Market Structures
[How many sellers in each industry]
Competition
Greyhound
Natural Monopoly
TXU
Competition would be
chaotic. It is natural
to give it to one co. Waste
Management
Ex: Utilities
Beauty Shops
Barber Shops
Monopolistic Competition
Forney High
Owned & operated by G
Ex: U.S. Mail
State Highways
U.S. Mail
Geographic Monopoly
Only seller in a specific area
Example: Remote Store
Monopoly
[mono(1) poly (seller)]
Control over price: Total
Product: unique
Ex: Comcast Cable TV
Rubik’s
Cube
Cable TV
Perfect Competition
Monopolistic Competition
Market
Perfect
Control over price: None
Competition
Products: Identical
Monopolistic
(Agricultural & fishery)
Competition
Oligopoly
Pure Monopoly
Price Taker
Control
over Price
Structures
[How many sellers]
Very many [100s] of sellers
Many [25-75] sellers
Control over price: Some
Ex: Blue Jeans
Monopoly
Oligopoly
[buyer & seller]
Technological Monopoly
“Patent”
Ex: Rubik’s Cube
[Element of monopoly with
“product differentiation”]
“Price Makers”
DART
Government Monopoly
Blue Jeans
Basic Cable Rate
Perfect Competition
Most Competitive
Oligopoly
Oliogo (few) poly (seller)
[A few control 70% of market
Duopoly
Control over price: Fair Amount
Differentiated or Identical
Reebok
Oligopoly
Differentiated
Differentiated Products
Autos & Sneakers
[undifferentiated]
Pure Oligopoly
Identical Products
(steel)
DART
Basic Cable Rate
Forney High
Greyhound
Waste
Management
DART
Government Monopoly
Owned & operated by G
Ex: U.S. Mail
State Highways
U.S.Mail
“Price Makers”
Monopoly
Rubik’s
Cube
Natural Monopoly
Competition would be
chaotic. It is natural
to give it to one co.
Ex: Utilities
Cable TV TXU
[mono(1) poly (seller)]
Control over price: Total
Product: unique
Cable TV
Ex: Comcast Cable TV
Technological Monopoly
“Patent”
Ex: Rubik’s Cube
Cable TV
Geographic Monopoly
Only seller in a specific area
Example: Remote Store
Monopoly – the “power of one”
Greyhound
Natural Monopoly
TXU
Competition would be
chaotic. It is natural
to give it to one co. Waste
Management
Ex: Utilities
Beauty Shops
Barber Shops
Monopolistic Competition
Forney High
Owned & operated by G
Ex: U.S. Mail
State Highways
U.S. Mail
Geographic Monopoly
Only seller in a specific area
Example: Remote Store
Monopoly
[mono(1) poly (seller)]
Control over price: Total
Product: unique
Ex: Comcast Cable TV
Rubik’s
Cube
Cable TV
Perfect Competition
Monopolistic Competition
Market
Perfect
Control over price: None
Competition
Products: Identical
Monopolistic
(Agricultural & fishery)
Competition
Oligopoly
Pure Monopoly
Price Taker
Control
over Price
Structures
[How many sellers]
Very many [100s] of sellers
Many [25-75] sellers
Control over price: Some
Ex: Blue Jeans
Monopoly
Oligopoly
[buyer & seller]
Technological Monopoly
“Patent”
Ex: Rubik’s Cube
[Element of monopoly with
“product differentiation”]
“Price Makers”
DART
Government Monopoly
Blue Jeans
Basic Cable Rate
Perfect Competition
Most Competitive
Oligopoly
Oliogo (few) poly (seller)
[A few control 70% of market
Duopoly
Control over price: Fair Amount
Differentiated or Identical
Reebok
Oligopoly
Differentiated
Differentiated Products
Autos & Sneakers
[undifferentiated]
Pure Oligopoly
Identical Products
(steel)
The
“invisible
hand” is
omnipotent.
