Unit 4: Imperfect Competition 1. Monopoly 2 Characteristics of Monopolies 3.
Competition and Monopolies. Perfect Competition Market Structure : the extent to which competition...
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CHAPTER 9Competition and
Monopolies
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CHAPTER 9SECTION 1Perfect Competition
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Market Structure
Market Structure: the extent to which competition prevails in particular markets
Market structures are a way to categorize businesses by the amount of competition they face.
Four basic market structures in the American economy are: perfect competition, monopolistic competition, oligopoly, and monopoly.
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Conditions of Perfect Competition
Perfect Competition: market situation in which there are numerous buyers and sellers, and no single buyer or seller can affect price
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Conditions of Perfect Competition
For perfect, or pure, competition to take place five conditions must be met: A Large Market: Numerous buyers and sellers must
exist for the product. A Similar Product: The good or service being sold
must be nearly identical Easy Entry and Exit: Sellers already in the market
cannot prevent competition or entrance into the market.
Easily Obtainable Information: Information about prices should be easily obtainable.
Independence: The possibility of seller or buyers working together to control the price is almost nonexistent.
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Agriculture as an Example
The agriculture market is close to a perfectly competitive industry. No single farmer has control over price. Supply and demand determine price. Individual farmers have to accept the market
price. Demand for agriculture is unique and
inelastic.
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Benefits to Society
Price will drop to a level that benefits both consumer and entrepreneur.
Economically efficient
Resources are used in the most productive manner.
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CHAPTER 9SECTION 2
Monopoly, Oligopoly, Monopolistic Competition
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Imperfect Competiton
Most industries are a form of imperfect competition.
There are 3 types of imperfect competition that differ in how much competition and control over price the seller has.
These 3 types are: Monopoly Oligopoly Monopolistic
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Monopoly
Monopoly: market situation in which a single supplier makes up an entire industry for a good of service with no close substitutes
Characteristics of Monopoly A Single Seller No Substitutes No Entry Almost Complete Control of Market Prices
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Monopoly
Barriers to Entry: obstacles to competition that prevent others from entering a market
Potential barriers include: Laws preventing competing businesses from
operating in an area where a company already provides services.
The cost of starting a business, or excessive money capital costs, can prevent entry to the market.
Ownership of raw materials can be a barrier.
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Monopoly
There are 4 types of pure Monopolies Natural
Geographic
Technological
Government
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Natural Monopolies
Natural monopolies are providers of utilities, bus services, cable.
They have economies of scale, producing the largest amount for the lowest cost. Economies of Scale: low production costs
resulting from the large size of output
Government has begun making moves to deregulate and allow more competition.
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Geographic Monopolies
Geographic monopolies are created due to geographic barriers for competition.
Because the potential profits are so small, other businesses choose not to enter.
These types of monopolies are declining, however, as competition arises from mail-order and Internet catalogs and delivery services.
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Technological Monopolies
Technological monopolies are the result of inventions that are patented and copyrighted.
Patent: exclusive right to make, use, or sell an invention for a specified number of years (usually 20)
Copyright: exclusive right to sell, publish, or reproduce creative works for a specified number of years (usually 70 years after the author dies)
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Government Monopolies
Government monopolies are similar to natural monopolies but held by the government
The construction and maintenance of roads and bridges are the responsibility of local, state, and national government.
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Oligopoly
Oligopoly: industry dominated by a few suppliers who exercise some control over price
Conditions of Oligopoly Domination by a Few Sellers Barriers to Entry Identical or Slightly Different Products Nonprice Competition Interdependence
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Oligopoly
Product Differentiation: manufacturers’ use of minor differences in quality and feature to try to differentiate between similar goods and services
Competition is not based on price but product differentiation is based on consumer perception of the value of one over the other.
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Oligopoly
Interdependent Behavior With so few firms in an oligopoly, whatever
one does the other are sure to follow. When one airline drops airfares, the others will
follow and a price war ensues. This price war is good for consumers until an
airline goes out of business and less competition forces higher prices.
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Oligopoly
Cartel: arrangement among groups of industrial businesses to reduce international competition by controlling the price, production, and distribution of goods
Cartels collude to keep prices high for various products.
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Monopolistic Competition
Monopolistic Competition: market situation in which a large number of seller offer similar but slight different products and in which each has some control over price
Conditions of Monopolistic Competition Numerous Sellers Relatively Easy Entry Differentiated Products Nonprice Competition Some Control Over Price
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Monopolistic Competition
Monopolistic Competition is the most common form of market structure in the US.
Examples include brand-name items such as toothpaste, cosmetics, and designer clothes.
Many of the characteristics of monopolistic competition are the same as those of an oligopoly but with a major difference in the number of sellers.
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Monopolistic Competition
Advertising
Advertising tries to convince consumers of the superiority of a given product.
Successful advertising enables companies to charge more than the market price for a product.
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CHAPTER 9SECTION 3Government Polices Toward Competition
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Antitrust Legislation
John D. Rockefeller monopolized the oil industry by creating interlocking directorates and putting Standard Oil people on boards of the competition. Interlocking Directorate: a board of directors,
the majority of whose member also serve as the board of directors of a competing corporation
Because the same group controlled both companies, it was less tempting for them to compete with one another.
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Antitrust Legislation
Sherman Antitrust Act Antitrust legislation preventing new
monopolies or trusts from forming and broke up existing ones.
Antitrust Legislation: federal and state laws passed to prevent new monopolies from forming and to break up those that already exist
Clayton Act Sought to clarify the laws in Sherman Antitrust
Act by prohibiting or limiting a specific number of business practices.
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Mergers
Most antirust legislation deals with restricting the harmful effects of mergers.
Merger: a combined company that results when one corporation buys more than half the stock of another corporation and, this, controls the second corporation
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Mergers
There are 3 types of mergers Horizontal
The merging of two corporations in the same business.
Vertical The merging of two corporations in the same
chain of supply.
Conglomerate The merging of two corporations involved in at
least four or more unrelated businesses.
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Regulatory Agencies
Government makes laws regarding business pricing and product quality and uses regulatory agencies to oversee that various industries and services obey these laws.
Deregulation is when the government removes its regulations to increase competition. It was found that in trying to protect consumers
from unfair practices, government regulations had actually decreased the amount of competition in the economy.