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9.competition and monopolies
Learning Goal:
Explain the five conditions of perfect
competition.
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. 
Market Structures
 Market structures are a way to
  categorize businesses by the
  amount of competition they face. 
Markets that are either
perfectly competitive or
pure monopolies are rare.
Most industries in the
United States fit one of the
other two forms.
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.
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.
9.competition and monopolies
Why is it
difficult for
industry to
achieve perfect
competition?
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.
Benefits to Society
Price will drop to a level that benefits both
  consumer and entrepreneur. 
Economic efficiency. 
Resources are used in most productive
 manner.
The can make
higher profit
margins if there
is less
competition.
9.competition and monopolies
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?
9.competition and monopolies
Objectives
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.
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 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.
9.competition and monopolies
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.
9.competition and monopolies
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 9.8
Selected Oligopolies
Oligopolies
exist in a
number of
industries
throughout
the United
States.
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 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.
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.
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.
9.competition and monopolies
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
9.competition and monopolies
Objectives
– What is the difference between
  interlocking directorates and mergers?
  
– What is the purpose of federal
  regulatory agencies? 
– How has some regulation hurt
  consumers?
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.
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 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?
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.
Figure 9.11
Mergers
Which type of monopoly might be the
most likely to hurt the consumer? 
Explain your reasoning.
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.
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 many
different regulatory agencies?
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.
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.
How has some regulation hurt
consumers?


Some government regulations
have decreased the amount of
competition in the economy.

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9.competition and monopolies

  • 2. Learning Goal: Explain the five conditions of perfect competition.
  • 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.
  • 9. Why is it difficult for industry to achieve perfect competition?
  • 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.
  • 12. The can make higher profit margins if there is less competition.
  • 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 materials.
  • 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.
  • 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.
  • 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.
  • 26. Figure 9.8 Selected Oligopolies Oligopolies exist in a number of industries throughout the United States.
  • 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.
  • 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
  • 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.