ECONOMICS CHAPTER 6

CharacteristicsPerfect Competition # of Firms In Each Industry Many Market ConcentrationLow Type of ProductSimilar or Identical Availability of Information Much (Advertising) Entry Into IndustryVery Easy Control Over PricesNone ExamplesAgriculture/Candy

CharacteristicsMonopolistic Competition # of Firms In Each Industry Many Market ConcentrationLow Type of ProductSimilar or Identical Availability of Information Much (Advertising) Entry Into IndustryFairly Easy Control Over PricesLittle ExamplesAirlines/Blue Jeans

CharacteristicsOligopoly # of Firms In Each Industry Few Market ConcentrationHigh Type of ProductSimilar or Differentiated Availability of Information Much (Advertising) Entry Into IndustryDifficult Control Over PricesSome ExamplesCereal/American Autos

CharacteristicsMonopoly # of Firms In Each Industry One Market ConcentrationAbsolute Type of ProductUnique (No Substitutes) Availability of Information Some (Advertising) Entry Into IndustryDifficult/Prohibitive Control Over PricesComplete ExamplesElectricity/Gas

MONOPOLY OLIGOPOLY MONOPOLISTIC COMPETITION PERFECT COMPETITION

B. 1. Define product differentiation. When sellers point out differences between their product and another seller’s product.

B. 2. Provide an example of product differentiation (outside of the textbook). Quality, size, comfort, fit, taste, etc.

B. 3. Define non-price competition. Competition between firms that is based on something other than price.

B. 4. Provide an example of non-price competition (outside of the textbook). Use of celebrities in advertisements, brand names, warranties, guarantees, service, etc.

B. 5. How do oligopolies use non-price competition? Through advertisements and brand name loyalty.

B. 6. How do sellers in oligopolies maintain a degree of control over price? Through interdependent pricing, responding to price changes of their competitors.

B. 7. Explain the most common form of interdependent pricing. Price leadership, a large seller takes the lead at setting a price.

B. 8. a. What is a price war? Sellers aggressively undercut each other’s prices in order to gain a larger share of the market. b. What causes a price war? Failed pricing policies of sellers. c. Explain what occurs when price wars end? Loss of profits, business go under.

B. 9. Define collusion. The illegal action of sellers in an industry secretly agreeing to set production levels or prices.

B. 10. a. What is a cartel? An organization of sellers of similar products. b. Why are cartels illegal? They fix prices/interfere with the market. c. Why are cartels short-lived and unstable? Members may not adhere to their agreements.

B. 11. Type of Monopoly DefinitionExample a.NaturalEfficient producer Gas Co./ Electric Co. b. GeographicLocationLumber Mill c. Technological Patent/ Copyright iPod d. GovernmentPublic Service/ Goods Post Office

B. 12. Explain three forces that limit the seller’s control over prices. Consumer demand Potential competition (more sellers enter the industry) Government regulation of the industry or product

B. 13. How did the relationship between government and business change in the late 1800s? Trusts held too much control over the market, so the government began to regulate them.

B. 14. a. Interstate Commerce Act Created the Interstate Commerce Commission to regulate railroad rates, so that railroad companies would not take advantage of farmers who had to transport their goods.

B. 14. b. Sherman Antitrust Act Prohibited any agreement that would interfere with interstate trade or cause a monopoly to form.

B. 14. c. Clayton Antitrust Act A follow-up to the Sherman Antitrust Act: Prohibited price discrimination, mergers that would reduce competition, and exclusive sales contracts.

B. 14. d. Free Trade Commission Act Created the Free Trade Commission to investigate charges of unfair competition.

B. 14. e. The Robinson-Patman Act A follow-up to the Clayton Antitrust Act: Prohibited price discrimination. Wholesalers cannot charge small sellers higher prices than large sellers.