econ ch 7

non price competition

the use of product differentiation and advertising to attract customers

what harmful effects can oligopolies have on consumers

they can use their market power to limit competition and raise prices

how and why is the cell phone market structured differently from other markets

through 2013 a few major companies have dominated the cell phone industry, and these companies all acted pretty much the same

what characteristics of an oligopoly most clearly resemble characteristics of a monopoly

It is another form of imperfect competition in which firms exercise considerable market power

why is the shoe industry a good example of monopolistic competition

If you go to a discount shoe store, you will find hundreds of pairs of shoes on display, made by many different companies. Each company has marked its shoes with its own brand, or trade name. Each has worked to make its line of shoes distinctive in style, color, material, or quality of construction

what was the outcome of the conquest appeal by microsoft- in 2002

Microsoft settled its case with the government by agreeing to change the way it dealt with other software firms

why do goods and service that generate positive externalities underproduced (use beekeeper example)

They tend to be underproduced relative to their benefits. Consider a beekeeper who sells honey for a living. The money she makes from her business is her private benefit. The beekeeper's neighbors, however, receive an external benefit when her bees pollinate their flowers and fruit trees at no cost. They may wish that she would double her number of hives. But unless the beekeeper can reap a private benefit from doing so, she is unlikely to expand her business no matter how much it might benefit her neighbors

3 textbook example of externality

When a factory dumps chemical waste into a river and the polluted water affects the health of people who live downstream, that is an externality. If a neighbor plants a new flower garden and the results please you, that is also an externality. If that same neighbor holds a party with loud music that keeps you up at night, that is an externality, too. In fact, it is an externality if you hear the music at all, whether you like it or not

positive externality (ex)

a benefit that falls on someone other than the producer or consumer. If you enjoy hearing the music from a neighborhood party, that spillover sound is a positive externality

technology spillover (ex)

a benefit that results when technical knowledge spreads from one company or individual to another, thereby promoting new innovations

why are shoes not classified as a commodity

because they are not all exactly the same

3 reasons that contributed to microsoft being guilty of engaging in monopolistic practices

1) In the 1980s, Microsoft received a copyright for its computer operating system known as Windows. Microsoft then made deals with computer makers to sell machines with Windows already installed on them 2) Microsoft's monopoly power allowed it to charge more for Windows than it might have in a more competitive market 3) Microsoft also used its market power to drive potential competitors out of the market

2 negative consequences of monopoly for consumers

1) because a monopolistic firm has considerable market power, it can set prices without fear of lower-priced competition from other firms 2) since such firms face little or no competition, they have less incentive to innovate or to satisfy consumers

in what 2 ways are perfect markets beneficial to society

1) they force producers to be as efficient as possible. When producers can sell only at the equilibrium price, the only way to maximize profits is by allocating resources to their most valued use and by keeping production costs as low as possible. 2) because perfect competition is efficient, consumers do not pay more for a product than it is worth

4 main characteristics of an oligopoly

Few producers - In general, an industry is considered an oligopoly if the four top producers together supply more than about 60 percent of total output. The proportion of the total market controlled by a set number of companies is called the concentration ratio. For example, the four-firm concentration ratio in the light bulb industry is 75 percent. Similar products - Producers in oligopolies offer essentially the same product, with only minor variations. For example, light bulbs are all very similar. They may come in different shapes and sizes, but they are all close substitutes for one another. High barriers to entry - It is hard for new firms to break into an oligopoly and compete with existing businesses. One reason may be high start-up costs. Existing firms may already have made sizable investments and enjoy the advantage of economies of scale. For example, it would cost many millions of dollars to open a new computer chip factory and compete with industry leaders such as Intel. In addition, customers might be reluctant to give up their loyalty to the old brands and try something new. Some control over prices - Because there are few firms in an oligopoly, they may be able to exert some control over prices. Firms in an oligopoly are often influenced by the price decisions of other firms in the market. This interdependence between firms in setting prices is a key feature of oligopoly

4 basic characteristics of monopolistic competition

Many producers - Monopolistically competitive markets have many producers or sellers. In a big city, many restaurants compete with one another for business. Differentiated products - Firms in this type of market engage in product differentiation, which means they seek to distinguish their goods and services from those of other firms, even when those products are fairly close substitutes for one another. For example, a pizza stand and a taquería both offer fast foods. A customer may have a taste for one type of food over the other, but either will provide a suitable lunch. Few barriers to entry - Start-up costs are relatively low in monopolistically competitive markets. This allows many firms to enter the market and earn a profit. For example, it does not cost much to get into the custom T-shirt business. That means that an entrepreneur with a good set of T-shirt designs may be able to open a shop or create a Web site and sell enough shirts to make a profit. Some control over prices - Because producers control their brands, they also have some control over prices. However, because products from different producers are close substitutes, this market power is limited. If prices rise too much, customers may shift to another brand.