Many
Market Structure Vocabulary
U.S. States Sue Big Music over Price-Fixing
This price-fixing lawsuit against the 5 major recording labels
charged that they increased the price of CDs in violation of
antitrust laws. “Because of these conspiracies, tens of millions of
consumers paid inflated prices to buy CDs of artists including
Santana, Whitney Houston, Madonna and Eric Clapton.” The FTC
estimated that the recording companies policies[$40 billion industry]
forced U.S. consumers to pay as much as $480 million more than
they should have for CDs and other music over the last three years.
Auto body shops sued paint companies, including Sherwin-Williams,
for fixing prices on paint, primer and fillers.
Four major toy manufacturers (Hasbro, Little Tykes, Mattel, & Toys R’Us)
were sued for conspiring to fix prices of toys. Toys R’Us was accused
of brokering an illegal agreement with toy manufacturers to not sell
their most popular products to the warehouse clubs.
4.0
1.4
1.6
The average child sees 245 ads per day. They
see around 30,000 commercials in 1 year. By age
65, on average, we see 3 mil. commercials, which
is like watching 3 years of non-stop commercials.
3
Perfect Competition – has a very large number
of sellers (hundreds or thousands) of the same
product (any agriculture or fishery product). They
are all selling the same undifferentiated products
(oranges).
4
Competition
5
Market Structure – degree of competition
– economic rivalry among businesses.
among firms operating in the same market (autos).
Four Market Conditions Necessary For Perfect Competition
6A 1. Very large number of sellers (hundreds or thousands).
Each seller will have only a small share of the market.
B
2. Similar or identical products (sweet corn/brocolli/eggs)
which means there is no reason for non-price competition.
C
3. Easy entry and exit into the market.
D
4. Absence of price controls (too many sellers & consumers).
Perfect Competition and Price
No one firm controls price. Lowering price would
lower profits as consumers would buy similar
substitutes. Prices are set by the market rather
than by the firms. These firms are “price takers.”
1. Jeans
2. Shampoo
What Is The Best?
5. Aspirin
6. Razor
3. Cologne
4. Perfume
7. Gas
8. Ice cream
9. Toothpaste
10. Batteries
Some of these differences are “perceived”
rather than “real”.
Is A Beer A Beer?
[Differentiation may be perceived rather than real]
To show that some differentiation is perceived
rather than real, blind taste tests on beer were conducted
on 250 participants. Four cans of identical beer with
different labels were presented to the subjects as four
different brands of beer. In the end, all of the subjects
believed that the brands of beer were different and that
they could tell the difference between them. Another
interesting result came out of the taste test – most of
the participants commented that at least one of the
beers was unfit for human consumption.
Tastes Great.
Not fit for human
consumption
20 Monopolistic Competition – fairly large
number (25-75) of sellers competing to sell
slightly differentiated products. Product
differentiation (real or imaginary) is vital.
This is the most common market structure.
Sellers try to decrease competition
by making their products different
from the others. Since each firm
attempts to make its product unique,
unique, there is an “element of monopoly”,
thus monopolistic competition.
Product differentiation, when it is successful, enables
a firm to “establish a kind of monopoly” so that loyal
customers will prefer it rather than buy from the
competition. [They try to monopolize a small portion
of the market.]
21 Even virtually identical products may be differentiated
by brand name, packaging, or design but they are still
similar. They have all the conditions of perfect competition
except for product “differentiation.”
22 They use “nonprice” methods of competition such as
advertising and improved service to increase sales.
Reputation is important [builds loyalty]. Most manufactured
goods are made by only a few producers.
4 Market Conditions For Monopolistic Competition
1. 25-75 buyers and sellers must exist. Firms act independently
but no single firm is large enough to change the supply or
price of a good.
2. The products are similar but they emphasize product
differentiation (differences among products). This is the one
thing that separates monopolistic competition from perfect
competition.
