7 Chapter Competition

Competition=freedom to choose from several alternatives Competition is about choice It is the very basic principle of economics

Six Conditions of Competition Number of buyers and sellers in the industry Type of product produced (identical or unique) Degree to which individual firms in the industry control price Amount of information available to producers and consumers Ease of entry and exit from the industry Role of government

Perfect Competition: Good Example thousands of firms, acting independently, turn out identical products for consumers. Supply and demand work together to decide which goods and services will be produced and at what price Rarely exists anywhere in the world. 1000s of buyers and sellers Identical products No control over price Complete information easy entry and exit Small role of government Good Example not

Imperfect Competition Monopolistic Many sellers/buyers Differentiated products Limited control over price Good access to information Relative easy entry and exit Small role of government Oligopoly Few firms Differentiated or identical products Greater influence on price Limited information Difficult entry and exit Larger role of government

Monopolistic Competition 1. All firms produce similar yet not perfectly substitutable products. 2. All firms are able to enter the industry if the profits are attractive. 3. All firms are profit maximizers. 4. All firms have some market power, which means none are price takers.

Oligopoly Similar to a monopoly, in which only one company exerts control over most of a market. In an oligopoly, there are at least two firms controlling the market.

No Competition: Monopoly Characteristics of Monopoly: One firm Unique product Control over price Complete information Extreme difficulty of entry and exit Significant role of government

Sherman Antitrust Act 1890 the first measure passed by the U.S. Congress to prohibit abusive monopolies 1982 broke-up of the American Telephone and Telegraph (AT&T) 1998 attempted to rein in abusive monopolistic practices by Microsoft

Deregulation Deregulation of the electric and natural gas markets came on the heels of deregulation in the airline and telephone industries.  Those industries underwent drastic changes during periods of expansion and contraction.  Today, airfare and phone rates adjusted-for-inflation, are considerably less than they were in the 1980s and many new products and services exist. 

O.S.H.A. Occupational Safety and Health Administration Federal agency of the United States that regulates workplace safety and health

Cartel Agreement among competing firms. It is a formal organization of producers that agree to coordinate prices through Collusion. Organization of the Petroleum Exporting Countries (OPEC) Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, & Venezuela 55% of oil traded worldwide

Types of Monopoly Natural monopoly: single firm produces more efficiently than competing firms (Ex: Electric Companies) Government monopoly: government grants company a monopoly (Ex: USPS, Garbage) Technological monopoly: company patents/copyrights product to eliminate competition (Ex: Pharmaceuticals, Computers) Geographic monopoly: sole provider in a region (Ex: Supermarkets in small towns) Internet primarily eliminated Monopoly franchise: local government grants exclusive right to do business in an area (Ex: Cable companies)

HW: Features of Various Market Structures Number of Firms in Industry Type of Product Influence over Price Amount of Information Ease of Entry and exit Role of Government Perfect Competition Thousands identical none complete easy small Monopolistic Competition many differentiated Limited considerable Relatively Oligopoly 12-50 Identical Or limited difficult larger Monopoly one unique Extremely significant Market Structures