How Businesses Compete Chapter 11

Competition Market Competition- When businesses compete with one another to excel in free markets. Entrepreneurs & business owners try to get ahead by offering goods & services they hope people want to buy

When Businesses Compete Consumers benefit in numerous ways: 1. lower prices 2. better quality 3. higher wages 4. more job opportunities KAYAK - Cheap Flights, Hotels, Airline Tickets, Cheap Tickets, Cheap Travel Deals - Compare Hundreds of Travel Sites At Once

What is Market Structure? It is a way to analyze the level of competition in an industry There are 2 descriptions of market structures A) Price taker-a business must accept the price established by the market forces of supply and demand B) Price searcher-a business who goes into the market and seeks out the right price to charge for their good (Monopolistic Competition, Oligopoly, & Monopoly)

Types of Market Structure 1. Pure Competition- Characteristics a. many buyers & sellers (literally 1000s to millions) b. standardized or identical product- one companies product is exactly the as every other companies c. easiest market to enter & exit as a producer

Types of Market Structure d. No Government restrictions to prevent the company from opening e. consumers can obtain complete information about the product & stores in this market f. no control over the products price! g. examples: -1. most agricultural products -2. florist -3. bakery

Paul Solomon Video

Anticipatory Set Day 2 What is a price taker?

Monopolistic Competition A) many small firms in the market (1,000s-10,000s) A highly competitive market B) Sell a very similar but not identical product C) Product differentiation— what makes products different

Product Differentiation 1. Product name 2. Trademarks 3. Warranties 4. Services 5. Customer Service

Monopolistic Competition D) since products are not identical, businesses can control the quantity and thus slightly control the price they charge (Minimal control over price) Easy entry & exit into the market F) examples Restaurants, department stores, etc

Oligopoly A) When 2 or more firms dominate an industry B) severe barriers to entry & exit into the market C) Products are usually similar, yet not identical D) High levels of “Non-price competition”

Oligopoly E) Collusion- When firms secretly get together in order to control both the product price & quantity of their goods This is illegal in the United States (why?) It establishes monopoly power in the market!

Oligopoly F) Product information is plentiful the more competitive the oligopoly G) How does the Government distinguish between a monopoly, completive market and an oligopoly? H) Concentration Ratio- If the 4 largest firms in the industry an account for 40% or more of total output of the product.

Oligopoly Safari Montage YouTube - OPEC OIL EMBARGO – 1973 OPEC's Production Cuts - CBS News Video2008

Solutions YouTube - Ethanol on Modern Marvels

Questions What other fields are susceptible to becoming oligopolies? What things do you think are necessary for an oligopoly to work?

What have you heard about monopolies? Are there any dangers to a monopoly? How is a monopoly different from an oligopoly?

Pure Monopoly A) Extreme opposite of Pure Competition B) One Seller-The firm is the industry C) A product for which there are NO close substitutes D) Barriers to entry & exit are considered impossible E) Firm has total control over price F) Can achieve “Economies of Scale” –Produce mass quantities & specialization which reduces costs of production (also applies to Oligopolies)

Types of Legal Monopolies 1) “Public Legal” also referred to as “Natural Monopolies” because it is in societies best interest to have a monopoly market in place. Energy, public transportation… 2) “Private Legal” Protect the rights of the individuals

Day 4 There are legal monopolies. Is there anything that you think would be better run if it were a monopoly?

Private Legal A) Copyright- exclusive rights to something written like a book, poem, music, songs etc, which is good for 28 years & is renewable (Beatles songs) B) Trademark- name or symbol that represents a product C) Patent- exclusive rights to an invention. Last 17 years.

Resource Monopoly “Resource Monopoly”- When a firm owns the rights to a key natural resource used to make a good A) ALCOA (Aluminum Company of America) Owns 90% of all known Bauxite reserves in the world B) DeBeers Diamonds- Owns 90% of all the world’s diamond mines

Video: USFL YouTube - ESPN 30 for 30 - Who Killed The USFL Part 4/6 What type of monopoly does the NFL have? How did the USFL challenge that?

Government monopoly Government itself is the sole producer A) U.S postal Service… B) Print coins and currency MONOPOLIES ARE ILLEGAL IN THE U.S! 1)Anti-trust laws make them illegal 2) Sherman Anti-Trust Act-1st anti-trust law passed in the U.S. (1892)

Mergers Merger- when one company takes over another Why do firms merge? 1) add new products 2) a way to reduce costs & spread out risks 3) Benefits of increased size and efficiency

Types of Mergers 1) Horizontal- a combination of 2 companies who produce the same kind of product Example- Exon-Mobil 2) Vertical- a combination of 2 companies involved with different steps of the production of the same good

Conglomerate Conglomerate- a combination of 2 unrelated businesses under single management Example: Liggett & Myers= a cigarette Company merged with a dog food maker Joint Venture- When 2 companies keep their independence, but cooperate with each other for a project When the project is over the firms disengage Example: Toyota & GM created the chevy nova worksheets

Geographic Monopoly “Geographic Monopoly” – usually small in nature A) Based on the size of a potential market where only 1 firm could survive 1) example Hardware store, Drugstore How has this changed with Walmart?

Marketing Marketing- consists of everything that takes place in a business from the production phase to the actual sale of the product 1) buying & selling, transportation, storage, market research, customer service, advertising, insurance etc.

4 P’s of Marketing 1) Product- something consumers want, features must meet consumer expectations for the Price they pay 2) Price- how much does it cost to make, how much will consumers pay, how profitable is it 3) Promotion- The way businesses get their message to the consumer 4) Place- where to sell the good, location of your business