Economics Ch 6

Market Structures6.1, 6.2, 6.3

What is perfect competition?

o Perfect competition- (pure competition) consumers(buyers) and sellers(producers) compete fully under the laws of supply and demand.

o There are 4 conditions to a perfect market:o Many buyers and sellers are independento Sellers offer similar productso Buyers are all well informed on what the producer wants to

sell.o Sellers can enter or exit the market without hassle.

What is monopolistic competition?

o Most everything is the same between monopolistic competition and perfect competition.

o Its vital difference is that the sellers offer many different products instead of all similar products.

o More common due to everyone wanting to sell many different products.

How do sellers differentiate their products under monopolistic

competition?o Non-price competition- competition on a basis other

than price.o They can base competition on differences between their

product and a similar product with another brand name. o Ex: Nesquik syrup vs. Hershey's syrup

How is an oligopoly structured?

o A few large sellers control most production.o Only exists when 3 conditions are present:

o There are only a few large sellers – no other type of market has this feature

o Sellers offer many similar products – new sellers don’t want to risk losing it all by introducing a new product that might fail, so the products in this market are limited.

o Other sellers can’t enter the market easily – the big businesses like to keep their power and don’t want to share it with any new sellers.

What is a monopoly?

o Single seller controls productiono Opposite from a perfect competitiono Has 3 conditions:

o Single sellero No substitutes – ex. No cheez-its vs. cheese nips (only one

of the two)o Other sellers can’t enter market easily.

What types of monopolies exist?

o Natural monopolies – often has a single large seller, almost no competition, has an exclusive right to provide services for a certain area. (ex. electric and cable companies)

o Geographic monopolies – forms due to the limit the geography puts on the monopoly, declined in recent decades because there is more technology to be able to communicate.

o Technological monopolies – developed due to new technology, has one producer

o Government monopolies – usually only public utilities, government is the sole producer.

What factors affect price in oligopolies and monopolies?

o In oligopolies, the price is dependent on the type of pricing the seller intends to use. They can use either non-price competition (ads, name brand) or interdependent pricing.o When they use interdependent pricing, the pricing depends

on the other sellers price. Usually, the product is sold at around the same price due to competition.

o Another way of pricing is Collusion, it is ILLEGAL and will end in jail time. In collusion, sellers secretly predetermine what they want to sell, how much they want to sell and what price (which is usually higher than average) they want to sell it for.

o In cartels, companies openly organize a system of prices and marketing.

o In monopolies the prices depend on 3 variables: consumer demand, potential competition, and government regulation.

What was the relationship between the US govt. and business before

1880?o The government was more hands-off (laissez-faire)

about monitoring business.o The government became more hands-on after the

1880s because people progressively became more worried about the amount of control the big businesses had over the marketplace.

What was the purpose of early antitrust legislation?

o To regulate and monitor big businesses, prevent monopolies, and take apart the already-made monopolies.

o Taft and Roosevelt were big “trust-busters”o Ex: ICC, Sherman antitrust act, clayton antitrust act,

FTC, Robinson-Patman act

How has the government enforced antitrust legislation?

o They passed the Sherman antitrust act which prohibits any kind of communication that can lead to forming monopolies.o With this act, the government won a case against AT&T (in

1982) for being a huge natural monopoly they thought was no longer beneficial to the marketplace.

Credits

o Book:Pennington, Robert Leroy. Holt Economics. Austin, Texas: Holt, Rinehart and Winston, 2003. Print.o Picture:Annakarenina. "Monopolistic Competition and the Effects on the Market !" Docsity. N.p., 15 Mar. 2012. Web. 25 Aug. 2012. <http://en.docsity.com/news/economics/monopolistic-competition-effects-market/>.