Transcript Chapter 7 Review 63KB Jun 10 2011 01:46:29 PM

Chapter 7 Review
A Spectrum of Markets
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4 kinds of markets make up the spectrum
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Perfect Competition
Monopolistic Competition
Oligopoly
Perfect Monopoly
A Spectrum of Markets

As we move through the spectrum from
pure competition to monopoly:
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Competition decreases (fewer companies)
Control over price increases
Pure Competition Monopolistic Competition Oligopoly Pure Monopoly
Decreasing Competition
Fewer Companies
Increasing Control Over Price
Kind of Market
Pure
Competition
Monopolistic
Competiti
on
Oligopoly
(Homogeneo
us)
Oligopoly
(Different
ial)
Pure Monopoly
Number of
Producers/Pro
duct Type
Many
Producers/
Same
Product
Many
Producers/
Some
distinction
Few
Few
One!/One
Product
Conditions of
Entry
Easy
Easy
Difficult to Enter
Difficult to
Enter
Almost
Impossible
Influence Over
Price
No Influence.
“PriceTakers”
Yes (some)
Yes- Dependent
on
Cooperation
and
Competition
Yes-Dependent
on
Cooperati
on and
Competiti
on
Extreme
influence
over price.
“PriceMakers”
Existence of Nonprice
Competition
None
Yes advertising
Yes
Yes
Yes – Advertise
company’s
image.
Examples
-Stock
Exchange
-Farmer’s
Market
-Fast Food
-Lululemon
(retail)
Oil
Pulp
Cement
Automobiles
Cell Phones
Cereal
Electrical
Newspapers
(sometimes)
Hydro
Producers/So
me
distinction
Producers/
More
distinction
Perfect Competition

Perfectly competitive markets are ones in
which:
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Identical goods and services are sold.
Prices are generally known.
There is competition in the market between
buyers and sellers.
“price-takers”
Easy to enter this market
Ex. Farmer’s Market
Monopolistic Competition

A market situation in which there are many sellers
providing a similar but not identical good or
service
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Called Monopolistically Competitive because firms
compete with each other, but each has monopoly on it’s
own product.
Products similar but not identical (which gives supplier
some individual control over price).
Easy to enter this industry.
Ex. Fast food or retail clothing
Oligopoly

A kind of market where a few firms supply most of
the goods and services.
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Homogeneous oligopoly. When products being produced
are virtually identical. Ex. Oil companies.
Differentiated oligopoly. When companies strive to make
distinct products. Ex. Automobile makers.
Difficult to enter this market
If cooperation is low and competition high among
oligopolies, prices will be low.
Monopoly

A market situation where there is only one
producer of a good or service and many
buyers.

Very difficult if not impossible to enter this
market.
Kinds of Monopolies
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Natural monopoly. It makes sense for only one
firm to provide it. Ex. Electrical service
Legal monopoly. Government makes it illegal for
more than one company to provide it. Ex. Public
transit
Combines or Cartels. When a group of producers
agree to limit competition by fixing prices, limiting
output or dividing the market geographically
among them. ILLEGAL
The Problem with Monopolies
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Usually on products or services with inelastic
demand (ex. telephone or power company)
Inelastic demand + no competition among
producers = expensive, poor quality.
For this reason, governments regulate (monitor
quality and control prices) or own the monopoly
to protect the customer.
Restricting Competition

Competition among companies can be
diminished through:

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Unfair (predatory) competition
Establishing a cartel
Interlocking directorates
Mergers
Establishing a holding company
Unfair Competition
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Also known as “predatory” competition
Firms engage in cut-throat pricing to drive
out their competitors.
Price goods well below the cost of
production
Once small competitors are forces out, the
cut-throat competitor raises prices again
Interlocking Directorates

When a person is on the board of directors
of a number of competing companies,
output and pricing policies can be
coordinated in a way to lessen competition.
Mergers
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The combining of the assets of two
companies into a single company.
Usually the result of one company taking
over another company.
Establishing a Holding Company

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Set up to hold (own) a significant
proportion of the shares of other
companies (51%)
As a result they control the activities of
these companies

“Horizontal Combination” When companies
of the same type combine by setting up a
holding company. Ex. Daimler-Benz and
Chrysler
Other Combinations

“Vertical Combination” or “Integration” – the
control of a company at various stages of
production.
Other Combinations
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“Conglomerate” – is formed when
companies in unrelated industries combine.
Advantage in diversification
Organized on the principle that it is a good
idea to spread business risks over several
unrelated industries.
Government Regulation

Government protects the interests of
consumers in three main ways:
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Government ownership
Laws to promote competition
Regulation of prices and services
Government Ownership

Governments will buy out private
companies that are “natural monopolies”
(water, sewage, public transit)

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There is still a monopolist (government), but
they do not have the same incentive to take
advantage of consumers
Prices are set to cover cost
Any profit (if any) is used to benefit the public
Laws to Promote Competition

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In Canada, agreements to fix prices or limit
output in order to raise prices or create a
monopoly are illegal.
It is also illegal for manufacturers to force
retailers to sell goods at “suggested retail
prices”
Regulation of Prices and Services
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Because people usually have little choice in
some of the local companies that provide
services, governments regulate prices.
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Provincial governments regulate the rates
charges for water, electricity and natural gas
Federal governments regulate air and rail
transportation