
Monopoly <ul><li>Patents:   gives inventors of new products exclusive right to offer good or svcs for 17 years </li></ul><...
How well did these companies do in creating their “look?”
Brands <ul><li>All </li></ul><ul><li>Bubblicious </li></ul><ul><li>Campbell’s </li></ul><ul><li>Dawn </li></ul><ul><li>Egg...
Mergers   <ul><li>Combining resources from multiple places to improve and increase production </li></ul><ul><li>Reasons to...
Three Types of Mergers: <ul><li>Vertical Merger: </li></ul><ul><ul><li>Merger of companies involved in different steps of ...
Marketing: <ul><li>Process of bringing together producers and consumers </li></ul><ul><li>In addition to advertising, mark...
Marketing <ul><li>The 4 P's of Marketing: </li></ul><ul><ul><li>Product:  give customers what they want </li></ul></ul><ul...
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Chapter 11: How Businesses Compete

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Chapter 11: How Businesses Compete

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

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