VII. Competition, Market Structures, And The Role Of Government

A. Competition and Market Structures

1. Pure Competition- This market situation includes independent and well-informed buyers and sellers of exactly the same economic product.

a. Conditions for Pure Competition

1. Large number of buyers and sellers

2. Buyers and sellers deal in identical products

3. Each buyer and seller acts independently

4. Buyers and sellers are reasonably informed about the items for sale

5. Buyers and sellers are free to enter into, conduct, or get out of business at any time

b. Profit Maximization- Under this theory, each firm is too small to influence price. Therefore the industry as a whole sets the price and each firm independently sets their own price to maximize profits.

c. A Theoretical Situation- This is not a realistic condition.

1. No preferred brands

2. All products identical

3. Price would not waiver

4. No barriers of entry

2. Monopolistic Competition- Is the market structure that has all the conditions of pure competition except for identical products. By making its product a little different, the monopolistic competitor tries to attract more customers and monopolize a small portion of the market.

a. Product Differentiation

1. Real or perceived differentiation

2. Geographical

3. Manner of payment

4. Delivery

5. Services and warranties

b. Nonprice Competition

1. Advertising blitz of superiority

c. Profit Maximization- Prices vary due to perceived conditions of the market (clash of brand name vs. generic).

3. Oligopoly- Is a market condition where a few large businesses own and operate the entire market system.

a. Interdependent Behavior

1. Collusion- Formal agreement to set prices

a. Price fixing

b. Pricing Behavior

1. Price Wars (Short or Long Term)

a. Hamburgers

b. Soda

c. Automobiles

c. Profit Maximization

4. Monopoly- Is a market situation with only one seller of a particular economic product that has no close substitutes. Generally, monopolies do not exist:

a. Natural Monopoly- Is a market situation where costs minimized by having a single firm produce the product. Often times, the government will arrange a franchise, which gives the firm exclusive rights to own and operate as a monopoly.

b. Geographic Monopoly- Is a market situation where a monopoly exists because no other business in the immediate area offers any competition. For instance, the lone gas station along a highway has a geographic monopoly.

c. Technological Monopoly- In this type of monopoly, a firm or individual has discovered a new manufacturing technique or has invented or created something entirely new.

1. Patents- An exclusive right to manufacture, use or sell any new and useful art, machine, manufacture or composition of matter, or any new and useful improvement thereof. Inventions are covered for 17 years.

2. Copyright- Art and literary works are protected under this measure as authors or artists maintain the exclusive right to publish, sell or reproduce their work for their lifetime plus 50 years.

d. Government Monopoly

1. Local- Water use

2. States- Alcohol and Tobacco (Utah)

3. Federal- Weapons-grade uranium

e. Profit Maximization- Marginal profits must equate to marginal revenue

B. Market Failures

1. Inadequate Competition

a. Dangers of Monopolies

1. Artificial shortages

2. Higher prices

3. Inefficient use of scarce resources

4. Prevention of new firms entering market

b. Economic and Political Power- The clout of a monopolizer

c. Both Sides of the Market- Maintaining adequate competition is a difficult but worthwhile goal. If markets can be kept reasonably competitive, they tend to police themselves and require less government intervention.

2. Inadequate Information- When adequate information is not available, it is difficult to employ resources to their fullest for the maximum benefit of society.

3. Resource Immobility- Are the factors of production moveable? In a competitive market, they are.

4. Externalities (Economic side effect that either benefits or harms a third party not directly involved in the activity)

a. Negative Externality- Economic action that harms a third party

1. Airports

2. Prison

3. Freeway

b. Positive Externality- Economic action that benefits a third party

1. Tourism

2. Special Events

c. Externalities and Market Failures- Wrap up

5. Public Goods- Are those products, such as highways, flood control, national defense, and police protection, that are collectively consumed by the population. The market does not adequately supply these services and therefore the government is often looked upon to provide them.

C. The Role of Government

1. Antitrust Legislation

a. Sherman Antitrust Act (1890)- Countries first significant law against monopolies. It sought to do away with restraints and monopolies that hindered competition or made competition impossible (Re: Standard oil Company).

b. Clayton Antitrust Act (1914)- Broader anti-trust law that outlawed price discrimination (practice of charging different prices for different buyers for the same product).

c. Federal Trade Commission Act (1934)

1. Cease and desist orders- Ruling by the FTC for companies to stop an unfair business practice, such as price fixing, that reduces or limits competition among firms.

d. Robinson-Patman Act (1936)- Forbids rebates and discounts on the sale of goods to large buyers unless the rebate and discount were available to all.

2. Government Regulation- Companies must go before the government to argue their case to raise rates/price.

a. Cable Television

b. Electricity

c. Telephones

3. Public Disclosure- Are meant to provide enough information in the public to prevent market failures.

a. Food and Drug safety (FDA)

b. Securities and Exchange Commission (SEC)

c. Banks (Federal Reserve)

d. Communications (FCC)

e. Aviation (FAA)

f. Occupational Safety and Health Administration (OSHA)

4. Modified Free Enterprise

a. Restrictions

1. Efficient use of resources

2. Government interventions

a. Promote and encourage fair play

b. Prevent monopolies

c. Regulate industries in which a monopoly is a public good