Competition and Monopolies
• This chapter describes the influence of
competition on supply, demand and price. It
also looks at perfect competition, pure
monopoly, oligopoly, and monopolistic
competition and the Government regulation
of business
• E.2.6
Demonstrate how government wage and
price controls, such as rent controls and minimum
wage laws, create shortages and surpluses.
• E.3.3
Compare and contrast the basic
characteristics of the four market structures:
monopoly, oligopoly, monopolistic competition,
and pure competition; explain how various
amounts of competition affect price and quantity.
• E.3.4
Recognize the benefits of natural
monopolies (economies of scale) and explain the
purposes of government regulation of these
monopolies.
I. Perfect Competition
A. Market structure
1. Market structures are a way to categorize businesses by the
amount of competition they face.
2. There are four basic market structures in the American
economy
a. Perfect competition
b. Monopolistic competition
c. Oligopoly
d. Monopoly
B. Conditions of perfect competition
1. For perfect competition to take place, 5 conditions must be met
a. A large market = many buyers and sellers exist for the product
b. A similar product = the good or service being sold must be nearly
identical.
i. no reason for buyers to prefer 1 seller’s merchandise over
another’s
ii. No difference in quality, no brand names, no need to advertise
c. Easy entry and exit = sellers already in the market can’t prevent
others from entering the market, the initial
investments are low,
and
the good/service is easy to learn to
produce
d. Easily obtainable information = information about prices
quality, and sources is easy to get
i. if sellers are reasonably well informed of their competitors
prices, they must keep their prices low to attract customers
e. Independence = sellers or buyers can’t group together to
control prices
i. supply and demand control the price
2. The key is information
a. True perfect competition is rarely seen,
but fierce competition does exist in many
sectors of the economy
b. In the past, reliable information about
prices, quality, and sources of supply was
hard and costly to obtain. But today, with
access to the internet, this information is
readily available
C. Agriculture as an example
1. The agriculture market is close to a perfectly
competitive industry
a. no single farmer has control over price
b. Supply and demand determine price
c. Individual farmers must accept the market price
d. Demand for agriculture is unique – inelastic
D. Benefits to society
1. When perfect competition exists, society benefits:
a. Price will drop to a level that benefits both
consumer and business
b. Economic efficiency – productive resources are
used in the most efficient and productive manner
I. Monopoly, Oligopoly, and Monopolistic
competition
A. Imperfect competition
1. Most industries in the U.S. represent some form of
imperfect competition
a. Imperfect competition is a market situation that
lacks one or more of the characteristics of perfect
competition
2. There are three types of imperfect competition that differ `
from one another on the basis of how much competition
and control over price the seller has.
B. Monopoly
1. The most extreme form of imperfect competition
2. 4 conditions are needed for a monopoly
a. A single seller controls the supply and price of a
market
b. No substitutes – no competitor offers good or service
that closely replaces what monopoly sells.
c. No entry – the monopoly is protected by barriers to
entry which could be gov’t regulations, a large initial
investment, or ownership of raw materials. Ex =
DeBeers Company of South Africa controls the
marketing of nearly all the world’s diamonds
d. Almost complete control of market price – by
controlling the available supply, the monopoly can
control the market price and raise prices with no fear of
competition
3. Four types of monopolies
a. Natural monopoly
i. Competition is not desirable. Ex = providers of utilities
(water and electric), bus services, cable tv, etc.
ii. Economies of scale – means because of its size, the
company can produce the largest amount for the lowest cost
iii. Today the gov’t realizes that advances in technology can
make natural monopolies more competitive, so the gov’t is
making moves to deregulate and open them up for
competition
b. Geographic Monopoly
i. Exists because of the location of a business – may occur
because of good planning or good luck
ii. No guarantee that other like businesses won’t move in
iii. This type of monopoly is declining as competition arises
from mail order and internet catalogs and delivery services
c. Technological monopoly
i. Special privileges given to those who invent a new
product or process.
ia. Patent – exclusive right to manufacture, rent, or sell
your invention for a specified number of years (usually
20), after that it becomes “public property” and anyone
can use it
ib. Copyright – protects art, literature, song lyrics, and
other creative works for the life of the author plus 70
years
d. Government monopoly
i. Similar to a natural monopoly but held by the Gov’t for
the public good. Ex = the construction and
maintenance of roads and bridges are the
responsibility of local, state and national governments
4. Monopolies are far less important than in the past & don’t
last as long
C. Oligopoly
1. For a market structure to be labeled an oligopoly, 5 conditions
must be met:
a. Domination by a few sellers – several large firms are
responsible for 70% to 80% of the market. Ex = autos,
rubber, steel, soft drinks, fast foods, sport shoes, airlines,
etc
b. Barriers to entry – capital costs are high and it’s
difficult for new companies to enter major markets
c. Identical or slightly different products – the goods and
services provided, such as airline travel, domestic
autos, and kitchen appliances are very similar.
d. Nonprice competition – advertising emphasizes
minor differences and attempts to build customer loyalty
e. Interdependence – because there are so few firms in an
oligopoly, whenever 1 firm does something the other firms
usually follow.
