Market Structures [How many sellers in each industry]
The “invisible hand” is omnipotent.
3 Perfect Competition– has a very large number of sellers (hundreds or thousands) of the same product (any agriculture or fishery product). They are all selling the same undifferentiated products (oranges).
Four Market Conditions Necessary For Perfect Competition 6A1. Verylargenumber of sellers (hundreds or thousands). Each seller will have only a small share of the market. B 2. Similar oridenticalproducts (sweet corn/brocolli/eggs) which means there is no reason for non-price competition. C 3.Easyentry and exit into the market. D4.Absenceof price controls (too many sellers & consumers). Perfect Competition and Price No one firm controls price. Lowering price would lower profits as consumers would buy similar substitutes. Prices are set by the market rather than by the firms. These firms are“price takers.”
MonopolisticCompetition – fairly large number (25-75) of sellers competing to sellslightly differentiated products. Product differentiation (real or imaginary) is vital.This is the most common market structure. Sellers try to decrease competition by making their products different from the others. Since each firm attempts to make its product unique, there is an“element of monopoly”, thus monopolistic competition. Product differentiation, when it is successful, enables a firm to “establish a kind of monopoly”so thatloyal customers will prefer it rather than buy from the competition. [They try tomonopolize a smallportion of the market.]
Monopolistic Competition[element of monopoly [differentiation uniqueness] so calledmonopolistic competition] This is the most common market structure – over 99% of all firms. Examples of Monopolistic Competition Blue Jeans Grocery Stores Candy Bars Dry Cleaners Rock Concerts Pizza Shoe Stores Cassette players Chicken Toothpaste Book Stores Soaps and detergents Restaurants Vacuum Cleaners Furniture Stores Barbershops Beauty Parlors Econ Textbook Co’s “Econ” “Econ,Econ”
Basic Cable Rate DART Forney High Greyhound Waste Management DART Natural Monopoly Competition would be chaotic. It is natural to give it to one co. Ex: Utilities Cable TV Government Monopoly Owned & operated by G Ex: U.S. Mail State Highways U.S.Mail “Price Makers” TXU Monopoly [mono(1) poly (seller)] Control over price: Total Product: unique Ex: Comcast Cable TV Cable TV Rubik’s Cube Technological Monopoly “Patent” Ex: Rubik’s Cube Geographic Monopoly Only seller in a specific area Example: Remote Store Cable TV Monopoly – the “power of one”
Practice Quiz[What kind of monopoly do the following have?]A. Natural B. Government C. Geographic D. Technological ___ 1.Rubik’s Cube ___ 2. Telecable Cable TV in Pilot Point ___ 3. TXU Gas ___ 4. The “Last Chance Gas Station” ___ 5. La VerniaHigh School ___ 6. Constructing a state highway between Dallas and Austin ___ 7. Heeling’s combo athletic shoe & one-wheel skate ___ 8. Only one man living in an isolated Trailer Park with 50 women
Monopoly Quiz A. Natural B. Technological C. Government D. Geographic 1. Dart – bus service (supported by taxes) 2. Postal Service (U.S. mail) 3. Construction on a state highway (supported by gasoline taxes) 4. Waste Management (privately owned) 5. Bell Helicopter producing patented V-22 Osprey 6. Polaroid Instamatic (patent) 7. Remote Drugstore in Podunk, TX “Privately owned” “Remote store”
Characteristics of Market Structures Not every industry fits neatly into one of these categories; however, this is a useful framework for thinking about industry structure and behavior.
Four Types of Market Structures Chapter 7 of your book will help with the chart.
