Warm Up There are several transportation markets in the United States. Airlines, for example, compete for customers. Long-distance passenger train service in the United States, however, does not have any real competition. It is run by one company, which is publicly funded, with prices regulated by the federal government. Customers who ride these trains do not choose between different companies. How does competition affect the prices that airlines charge for fares? How does a lack of competition affect the prices that the train company charges for fares? Why do you think the government regulates the prices of train fares?

Tuesday, February 26, 2019 Objective: Students will be able to explain and give examples of oligopolies and monopolies. Purpose: Understanding the structure of markets will make you a better consumer.

Oligopolies Oligopoly: a few firms dominate a market and have the ability to affect prices Less competitive than monopolistic competition Oligopolic firms are often very large and very similar in what they offer to consumers

Oligopolies Very difficult to enter the market Some advertising Expenses from nonprice competition are passed onto consumers, resulting in higher prices than in monopolistic competition Competition between Oligopolies Regularly release new versions of products

Are the music companies in this graph an example of an oligopoly Are the music companies in this graph an example of an oligopoly? Why or why not?

What characteristics of the video game console industry make it an oligopoly? How does this affect how each firm does business?

How is the industry that these companies are a part of an example of an oligopoly?

Monopolies Monopoly: only one seller of a particular product Most monopolies are imperfect, meaning there is some competition, but it is only a fraction of the market The problem with monopolies is that they can take advantage of their market power and charge high prices

In a monopoly, one company controls the entire market In a monopoly, one company controls the entire market. What are some barriers to entry that might allow a monopoly to exist?

How Monopolies Work Even a monopolist faces a limited choice—it can choose either output or price, but not both The monopolist looks at the big picture and tries to maximize profits, which leads to fewer goods being produced at a higher price If a monopolist produces more, the price of the good will fall, and if it produces less, the price will rise

Created in late 1901 by the merger of Carnegie Steel Company with other steel producers, U.S. Steel was the first billion-dollar corporation in the country. It supplied steel to build railroads, bridges, and naval ships. At one point, U.S. Steel controlled nearly 70% of the steel industry in the United States. The company held monopolistic power in the steel market for decades.

The U. S. Postal Service, a government agency, was created in 1775 The U.S. Postal Service, a government agency, was created in 1775. It was established as a monopoly because the government worried that private companies would only deliver to profitable routes, forcing taxpayers to pay for more expensive, less populous routes

Evaluating Monopolies “The great danger to the consumer is the monopoly—whether private or governmental. His most effective protection is free competition at home and free trade throughout the world. The consumer is protected from being exploited by one seller by the existence of another seller from whom he can buy and who is eager to sell to him.” —Milton Friedman Do you agree with Friedman that monopolies are dangerous and that they exploit customers? Or do you feel they serve a positive purpose in the economy? Write your opinion, and give examples to support your answer.

Price Discrimination Price Discrimination: the division of consumers into groups based on how much they will pay for a good based on the idea that each customer has a maximum price that he or she will pay for a good In the monopolist’s ideal world, the firm could charge each customer the maximum that he or she is willing to pay, and no less This is impractical, so companies divide consumers into large groups and design pricing policies for each group (Example: cable TV)

Cooperation and Collusion Collusion: an illegal agreement among firms to divide the market, set prices, or limit production One outcome of collusion is called price fixing, an agreement among firms to sell at the same or very similar prices (this is illegal in the United States) Sometimes the market leader in an oligopoly can start a round of price increases or price cuts by making its plans clear to other sellers This firm becomes a price leader, which can set prices and output for entire industries as long as other member firms go along with the leader’s policy