Chapter 6: Chapter 6: Perfect and Perfect and Imperfect Imperfect

CompetitionCompetition

Section A Section A Perfect CompetitionPerfect Competition

Consumers look for best priceConsumers look for best price For profit, firms must:For profit, firms must:

Cut costsCut costs Increase salesIncrease sales

DiversificationDiversification Sell different productsSell different products Reduces fixed costsReduces fixed costs Real world examples??Real world examples??

Market as a RegulatorMarket as a Regulator

Too many firmsToo many firms Low profitsLow profits Less efficient firms closeLess efficient firms close ““invisible hand”invisible hand”

Fewer firmsFewer firms Higher profitsHigher profits More firms enter marketMore firms enter market

Low Prices in competitive marketLow Prices in competitive market

Section B MonopoliesSection B Monopolies

Perfect MonopolyPerfect Monopoly Only supplier, no close substitutesOnly supplier, no close substitutes Consumers have no choiceConsumers have no choice Charge any priceCharge any price Very profitableVery profitable

Imperfect competitionImperfect competition Large companies have most control Large companies have most control

over prices.over prices. 3 Types3 Types

Monopolistic CompetitionMonopolistic Competition Many producers for similar productsMany producers for similar products Advertising, Branding, Perceived qualityAdvertising, Branding, Perceived quality Ex. soapEx. soap

OligopolyOligopoly Few producersFew producers Similar products, prices, policiesSimilar products, prices, policies Work like a one monopolyWork like a one monopoly

U.S. Auto makersU.S. Auto makers Natural monopolyNatural monopoly

Large capital investments (fixed costs)Large capital investments (fixed costs) Inefficient to have more than one producerInefficient to have more than one producer Utilities (natural gas, electricity)Utilities (natural gas, electricity) Regulatory agenciesRegulatory agencies

Protect public from abuseProtect public from abuse

Combinations and Big Combinations and Big BusinessBusiness

Small business vs. Big BusinessSmall business vs. Big Business What are the advantages of both?What are the advantages of both?

Horizontal CombinationHorizontal Combination

Joining of similar firms Joining of similar firms

Vertical CombinationVertical Combination

Joining of different steps/levelsJoining of different steps/levels

Advantages/Advantages/Disadvantages of Big Disadvantages of Big

BusinessBusiness AdvantagesAdvantages

Economies of scaleEconomies of scale Efficiency related to large sizeEfficiency related to large size

Bulk buyingBulk buying

DisadvantagesDisadvantages Diseconomies of scaleDiseconomies of scale

Inefficiency related to sizeInefficiency related to size Less personal serviceLess personal service

Costs and Benefits from Costs and Benefits from a Monopolya Monopoly

What are the advantages and What are the advantages and disadvantages of Microsoft’s disadvantages of Microsoft’s dominance in software industry?dominance in software industry?

The Government’s Role The Government’s Role in Competitionin Competition

Workable competitionWorkable competition Balance between benefits of large firms Balance between benefits of large firms

and competition.and competition. Anti-trust PolicyAnti-trust Policy

Sherman Anti-trust Act of 1890Sherman Anti-trust Act of 1890 Outlawed monopolistic behaviorOutlawed monopolistic behavior

Fines or forced splitFines or forced split

Today: Focus on price-fixing Today: Focus on price-fixing agreementsagreements