Market Structures & Types of Businesses

Essential Standards The student will analyze the four types of market structures in the US economy. The student will identify the basic characteristics of monopoly, oligopoly, monopolistic competition and pure competition.

Perfect Competition Where many buyers and sellers each compete to sell identical products. While there are no real “perfect” competitors… Farmers are a good example. Most produce is close to being identical.

Perfect Competition Perfect competition exists when four conditions are present: 1. Many buyers and seller act independently. 2. Sellers offer identical products 3. Buyers are well informed about products. 4. Sellers can enter and exit the market easily.

Monopolistic Competition The same as perfect competition, but these many sellers sell SIMILAR, rather that IDENTICAL products to compete. An example of monopolistic competition is in the candy bar industry. Sellers in monopolistic competitions compete by pointing out and MAGNIFYING small differences between their product and their competitors’. This is called product differentiation. (Ex: Burger King is “Better” than McDonald’s).

Oligopoly Oligopolies exist when there are only a few major competitors in the market. Examples—car manufacturers; airlines. In general, an oligopoly exists when three conditions are present: 1. There are only a few large sellers. 2. Sellers offer identical or similar products. 3. Other sellers cannot enter the market easily.

Tactics of Monopolistic Competitors & Oligopolies Non price competition: Competing in ways NOT involving prices—examples? Advertising, giveaways, store hours, customer service, etc. Price leadership- when one of the largest sellers takes the lead by setting the price for the product. Price war- Sellers aggressively undercut each other in an attempt to gain market share. Collusion- When sellers secretly agree to set production levels or prices (price fixing) for their products. This is ILLEGAL. Cartels – Companies openly organize a system of price fixing and market sharing. Example—OPEC.

Monopoly Monopolies exist when one seller controls all aspects of a good or service. They are sometimes called TRUSTS. Examples—cable television; water services. Monopolies exist when these three things exist: 1. A single seller. 2. No close substitutes. 3. Other sellers cannot enter the market easily.

Natural Monopoly Natural monopoly—a market that runs most efficiently when one large firm provides all the output. Public water is a good example… It would be inefficient for different companies to set up… Pipes, pumping stations, wells, etc.

Government Monopolies Government monopoly—a monopoly created by the government… Through copyright protections. Or through patents—a license that gives the inventor of a product the right to sell it for a certain time.

Essential Standards The student will explain the organization and role of business. The student will compare and contrast three forms of business organization—sole proprietorship, partnership, and corporation.

Barriers to Entry Barriers to entry—factors that make it difficult for new firms to enter the market. Common barriers include… Start-up costs—expenses a business must pay before the first product reaches a consumer....and… Technology—some markets require a high degree of tech. know-how.

Economies of Scale Economies of scale—factors that cause a producer’s average cost per unit to fall as its output rises. Think about shoes… Mass-produced sneakers can be purchased for less than $10.00… Hand-made Italian shoes can cost thousands… One reason for the cost difference is the scale of production.

Businesses and Organizations

Sole Proprietorship A business owned and operated by one person. It is the oldest, simplest, and most common type of business organization. Advantages: 1. easy start-up 2. full control 3. exclusive rights to profits. Disadvantages: 1. unlimited liability 2. sole responsibility 3. limited growth potential 4. lack of longevity.

Partnerships A business owned and controlled by two or more people. They’re most often seen in professional fields… Like accounting firms, doctors’ and lawyers’ offices. Advantages— 1. easy start-up; 2. specialization (different duties); 3. shared decision making; 4. shared losses. Disadvantages— 1. unlimited liability; 2. potential for conflict; 3. lack of longevity.

Corporations A business in which a group of owners, called stockholders, share in the profits and losses. Advantages— 1. limited liability; 2. management is separate from ownership; 3. easy to raise money; 4. longevity. Disadvantages— 1. heavily regulated by the government; 2. slow decision making; 3. double taxation (profits and dividends).

Horizontal Mergers Merger—when one company joins or absorbs another. A horizontal merger occurs when two companies that do the SAME thing come together. Examples? Delta and Northwest Exxon and Mobile AT&T and Cingular Wachovia and Wells Fargo

Vertical Mergers Vertical mergers occur when companies that produce different PHASES of a product come together. Andrew Carnegie was the master of the vertical merger— Tired of paying shipping companies to transport steel from refineries to his distribution centers, he bought the shipping lines… Tired of spending money at refineries that turn iron ore into steel, he bought the refineries… Tired of buying iron ore from mining companies, he bought the iron mines. And then controlled the steel industry from top to bottom.

Other Types of Organizations Franchises—businesses that are owned separately but have the same name. Example—McDonald’s. Cooperative (co-op)—owned collectively by members. Non-profit organization—a business with goals other than profits. Example—the Red Cross.