Imperfect Competition    Market Regulation

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Imperfect Competition Market Regulation

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1. Imperfect Competition & Market Regulation Ag Economics 210 Chapter 8 November, 2002

2. Comparison of Demand Characteristics DEMAND CURVE - always downward sloping, shows the amount consumers will purchased at various prices.

3. Continuum showing market extremes. MONOPOLY - produces exactly what the consumer demands. The only way to sell more is to lower prices. Price searcher

4. PURE COMPETITION - Producer decision-making can only influence costs (not price). Explain. Market will take all output but at decreasing prices Price taker

5. Imperfect Competition in the Market There are many variations between a pure monopoly and a purely competitive market. M?-----|---------------------|-----? PC Oligopoly Monopolistic competition or Imperfect competition Why does Imperfect Competition exist?

6. Imperfect Competition A term used to cover a wide variety of “real-life” possibilities. Imperfect indicates a lack of conformity to the conditions of pure competition. Generally there is still some degree of competition in the market place. Examples of imperfect markets? (Organic products)

7. Strategies to move towards Imperfect Competition #1 PRICE COMPETITION - a firm lowers its price to attract customers. Examples? “Cut-throat” competition - lowering prices below market price so as to drive the competition out of business. Walmart pharmacy example When price competition already exists…another characteristic of imperfect competition becomes evident.

8. #2 NONPRICE COMPETITION Nonprice competition is engaged in when a firm advertises to create a real (or imagined) special image about its product in the minds of consumers. If buyers can be convinced that a firm’s product has a special characteristic the firm has shifted the demand curve to the right and made the product more inelastic.

9. Non-Price Competition Strategies Special characteristics? Example? Improved product design. Example? Special services.

10. Public Regulation of Markets Historically markets have fallen under the domination of a single large firm or a few relatively large firms. The greater the size of the firms the greater is their opportunity to exert a special influence in the market. As wealth becomes concentrated in the hands of a few, their ability to manipulate the market is enhanced. Example?

11. The Growth of Firms Internal growth - increased value of the firm’s capital (stock for example) permits the construction of additional facilities thus increasing business volume as the market grows. External growth - A formerly independent firm merges with another. Growth is achieved by a change in asset ownership.

12. Types of Mergers Horizontal merger - firms in the same industry merge. Example - Hilmar cheese buys Gallo cheese. Vertical merger - two or more firms in different production or marketing stages within the same industry. Example - A poultry producer purchases a feedmill. Conglomerate merger - occurs among firms with unrelated industries.

13. The Anti-Trust Laws Sherman Anti-Trust Act - foundation of business regulatory policy today (primary weapons against formation of monopolies). Section 1 - illegal to restrain trade by conspiring with other individuals. Section 2 - illegal to monopolize trade by controlling the channels of trade.

14. Clayton Act - prohibited mergers by means of stock acquisitions that might reduce competition between firms modified so that firms intending to merge had to be approved by the FTC. Federal Trade Commission - (1914) investigates business organization and practices.

15. Agricultural Bargaining Problem - large number of farmers face a single buyer (a monopsonist) for their products. “Middlemen” maximizes their profits whereas farmers and consumers both lose (price takers). Capper-Volstead Act (1922) allows farmers to establish “marketing agencies in common”. Form cooperatives which may control market supply.

16. Other bargaining agreements: The Packers and Stockyards Act - regulated the buying and selling of livestock, service charges and commissions. The Cooperative Marketing Act - allows ag associations or federations to acquire, exchange and disseminate price and market information. Ag Marketing Agreement Act - deals with marketing orders in fruits, milk and vegetables.

17. What are the Economic Objectives for Ag Bargaining laws? #1 Protective devices for agriculture, because of the weakness of individual producers facing large firms in handling their products. #2 Food is a matter of National Security! Important for the well-being of society. Special measures are taken to insure a stable supply at reasonable prices for consumers.

18. That’s it!

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