2. Oligopolists generally prefer to compete on a nonprice basis
because they don’t want a price war.
a. They use advertising or product differentiation = the real or
perceived differences in the good or service that make it
more valuable in consumers’ eyes.
b. Cooperation (usually against the law) aka collusion
i. Price fixing = firms agreeing to charge the same or similar
prices for a product – usually higher prices than those
determined under competition
ii. Market agreement = divide up the market so that each
firm is guaranteed to sell a certain amount.
iii. Cartels = international groups that use collusion to seek
monopoly power. They reduce international competition by
controlling price, production, and the distribution of goods.
Ex = Middle East oil companies
c. Because collusion retrains trade, it’s against the law. But
neither the threat of heavy fines nor jail sentences has kept
collusion from taking place.
• There are:
• Four music companies control 80% of the market Universal Music Group, Sony Music Entertainment,
Warner Music Group and EMI Group
• Six major book publishers - Random House, Pearson,
Hachette, HarperCollins, Simon & Schuster and
Holtzbrinck
• Four breakfast cereal manufacturers - Kellogg,
General Mills, Post and Quaker
• Two major producers in the beer industry - AnheuserBusch and MillerCoors
• Two major providers in the healthcare insurance
market - Anthem and Kaiser Permanente
D. Monopolistic competition
1. A large number of sellers offer similar but slightly
different products
2. To be monopolistic competition, 5 conditions must be
met
a. Numerous sellers = no single seller or small group
dominates the market
b. Relatively easy entry = entry is easier than in a
monopoly or oligopoly. One drawback is the high cost
of advertising
c. Differentiated products = each supplier sells slightly
different product to attract customers
d. Nonprice competition = businesses compete by using
product differentiation and by advertising
e. Some control over price = by building a loyal
customer base through product differentiation, each
business has some control over the price it charges
3. Monopolistic competitors advertise or
promote heavily their products seem different
from everyone else’s.
a. if successful (in convincing buyers) the
business may be able to raise the price a
little above its competitors prices. Ex =
Nike, The Gap, Proctor & Gamble, Levi’s,
etc. pour millions of dollars into their
advertising budget
Government policies toward competition
The government takes part in economic affairs for
several reasons:
1. To promote and encourage competition
2. To prevent and do away with monopolies
that don’t allow the public to get the benefits
of competition
3. To regulate industries in which monopoly is
clearly for the public good
I. Antitrust legislation
A. John D. Rockefeller’s Standard Oil Company was the most
notorious for driving competitors out of business and
pressuring customers not to deal with rival oil companies.
1. Rockefeller monopolized the oil industry by creating
interlocking directorates and putting Standard Oil
people on the board of directors of the competition
B. Public pressure against Rockefeller’s monopoly, or trust,
over the oil business led Congress to pass antitrust
legislation
1. Sherman Antitrust Act (1890) = prevented new monopolies or
trusts from forming and broke up existing ones
a. Tried to do away with restraints and monopolies that hindered
competition or made competition impossible
2. Clayton Act (1914) = attempted to clarify the laws in the Sherman
Antitrust Act by prohibiting or limiting a specific number of
business practices
II. Mergers
A. The Federal Gov’t must determine whether the merging of 2 companies
will significantly lessen competition.
B. Three kinds of mergers exist
1. Horizontal = the merging of two corporations in the same business.
Ex = banks, oil companies, etc.
2. Vertical = the merging of two corporations in the same chain of
supply. Ex = paper company buys the lumber mill that supplies it with
pulp or buys the office supply store that sells its paper.
i. key pt = vertical mergers usually take place when companies
believe it’s important to protect themselves against the loss of
suppliers
3. Conglomerates = a huge corporation involved in at least 4 or more
businesses, each making unrelated products, none of which is
responsible for a majority of its sales.
i. key pt = main reason for conglomerates is diversification. Firms
believe that by “not putting all their eggs in 1 basket”, overall sales
and profits will be protected
III. Regulatory agencies
A. The government makes laws regarding business pricing
and product quality and uses regulatory agencies to
oversee that various industries and services obey the
laws
1. These agencies exist at the Federal, State, and Local
levels
2. The aim of gov’t regulations is to promote efficiency
and competition, but the gov’t has learned that
sometimes gov’t regulations have actually decreased the
amount of competition in the economy.
3. Deregulation is when the gov’t removes regulations to
increase competition.
i. The Federal Communications Commission
deregulated the TV industry and this allowed pay TV,
cable, and satellite systems to enter the market