Competition Chapter 9 Sections 1 thru 3

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Competition Consumer’s Benefit Lower Prices More Choices Better Quality

Market Structure Amount of Competition

Perfect Competition Situation that exists when a market includes so many sellers of a particular good or service that each seller accounts for just a small portion of the overall market.

Five Conditions of Perfect Competition Large Market Independence Nearly Identical Product Easy Entry and Exit Easily Obtainable Information

Cont. Perfect Competition is rare Information is Key for Consumer Benefits – Economic Efficiency Examples?

Monopoly Single seller controls the supply of the good or service and thus determines the price. Examples?

4 Characteristics of a Monopoly Single Seller No substitutes or close substitutes exist Large barriers to entry for potential competition to enter the industry. Almost complete control over price.

Cont. Can monopolies charge any price they want?? Why don’t other businesses join?

Types of Monopolies Natural – Government grants rights to companies (Ex. Utilities, Bus Systems, Cable TV). Economies of Scale – Low production costs resulting from the large size of output.

Cont. Geographic – Often in rural areas – Ex. A small town grocery store Government – United States Postal Service.

Cont. Technological – Rights to a new invention. Example – Microsoft Windows. Copyrights and Patents

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Oligopoly Industry dominated by a few suppliers who exercise some control over price.

Characteristics of an Oligopoly Dominated by only a few sellers Large (difficult) barriers to entry Identical or slightly different products Nonprice Competition amongst the firms Interdepence

Cont. Product Differentiation - Manufacturers use of minor differences in quality and features to try and differentiate between similar goods and services. Can be real or perceived differences in a good or service.

Cont. Interdependent Behavior – Follow/copy what the other firms are doing. Ex. GM offers in employee pricing, then Ford does, then Chrysler

Cont. Collusion – Secret agreement amongst competitors in an oligopoly. ILLEGAL to do. DON’T CONFUSE WITH… Cartel – Arrangement among different businesses to control and supply (and therefore price) involving industries in different countries outside the US.

Monopolistic Competition Large number of sellers offer similar but slightly different products and in which each has some control over price. Examples

Characteristics of Monopolistic Competition Numerous Sellers – No single seller or small group of sellers dominates the market. Relatively easy entry into the market. Nonprice competition Some control over price

Cont. Brand Loyalty – Gain respect and a following and you can raise prices at least slightly (Ex. Nike) Advertising…

Advertising Extremely important in monopolistic and oligopolies. Must get people to see differences between your product and the competitors, whether that difference is real or perceived.

Anti-Trusts and Gov’t Regulation WHAT should the role of government be with regards to competition in the market place?

Anti-Trust Laws Goal = Encourage competition in the economy and to prevent unfair trade practices.

Cont. Anti-Trust Legislation = Laws written to prevent new monopolies (AKA Trusts) from forming and to break up those that already exist. Reasons?

Merger Two or more companies combine into one business. 3 Types

Mergers Horizontal – Same types of business Vertical – Different types of businesses but same industry Conglomerate – Unrelated businesses combine together

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