Chapter 9 - Competition and Monopolies

monopoly

a single seller makes up the entire industry for a product or service with no close substitutes (In a monopoly, the firm controls the price)

vertical merger

combination of businesses taking part in different steps of the manufacturing process. (EX: a car maker merging with a parts supplier)

horizontal merger

combination of businesses that make the same product or provide the same service (like Northwest Airlines with Delta Airlines)

patents

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

anti-trust legislation

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

copyright

gives an artist exclusive right to sell, publish or reproduce creative works for the life of the artist plus 70 years

economies of scale

profits may only be possible when output is very high and there is not enough demand for a second firm to produce that level of output

government monopoly

similar to a natural monopoly except that the monopoly is held by the government itself. (Ex: the post office and highway construction)

market structure

the extent to which competition prevails in a particular market

government policies toward competition

the goal of government is to promote competition because competition leads to lower prices and more choices for consumers

government regulation

the goal of regulatory agencies is to promote efficiency, competition, fairness and safety. Unfortunately, sometimes overregulation impedes starting new businesses.

natural monopoly

the government grants exclusive rights to companies such as utilities or bus service (This is usually done because of economies of scale.)

merger

the legal combination of two or more companies that become one corporation

independence (in perfect competition)

the possibility of sellers or buyers working together (collusion) to control the price is almost non-existent

barriers to entry

things that prevent easy entry to and exit from the market such as... 1: excessive money capital costs: a large initial investment 2: government regulation that makes it difficult to enter the market 3: patents that prevent companies from manufacturing a good 4: economies of scale

geographic monopoly

this results from the setting of the business being geographically isolated. (An example is a rural grocery store where there are no other grocery stores.)

deregulation

a reduction of government regulation and control over business activity

technological monopoly

a patent gives the firm the exclusive right to make, use or sell an invention for a specified number of years (Ex: Microsoft Windows)

characteristics of a monopoly

1: a single seller 2: no substitutes 3: barriers to entry 4: monopoly has complete control of the price

characteristics of an oligopoly

1: domination by a few sellers 2: barriers to entry 3: identical or slightly different products 4: non-price competition (advertising) 5: interdependence

benefit of perfect competition to society

1: intense competition keeps the price low - just high enough to cover the cost of production with very little profit 2: it yields efficiency

characteristics of perfect competition

1: numerous buyers and sellers 2: identical products 3: easy entry to and exit from the market 4: easily obtainable information 5: independence

characteristics of monopolistic competition

1: numerous sellers 2: relatively easy entry 3: differentiated products 4: non-price competition (product differentiation and advertising) 5: some control over price

4 types of market structures

1: perfect competition, 2: oligopoly, 3: monopoly, 4: monopolistic competition

Clayton Act in 1914

Prohibits conduct that impedes competition such as price discrimination (selling at different prices to different buyers) and prevents mergers that result in a monopoly

perfect competition

There are numerous buyers and sellers and no single buyer or seller can affect the price

Sherman Anti-Trust Act of 1890

The law prohibited trusts (large corporations that own all of the smaller corporations in an industry), monopolies and cartels.

monopolistic competition

a large number of firms offering differentiated products in a market where each has some control over the price

cartel

an arrangement among groups of industrial businesses (often in different countries) to reduce international competition by controlling price, production and distribution of goods

collusion

an illegal act where firms secretly agree to raise prices

oligopoly

an industry dominated by a few firms who can exercise some control over the price

interdependence

any change on the part of one firm in the industry will cause a reaction by the other firms in the industry (EX: airlines)

product differentiation

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

conglomerate

large corporation made up of smaller corporations dealing with unrelated businesses (EX: Proctor & Gamble or Unilever)