Name 1. ________________ Name 2.________________ Market StructureWord Scramble [From the word scramble below, pick out the 5 correct answers for each market structure] *Write thebold face type. Very many(100’s) sellers Price takers Many[25-75]sellers Oligopoly 1._______________________ 2._______________________ 3._______________________ 4._______________________ 5._______________________ Perfect Competition 1._______________________ 2._______________________ 3._______________________ 4._______________________ 5._______________________ Pure Monopoly 1._______________________ 2._______________________ 3._______________________ 4._______________________ 5._______________________ Monopolistic Competition 1._______________________ 2._______________________ 3._______________________ 4._______________________ 5._______________________ A few control 70% of the market Natural,Geographic, Technological,& Gov. One seller Easiest to enter Nike, Reebok, New Balance,andAdidas Comcast Cable TV Homogeneousproduct [Identical] Economics(college) Textbook Companies (over 50 of these and they are differentiated Identical(pure)or differentiated products Black eyed peas Price Leadership is used Polaroid Instamatic Blue Jean Companies (dozens and differentiated) McDonald’s, Wendy’s, andBurger King Price Maker Beauty Shop Product differentiation gives an element of monopoly
The government’s Record On Regulating The Economy
Antitrust Legislation Since the 1880s, the federal government had aided competition. To promote efficiency, certain legal monopolies have been allowed to exist. Trusts – legally formed combinations of corporations or companies. In the latter half of the 1800s, cutthroat competition and mergers created trusts in steel, meatpacking, oil, sugar, coal, and tobacco. They were actually large cartels. By the 1880s, the government passed laws to protect competition. Anti-trust legislation – designed to monitor and regulate big business, prevent monopolies and break up existing monopolies. 1. Interstate Commerce Act-1887 – created the ICC to oversee railroad rates. Today it regulates railroads, motor vehicles, & otherfreight carriers. 2. Sherman Anti-trust Act-1890 – the “cornerstone of anti-trust legislation.” It prohibited any agreements, contracts or conspiraciesthat would restrain interstate trade or cause monopolies to form. This actprotected trade against unlawful restraint & monopoly. It was the 1st significant act against monopolies. Later legislation defines the principles in this act. The Sherman Anti-trust’s failure to define key terms such as “trusts” and “restraintof trade” made it somewhat ineffective. It was not clear what was legal or illegal. This act also ran contrary to the economic theory of laissez-faire (hands-off by the government) attitude of the past 100 years.
Landmark Antitrust Legislation The Federal Trade Commission (FTC), created by Congress in 1914, was established to investigate the structure and behavior of firms engaging in interstate commerce, to determine what constitutes unlawful “unfair” behavior, and to issue cease-and-desist orders to those found in violation of antitrust law. The penalties for violating antitrust laws have become more severe. Treble damages are awards to any person or private company that sustains injury or financial loss because of an antitrust violation, which are three times the actual damages.
Progressive Era(1901-1920)Legislation(A Reform MindedEra) Clayton Antitrust Act – 1914 spelled out specific illegal businesses practices. It gave the government power against monopolies. Outlawed price discrimination-chargingcustomers different prices for the same product– where it might lessencompetition or lead to monopolies. Large retail outlets had gotten price breaks. The Clayton put some teeth into the Sherman Act by specifying what acts were in restraint. Federal Trade Commission Act – 1914 – created the FTC to investigate charges of unfair methods of competition. (false and misleading advertising) “If you cut back on food intake” [Had to discontinue this.] Robinson-Patman Act(Anti-price Discrimination Act) – 1936 It strengthened the Clayton Act on price discrimination. It protected small retail businessesby prohibiting wholesalers from charging small retailers higher prices than they charged large chain stores and byprohibiting large retailersfrom setting artificially low prices. All rebates had to be available to all. Celler-Kefauver Act(Celller Anti-merger Act)–1950–prevented mergers and the purchase of competitor’s assets when such acquisition would reduce competition.
Senator John Sherman
By the Early 1890s, a number of businesses were convicted under the Sherman Antitrust Act. In 1911, the Supreme Court declared that the Standard Oil Companywas practicing unreasonable “restraint of trade” and ordered that its 90% monopoly be broken up into 34 smaller companies. They became known as Exxon, Mobil, Chevron, Amoco, etc. Broken up were American Tobacco, Standard Oil, and Northern Securities. American Tobacco was charged with using predatory pricing [underselling others until they were driven out of business, then raising prices] and other means to monopolize the cigarette business. It was split into 16 firms like R.J. Reynolds & British American Tobacco. AT&T was accused of using its monopoly of local phone service to exclude competitors from the related long-distance and telephone equipment markets. The two sides settled in 1982. They agreed to spin off seven local phone companies known as the “Baby Bells.”
Using the chart in your book on page 180 answer the question on the worksheet