what are the 4 main characteristics of perfect competition

Many producers and consumers - Having a large number of participants in a market helps promote competition. Identical products - Products in perfectly competitive markets are virtually identical. As a result, consumers do not distinguish among the products of different producers. Examples include grains, cotton, sugar, and crude oil. Easy entry into the market - In a perfectly competitive market, producers face few restrictions in entering the market. Ease of entry ensures that existing producers will face competition from new firms and that a single producer will not dominate the market. No control over prices- Under conditions of perfect competition, producers have no market power. They cannot influence prices because there are too many other producers offering the same product. Instead, the market forces of supply and demand determine the price of goods. Producers are said to be price takers because they must accept, or take, the market price for their product

4 main characteristics of market structure

Number of producers - helps determine the level of competition. Markets with many producers are more competitive. Similarity of products - The more similar the products are, the greater the competition among their producers. Ease of entry - Markets that are easy to enter, with few restrictions, have more producers and are thus more competitive. Control over prices - Markets also differ in the degree to which producers can control prices. The ability to influence prices—usually by increasing or decreasing the supply of goods—is known as market power. The more competitive the market, the less market power any one producer will have.

list/explain three possible barriers to entry and give examples for each

One possible barrier is start-up costs, or the initial expense of launching a business. It is much less expensive, for example, to open a bicycle repair shop than it is to open a bicycle factory. An entrepreneur with little financial capital might find it difficult to get into bicycle manufacturing because of the high cost of building a factory The mining industry offers an example of another barrier to entry: control of resources. If existing mining companies already control the best deposits of iron, copper, or other minerals, it will be hard for new firms to enter the market The computer industry is one example. Not only does the manufacture of computers require advanced technology, it also requires specialized knowledge that can be obtained only through years of education. These factors may act as a barrier, keeping new firms out of the computer market

4 main characteristics of monopolies

One producer - There is no competition in a monopoly. A single producer or firm controls the industry or market. Unique product - A monopoly provides the only product of its kind. There are no good substitutes, and no other producers provide similar goods or services. High barriers to entry - The main factor that allows monopolies to exist is high barriers to entry that limit or prevent other producers from entering the market. Substantial control over prices - Monopolistic firms usually have great market power because they control the supply of a good or service. They can set a price for a product without fear of being undercut by competitors. Unlike competitive firms, monopolistic businesses are price setters rather than price takers

4 focal points of non price competition (and examples)

Physical characteristics - There are many kinds of products that consumers will pay more for because of their unique physical characteristics. For example, a pair of running shoes may stand out from its competitors because of the shoe's unique design, color, or materials. A consumer who likes that particular shoe may not consider buying any other pair, regardless of price. Service - Some producers offer better service than others and can therefore charge higher prices. For example, a fast food chain and a sit-down restaurant both offer food, but the more expensive restaurant also offers table service. Location - Gas stations, dry cleaners, motels, and other businesses may compete with one another based on location. Although they offer the same basic product or service, a firm may win customers because it is located near a highway, a shopping mall, or some other convenient spot. Status and image - Sometimes companies compete on the basis of their perceived status or trendiness. One brand may be regarded as more exclusive, more "natural," or more fashionable than another. For example, a handbag from an expensive boutique may have greater status in a customer's eyes than a similar bag from a discount store.

3 ways that oligopolies drive prices up

Price leadership - In an oligopoly dominated by a single company, that firm may try to control prices through price leadership. The dominant firm sets a price, and the other, smaller firms follow suit. If the industry leader sets the price high, the other firms benefit. Sometimes, however, the dominant firm may cut prices to take business away from its competitors or even force them out of business. If the other firms also lower their prices, the market is said to be experiencing a price war. Price wars are hard on producers but beneficial for consumers. Collusion - Firms in an oligopoly may also try to control the market through collusion. Collusion occurs when producers get together and make agreements on production levels and pricing. Collusion is illegal because it unfairly limits competition. Nevertheless, firms sometimes try to get around the law. For example, Apple and five major book publishing companies were accused of collusion aimed at fixing the prices of electronic books, or e-books. In 2013, a federal judge ruled that these companies negotiated with one another to drive up prices. Cartel formation - A cartel is an organization of producers established to set production and price levels for a product. Cartels are illegal in the United States, but they do sometimes operate on a global scale, most often in the commodities markets. For example, nations that produce coffee, sugar, and tin have all tried to form cartels in the past. The Organization of the Petroleum Exporting Countries is the best-known modern cartel. OPEC consists of about a dozen countries that agree to set quotas on oil production and exports. By setting limits on the supply of oil, OPEC exerts a major influence on world oil prices.

