Economics

1
Economics

• Chapter 6

2
Chapter 6

• Section 1

3
Objectives

1. What is perfect (pure) competition?
2. What is monopolistic competition?
3. How do sellers differentiate their products under
   monopolistic competition?

4
Highly Competitive Markets

• What is a highly competitive market?
• Market that has a wide range of products with
  lower prices.
• Products are offered by a lot of sellers.
• Example-market for jeans.

5
Types of Highly Competitive Markets

• Two types of highly competitive markets
• Perfect competition-Ideal market structure in
  which consumers and producers compete under the
  laws of supply and demand.
• Four characteristics of perfect competition
• Many buyers and sellers act independently.
• Sellers offer identical products.
• Buyers are well informed about products.
• Sellers can enter or exit the market easily.

6
Types of Highly Competitive Markets

• 2. Monopolistic Competition-Seller offers
  different rather than identical products.
• ?Three characteristics of monopolistic
  competition
• Product differentiation-point to differences.
• Nonprice Competition-Compare products in ways
  other than price. Concentrate on advertising
  brand name.
• Profit-by concentrating on product
  differentiation and nonprice competition, sellers
  can set prices above competitive rates to
  increase profits.

7
Chapter 6

• Section 2

8
Objectives

1. How is an oligopoly structured?
2. What is a monopoly?
3. What type of monopolies exist?
4. What factors affect price in oligopolies and
   monopolies?

9
Imperfectly Competitive Markets

• We talked about perfectly competitive markets
  last time, but not all markets are this way.
• Therefore, we have imperfectly competitive
  markets or not competitive.
• There are two types of imperfectly competitive
  markets
• Oligopoly
• Monopoly

10
Oligopoly

• Oligopoly-Market in which a few large sellers
  control the market.
• Three characteristics
• Few large sellers
• Identical or similar products.
• Sellers cannot enter the market easily due to
  start-up costs and consumer loyalty.

11
Oligopoly

• Four ways oligopolies determine prices
• Nonprice competition-advertising and brand
  loyalty.
• Interdependent pricing-the setting of prices in a
  manner responsive to ones competitors. Can lead
  to a price war.
• Collusion-when sellers secretly agree to set
  production levels-illegal in the U.S.
• Cartel-same as collusion, but not secret.

12
Monopoly

• Monopolies-Market in which one seller controls
  the market.
• Three characteristics of a monopoly
• Single seller
• No close substitute available.
• Other sellers cannot enter the market easily.

13
Monopoly

• Four types of Monopolies
• Natural monopoly-market in which competition is
  inconvenient and impractical. SCEG, no sense in
  having two power companies in Williston.
• Geographic monopoly-a market whose geographic
  area is so limited that single seller can provide
  services and set prices.
• Technological monopoly-market that is dominated
  by a single producer because of new technology.
  Government gives patents to protect producer.
• Government monopoly-any market in which the
  government is the sole producer. Town water.

14
Monopoly

• Three reasons that prevent monopolies from
  raising prices to high
• Consumer demand
• Potential competition-high profits leads others
  to enter the market.
• Government regulation.

15
Chapter 6

• Section 3

16
Objectives

1. What was the relationship between the U.S.
   government and business before the 1880s?
2. What was the purpose of early antitrust
   legislation?
3. How has the government enforced antitrust
   legislation?

17
Era of Big Business

• After the Civil War, fierce competition swept
  through the U.S.
• Many small companies went out of business or were
  bought by larger companies.
• This time period became an era of big business
  dominated by monopolies called trusts.

18
Era of Big Business

• Trust- A group of companies that combine to
  eliminate competition in an industry and thereby
  gain a monopoly.
• At first the government did not do anything about
  this because it had a economic policy of
  laissez-faire (let them be) or a hands off
  economic policy.
• Of course this was not a good thing, and many
  people became concerned about the trusts.

19
Era of Big Business

• The government finally stepped in and passed
  several pieces of antitrust legislation.
• Antitrust legislation- Acts designed to monitor
  and regulate big business, prevent monopolies
  from forming, and break up existing monopolies.

20
Antitrust Legislation

• Interstate Commerce Act- Created the Interstate
  Commerce Commission (ICC).
• Oversaw the railroad freight business.
• Rates for transporting goods had risen too high.
  This legislation tried to keep prices down.
• Legislation was abolished in 1995

21
Antitrust Legislation

• Sherman Antitrust Act- Banned any agreements and
  actions in restraint of trade.
• Language of the Act was very vague and many
  trusts were able to get around it.
• Most famous monopoly to be broken up was the
  Standard Oil Company.
• The Standard Oil Company controlled almost all of
  the oil industry in the U.S.
• One branch of this company still exists today,
  Exxon.

22
Antitrust Legislation

• Clayton Antitrust Act- Strengthened the Sherman
  Antitrust Act.
• One main thing it did was outlawed price
  discrimination.
• Price discrimination Practice of offering
  different prices to different customers under the
  same circumstances.
• This meant that big companies were trying to get
  suppliers to give them discounts because they buy
  such large quantities of supplies.

23
Antitrust Legislation

• Federal Trade Commission Act- Created the Federal
  Trade Commission (FTC).
• The FTC investigates charges of unfair methods of
  competition and commerce.
• It could order a company to change its methods of
  doing business.