Chapter 9 Competition & Monopolies

5 conditions of perfect competition

1. A Large Market (numerous buyers & sellers) 2. A Similar Product (the good or service must be nearly identical) 3. Easy Entry & Exit (Sellers already in the market cannot prevent competition, or entrance into the market. Also, the initial costs of investment are small, and the good or service is easy to learn or produce) 4. Easily Obtainable Information (Info about prices, quality, and sources of supply is easy for both buyers & sellers to obtain) 5. Independence (The possibility of sellers or buyers working together to control the price is almost nonexistent)

Four Characteristics of a Monopoly

1. A single seller 2. No Substitutes 3. No Entry (too many obstacles for others to enter the market) 4. Almost Complete Control of the Market Price (By controlling the available supply, the monopolist can control the market price.)

cartel

1. An important form of collusion 2. An arrangement among groups of industrial businesses (often in different countries) to reduce international competition by controlling the price, production, and distribution of goods. 3. Cartels seek monopolistic power.

5 Conditions of an Oligopoly

1. Domincation by a Few Sellers 2. Barriers to Entry 3. Identical or Slightly Different Products 4. Nonprice Competition (Advertising emphasizes minor differences and attempts to build customer loyalty) 5. Interdependence (Amy change on the part of one firm will cause a reaction on the part of other firms in the oligopoly)

types of barriers to entry

1. Legal barriers (i.e. state laws in place due to fear of wasteful duplication, for instance, competing gas companies in a given area) 2. "Excessive money capital costs": initial start up costs are too high due to amount and cost of equipment (i.e. in the cars or steel industries) 3. Others' ownership of essential raw materials creates a barrier to entry (i.e. Debeers Company in South Africa owns so much of the land from which diamonds are mined, thus they can control the marketing of nearly all the world's diamonds)

4 Types of Monopolies

1. Natural 2. Geographical 3. Technological 4. Government

5 Conditions of Monopolistic Competition

1. Numerous Sellers (no single seller or small group dominates the market) 2. Relatively Easy Entry (however, high cost of advertising is a drawback) 3. Differentiated Products 4. Nonprice Competition (Businesses compete by using product differentiation and by advertising) 5. Some Control Over Price (Via building a strong/loyal customer base, each firm has some control over the price it charges.)

benefits to society of perfect competition

1. perfect competition keeps prices as low as possible 2. perfectly competitive industries yield economic efficiency 3. price charged for good or service is "correct signal" about the value of those products in society

monopolistic competition

1.The most common form of market structure in the U.S. 2. Market situation in which a large number of sellers offer similar but slightly different products and in which each has some control over price (i.e. toothpaste, cosmetics, designer clothing)

Clayton Act

A law passed in 1914 which sharpened antitrust provisions as originally spelled out in the Sherman Antitrust Act. This Act prohibited or limited a number of particular business practices that lessened competition substantially. Because "substantially" is a subjective term, the federal government must make subjective decisions regarding whether or not to allow two corporations to merge. This Act specifically restricted price discrimination, prohibited sellers from requiring a buyer not deal with a competitor, and it outlawed interlocking directorates between competitors.

muckraking

A new kind of journalism that emerged in the late 1800s; it exposed corruption in business and politics; one of most famous of this profession was Ida Tarbell who attacked John D. Rockefeller's Standard Oil Company monopoly.

Environmental Protection Agency (EPA) (1970)

Develops and enforces environmental standards for air, water, and toxic waste.

What is major difference between monopolistic competition and an oligopoly?

Number of sellers

Sherman Antitrust Act

Public pressure against Rockefeller's oil business monopoly led Congress to pass this trade-protecting legislation in 1890. This law is to prevent new monopolies or trusts from forming and to break up those that already exist. It outlawed agreements and conspiracies that restrain interstate trade.

Functions of Federal Trade Commission (FTC) (1914)

Regulates product warranties, unfair methods of competition in interstate commerce, and fraud in advertising

Functions of Food and Drug Administration (FDA) (1927)

Regulates purity and safety of foods, drugs, cosmetics.

Federal Communications Commission (FCC) (1934)

Regulates television, radio, telegraph, and telephone; grants licenses, creates and enforces rules of behavior for broadcasting; most recently, partly regulates satellite transmissions and cable TV.

Nuclear Regulatory Commission (NRC) (1974)

Regulates the nuclear power industry; licenses and oversees the design, construction, and operation of nuclear power plants.

Securities and Exchange Commission (SEC) (1934)

Regulates the sale of stocks, bonds, and other investments.

Occupational Safety and Health Administration (OSHA) (1970)

Regulates the workplace environment; makes sure that businesses provide workers with safe and healthful working conditions.

Equal Employment Opportunity Commission (EEOC) (1964)

Responsible for working to reduce discrimination based on religion, gender, race, national origin, or age.

perfect competition

The market situation in which there are many sellers in a market and no buyer or seller is large enough to dictate (or affect) the price of a product

interlocking directorate

a board of directors, the majority of whose members also serve as the board of directors of a competing corporation

merger

a combined company that results when one corporation buys more than half the stock of another corporation and, thus, controls the second corporation

probably the closest example of perfectly competitive industry in the U.S. & why

agriculture

collusion

an illegal act in which competing firms in an oligopoly covertly agree to raise prices or to divide the market.

patent

exclusive right to make, use, or sell an invention for a specified number of years (usually 20 years)

copyright

exclusive right to sell, publish, or reproduce creative works (i.e.literature, song lyrics, images) for the life of the author plus 70 years

antitrust legislation

federal and state laws passed to prevent new monopolies from forming and to break up those that already exist

oligopoly

industry dominated by a few suppliers who exercise some control over cost

conglomerate

large corporation made up of smaller corporations dealing in unrelated businesses

economies of scale

low production costs resulting from the large size of output

product differentiation

manufacturers' use of minor differences in quality and features to try to differentiate between similar goods and services

monopoly

market situation in which a single supplier makes up an entire industry for a good or service with no close substitutes

In which market structure type (monopoly; oligopoly; monopolistic competition) is advertising most crucial?

monopolistic competition

barriers to entry

obstacles to competition that prevent others from entering the market

deregulation

reduction of government regulation and control over business activity

market structure

the extent to which competition prevails in particular markets