3 types of legal monopolies (and examples)

Resource monopolies- Resource monopolies exist when a single producer owns or controls a key natural resource. Other firms cannot enter the market because they do not have access to the resource. For example, if a firm owns the only stone quarry in a town, it may be able to monopolize the local market for building stone. Government-created monopolies. Government-created monopolies are formed when the government grants a single firm or individual the exclusive right to provide a good or service. The government does this when it considers such monopolies to be in the public interest. Government-created monopolies may be formed in three ways. -Patents and copyrights - These legal grants are designed to protect and promote intellectual capital. They give inventors or creators the right to control the production, sale, and distribution of their work, thus creating a temporary monopoly over that work. For example, a patent issued to a pharmaceutical company gives that company the sole right to produce and sell a particular drug for a period of 20 years. Such patents encourage investment in research and development. -Public franchises. A public franchise is a contract issued by a government entity that gives a firm the sole right to provide a good or service in a certain area. For example, the National Park Service issues public franchises to companies to provide food, lodging, and other services in national parks. School districts may issue public franchises to snack food companies to place their vending machines in public schools. -Licenses - A license is a legal permit to operate a business or enter a market. In some cases, licenses can create monopolies. For example, a state might grant a license to one company to conduct all vehicle emissions tests in a particular town. Or a city might license a parking lot company to provide all the public parking in the city. Licenses ensure that certain goods and services are provided in an efficient and regulated way. Natural monopolies - This kind of monopoly arises when a single firm can supply a good or service more efficiently and at a lower cost than two or more competing firms can. For example, most utility industries are natural monopolies. They provide gas, water, and electricity, as well as cable TV services, to businesses and households. Because natural monopolies are efficient, governments tend to view them as beneficial. A natural monopoly occurs when a producer can take advantage of economies of scale to dominate the market.

why are economies of sale beneficial- using the cost of supplying water to a new subdivision of homes

Suppose it costs a water company $100,000 to build a network of pipes that will bring water to the subdivision. In addition, installing a water meter at each home costs $1,000. The total cost of supplying water to the first home is $100,000, plus $1,000 for a meter, or $101,000 total. Now look at the cost per home as the number of homes increases. A water meter for the second home costs $1,000, bringing the total cost for two homes to $102,000, or $51,000 per home. A water meter for the third home costs another $1,000, bringing the total cost for three homes to $103,000, or $34,333 per home. By the time the water company gets to the 50th home, its total cost is $150,000—$100,000 for pipes and $50,000 for 50 meters. The cost per home has decreased to $3,000. Consider, now, what would happen if two companies were to compete to bring water to the sub-division. Each company would have to build its own network of pipes. The fixed costs of bringing water to the subdivision would essentially double, but the number of homes served would stay the same. As a result, the economies of scale would be substantially reduced. For that reason, it makes sense for the government to allow water companies, like other utilities, to do business as natural monopolies.

explain the spillover effects of the acme corn syrup company

Suppose that a corn syrup factory, run by a firm that we will call Acme Corn Syrup Company, produces an unpleasant odor and every day that odor drifts into a nearby neighborhood. The odor is an externality by itself, but it has other side effects as well. Because of the smell, some people in the area decide to sell their homes. The odor is so bad, however, that no one wants to buy the houses, so as a result, housing prices fall. An economist would consider the decline in property values around the factory to be a cost of corn syrup production, but it is not a cost paid by Acme Corn Syrup Company. Rather, this cost is external to the company and is borne by homeowners in the community. That external cost is an externality

explain how the market for milk is a good example to illustrate a perfectly competitive market (must address the 4 characteristics)

