LEQ: HOW DOES COMPETITION EFFECT WHAT IS PRODUCED IN THE MARKETPLACE? KEY TERMS: MONOPOLY MARKET STRUCTURE PERFECT COMPETITION PATENT COPYRIGHT CARTEL Competition and Monopolies

Competition Competition is one of the basic characteristics of our market economy. Competition benefits consumers because it leads to choice and usually lower prices because of surplus goods.

Market Structure Just like businesses were categorized by the number of owners, they are also categorized by the amount of competition they face. There are four basic market structures in American Economy: Perfect Competition, Monopolistic Competition, Oligopoly, and Monopoly.

Perfect Competition Perfect competition consist of when there is so many sellers of a particular good or service that each seller accounts for a small part of the total market. Examples: Fast Food, Gas Stations

Perfect Competition For Perfect Competition to exist there must be 5 conditions that exist  Large market- Numerous amounts of buyers and sellers.  A similar product  Easy entry and exit- Others can join in the market relatively easy to sell the similar product.  Easily obtainable information- Information about prices, quality, and sources of supply is easy for both buyers and sellers to obtain.  Independence- Possibility of sellers or buyers working together to control price is almost nonexistent.

Perfect Competition In a perfect competition the workings of supply and demand control prices, not a single buyer or seller. Because so many buyers and sellers exist, one business charging a higher or lower price will not affect market price.

Perfect Competition Few perfectly competitive industries exist in the United States. The agricultural market is the closest.  How does the wheat market apply to the five conditions of perfect competition (Figure 9.3 page 236). Perfectly competitive industries yield economic efficiency. All inputs are used in the most advantageous way possible, and society therefore enjoys an efficient allocation of productive resources.

Three types of imperfect competition Monopoly, Oligopoly, and Monopolistic Competition

Monopoly A single seller controls the supply of the good or service and thus controls the price.  Electric Companies in some communities. Characteristics of a Monopoly 1. A single seller 2. No substitutes 3. No entry 4. Almost complete control of market price

Monopoly Monopolies often exist in public utilities (water company and electric company). This is because state laws often restrict other companies forming in other areas because of the fear that competition may lead to wasteful duplication.

Monopolies Monopolies can be separated into 4 categories 1.Natural – Utilities, bus service, and cable TV 2.Geographic- A grocery store in a remote location in Alaska. 3. Technological- If you invent something you can have a patent put on it and you own the exclusive rights to manufacturing. Also, a copyright does the same thing for works of art or song lyrics. 4. Government- The construction of roads and bridges is the sole responsibility of the government.

Oligopoly An industry dominated by several suppliers who exercise some control over price.  Characteristics of an Oligopoly  1. Domination by a Few Sellers- Several large firms  2. Barriers to Entry- Difficult for new companies to enter market  3. Identical or slightly different products  4. Non Price Competition- Advertising attempts to build customer loyalty  5. Interdependence- The change one firm makes will change the other firms as well.

Oligopoly Product differentiation is the real or perceived differences in the good or service that makes it more valuable to customers. As we mentioned earlier this refers to non price competition. These companies are selling a name not the price GwbOY GwbOY

Oligopoly Interdependent behavior can lead to a lower market price of a good or service as a whole or a higher price. If one company drops prices, all the other will inevitably have to do the same. Some companies may not be able to stay in business if this happens and a monopoly may eventually be formed.  One airline drops price of tickets.

Monopolistic Competition Large number of sellers offer similar but slightly different products. Examples: Shoes, Clothes, Fastfood Characteristics of Monopolistic Competition 1. Numerous sellers 2.Relatively easy entry 3.Diffrentiated products 4. Non Price Competition 5. Some control over price

Monopolistic Competition This type of market structure has many firms, no real interdependence, and some slight difference among products. Competitive advertising is more important in this market structure than any other. This is because of the large amounts of similar products.

Government Policies Toward Competition Sherman Antitrust Act- In 1890 Congress passed the law in response to John D Rockefellers Oil Monopoly.  This antitrust legislation or law was to prevent new monopolies or trust from forming and to break up those that already exist. Because of the vagueness of the Sherman Antitrust, the Clayton Act of 1914 was created. This more specifically prohibited corporations from certain practices that lowered competition substantially.

Government Policies Toward Competition Most anti trust legislations restrict mergers. Mergers are when two or more corporations joint together.  Horizontal merger is if video store A buys Video store B. Or if Cell Phone company A buys Cell Phone company B.  Vertical Merger is if a paper company buys the wood mill that supplies the pulp. Or if McDonalds bought the potatoes farms that they use for fries.  A conglomerate is a larger merger of multiple corporations involved in different businesses.  CHART ON 251