We'll start with anything in chapter 7 from Naked Economics. (Please have chapter 8 read for next Wednesday.)
I asked you to think about... a business that you believe is either a "success" story or a "failure". Tell us why you think that business is either succeeding or failing...
Competition and Business: Let's look at the different market structures that exist for the goods. Most economists hold that there are four basic types of market competition: perfect competition, monopoly, monopolistic competition, and oligopoly. (The last three are summed up as forms of "imperfect competition".)
These characteristics help determine the market structure for a given good:
* number of firms in the industry
* the presence (or absence) of product differentiation
* ability (or lack of ability) of any or all firms to influence the market price
Perfect competition: This is a theoretical market structure, but it is very closely approximated in an industry like agriculture. Here are the characteristics of perfect (or "pure" competition):
* There are numerous sellers in the market, all selling identical products. This means their are no quality differences, no brand names, no need for advertising, etc.
* There is free entry into and exit from the market. Anyone who desires to produce and sell goods in a given market can do so.
* No individual seller or buyer can influence market price. It is instead determined by market supply and demand. Firms in perfect competition are "price takers".
* All sellers and buyers are informed about markets and prices. Cost advantages will not remain secret for long...
In perfect competition, economic profits tend to be low because of the ease with which firms can enter the industry. Short term profits will attract more firms.
Monopoly: This is the market structure in which only one producer or seller exists for a product that has no close substitutes. The only true monopolies that exist in our country today are probably some government-regulated public utilities.
* The seller holds a large degree of control over price. The monopolist is a "price maker".
* The key to obtaining and maintaining a monopoly lies in erecting barriers to the entry of other firms into the industry.
* Sources of monopoly:
- Economies of scale
- There are some "natural monopolies" like bus companies and public utilities.
- Control of raw materials can lead to a monopoly. (For example, ALCOA controlled almost all the world's bauxite.)
- Patents- These give the exclusive rights to use, keep, or sell an invention for a period of years.
- Competitive tactics- These would include pirating, pressuring, and predatory pricing.
Anti-trust legislation: As you probably learned in history, the federal government has passed a series of laws designed to maintain competition and prevent restraint of trade.
* Sherman Antitrust Act of 1890 - outlawed restraint of trade and attempts to monopolize
* Clayton Act of 1914 - outlawed certain business activities including price discrimination, tying contracts, exclusive dealings, interlocking directorates
* Federal Trade Commission Act of 1914 - created an organization to police unfair business practices
Oligopoly: This is a market structure in which relatively few firms produce indentical or similar products.
* The actions of any one firm in terms of price and output will be noticeable by others.
* There is interdependence among firms in setting their pricing policies.
* Firms may be reluctant to engage in price competition because of the possible reaction of competitors. Product differentiation is more often used. Firms may also rely on collusion or practice "price leadership".
Cartels are organizations of independent firms that agree to operate as a shared monopoly by limiting production and charging the monopoly price.
Monopolistic Competition: This is a market structure in which relatively many firms supply similar but differentiated products, with each firm having a limited degree of control over price.
* Product differentiation is the major characteristic. This is the practice of establishing real or imagined characteristics that identify a firm's produst as unique.
* Profits tend to be minimized as a lot of money is spent on packaging, advertising, etc. It is also relatively easy for firms to enter the market.
Questions to Discuss:
Why would a firm enter a market based on perfect competition? What are the system's advantages for the consumer?
How much monopoly is too much? (In what ways are monopolies beneficial?)
Should the government work harder to regulate potential monoplies?
If you were trying to gain a monopoly, how would you work to limit competition?
Are oligopolies necessarily bad for an economy? Why or why not?
How is product differentiation achieved? What methods do you believe are most effective?
Which market structure do you believe is best for consumers?