The milk market has many producers—about 51,000 dairy farms in the United States. They all offer the same basic commodity. Milk from one farm is pretty much the same as milk from any other farm. Furthermore, no farm produces enough milk to dominate the market and achieve market power. There are simply too many farms, and the overall quantity of milk produced is too great for any one producer to influence prices by increasing or decreasing supply, so dairy farmers must be price takers and accept the market price for their milk. If they were to charge more than the market price, their buyers—firms that process milk into dairy products—would simply buy milk from some other producer. Milk production also offers relative ease of entry. Anyone who wants to become a dairy farmer can enter the market, assuming that he or she has the resources. Even a farmer with only a few cows can sell milk to a local milk processor.

excludable good (ex)

This means that anyone who does not pay for the good can be excluded from using it. A grocery store, for example, will sell apples only to customers willing to pay for them

non-rival in consumption (ex)

a characteristic of a good or service that can be used or consumed by more than one person at the same time; a feature of public goods. One person's use of a streetlight's glow does not diminish another's ability to use its light as well

non-excludable good (ex)

a characteristic of a good or service whose use cannot be denied to anyone; a feature of public goods streetlights

negative externality (ex)

a cost that falls on someone other than the producer or consumer. This cost may be monetary, but it may also simply be an undesired effect Acme Corn Syrup Company

free-rider problem (ex)

a free rider is someone who enjoys the benefit of a good or service, such as roads or public schools, without paying for it; free riding becomes a problem when it leads to underproduction of that good or service If streetlights were a private good, for example, the company that provided them would want to charge the people who use them. But street lighting is not excludable, so anyone who passes under a streetlight can take a "free ride" by using the light and not paying for it. Because of these free riders, no private business will provide street lighting. The result, from the point of view of economists, is a market failure

rival in consumption (ex)

a good that cannot be consumed by more than one person at the same time. if you buy an apple and eat it, that apple is no longer available for anyone else to eat

externality

a side effect of production or consumption that has consequences for people other than the producer or consumer

market failures

a situation in which the market fails to allocate resources efficiently

define barriers to entry

an obstacle that can restrict a producer's access to a market and limit competition

define imperfect competition -what is the opposite of perfect competition

any market structure in which producers have some control over the price of their products The most extreme version of imperfect competition—and the opposite of perfect competition—is monopoly (a market or an industry consisting of a single producer of a product that has no close substitutes)

why do goods that generate negative externalities tend to be overproduced

changes in price and quantity demanded that do not occur under ideal market conditions is a sign that the market is not working efficiently. The result is that goods that generate negative externalities tend to be overproduced, because their full cost is not reflected in the market price

public good (ex)

goods and services that are not provided by the market system because of the difficulty of getting people who use them to pay for their use. Examples of public goods include fire and police services, national defense, and public parks

private good (ex)

goods and services that are sold in markets A grocery store, for example, will sell apples only to customers willing to pay for them

explain the main point made by Sullivan in gotcha capitalism (2007) what does he mean

millions of Americans have found themselves stuck in "cell phone jail" with no easy way out You don't act like a rational consumer in a normal, functioning market economy. You don't go buy the new phone, or get the cheap new plan. You don't reward the more efficient company with your business. You can't. You're in jail

why do firms in an oligopoly drive prices up to levels above market equilibrium

oligopolies behave more like monopolies. Rather than lower their prices to try to win a larger share of the market, firms in an oligopoly may drive prices upward to levels above the market equilibrium price

what are the 4 basic market structures

perfect competition, monopoly, oligopoly, and monopolistic competition

difference when comparing a price setter and a price taker -example of each

price setters set the price for a product, price takers accept the price already set monopolies are price setters, producers are price takers

economy of scale

refers to the greater efficiency and cost savings that result from increased production A firm that achieves economies of scale lowers its average cost per unit of production by increasing its output and spreading fixed costs over a larger quantity of goods

define market structure

refers to the organization of a market, based mainly on the degree of competition among producers

how does a company monopolize in the market structure of monopolistic competition

the goods offered by the competing brands are distinct enough to appear unique

what necessitated the need for anti trust laws

the government feared that monopolies were harmful to the public interest, so they enacted antitrust laws to limit their formation

why does the shoe industry not fit market structure of perfect competition, monopoly, or oligopoly

the shoe industry does not fit the model of perfect competition. At the same time, the sheer number of shoe producers indicates that the shoe industry is neither a monopoly nor an oligopoly

in nov 1999- what was the finding of the trial judge in this case

the trial judge found that Microsoft had violated antitrust laws. He ordered the company to be broken into two separate businesses: one that sold the Windows operating system and another that sold applications software. Microsoft appealed the decision to a higher court, which overturned the breakup order but upheld the antitrust verdict