The differences may be real or imaginary (a refrigerator with
plastic or metal trays). Aspirin, by federal law, has to have
certain chemicals but people believe highly advertised aspirin
is better. Revlon offers 157 shades of lipstick – 41 are pink.
3. Buyers must be well informed about differences in products.
Monopolistic competitors rely on informative and competitive
advertising.
4. Easy to enter or exit the industry. Few restrictions exist.
Monopolistic Competition
[element of monopoly [differentiation uniqueness] so called
monopolistic competition]
This is the most common market structure – over 99% of all firms.
Examples of Monopolistic Competition
Blue Jeans
Dry Cleaners
Shoe Stores
Toothpaste
Restaurants
Barbershops
Grocery Stores
Rock Concerts
Cassette players
Book Stores
Vacuum Cleaners
Beauty Parlors
Candy Bars
Pizza
Chicken
Soaps and detergents
Furniture Stores
Econ Textbook Co’s
“Econ”
Other Monopolistic Competition Examples
Janitorial Services
Air Conditioning
Auto Dealers
Karate
Body Shops
Pet Shops
Electrical Contractors
Window Cleaners
Dermatologists
Copying
Locksmiths
Pest Control
Alcohol Treatment Centers
Carpet Cleaning
Fingernail Saloons
Upholstery Cleaners
Tire Companies
Masonry Contractors
Dry Wall Contractors
Party Suppliers
Dog Grooming
Accountants
Monopolistic Competition and Price
23 There is some control over price because
differentiation creates buyer loyalty [jeans].
Non-price competition is used to control price. Developing
brand name loyalty will enable a firm to marginally increase
price without losing customers. If the increase is too much,
buyers will switch to a competitor’s product.
The “Real World”
The “real world” of competition involves
monopolistic competition & oligopolies. Over 99%
of all firms are monopolistic competitors. However,
a few thousand oligopolies produce most of the
products in the U.S. So, our big firms are oligopolists
and our smaller firms are monopolistic competitors.
Monopolistic Competition Cost Curves
[Like beauty, product differentiation is in the eye of the beholder]
[“One turkey farmer tries to convince you that his naked
turkeys are better than someone else’s naked turkeys.”]
What are you really buying when you go to a fancy restaurant?
Surely not just a meal. Undoubtedly, you’ll order something on
a somewhat higher culinary plane than a Big Mac, a large fries,
and a Coke, but is that meal worth $80? It is when it is served
by a waiter with a phony French Accent, there are flowers on
the table, a nice linen table cloth, candlelight, soft music, a
solicitous maitre d’, and the restaurant is a restored 17th
century carriage house.
PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION
Expect New Competitors in this industry.
Price and Costs
Profits are
above costs
“Yippee, an
economic profit,
good times ahead.”
M
C
ATC
P1
A1
Short-Run
Economic
Profits
D
MR
Q1
Quantity
PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION
Expect New Competitors
Price and Costs
Profits are
above costs
M
C ATC
“Yippee, an
economic profit,
good times ahead.”
P1
New
competition drives down the
price
level – leading to economic
A1
losses in the short run.
Short-Run
Economic
Profits
D
MR
Q1
Quantity
PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION
Many firms exit the industry
Going out
of business
sale
Price and Costs
“I’ve got to stay
upbeat, even
though it is a SR
economic loss.”
MC ATC
A2
P2
Short-Run
Economic
Losses
D
Costs exceed
the profits
MR
Q2
Quantity
PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION
Going out
of business
sale
Price and Costs
“I’ve got to stay
upbeat, even
though it is a SR
economic loss.”
MC ATC
A2
P2
With economic losses, firms will
exit theShort-Run
market – Stability occurs
Economic profits are zero
when economic
Losses
Costs exceed
the profits
MR
Q2
Quantity
D
Price and Costs
PRICE AND OUTPUT IN
MONOPOLISTIC COMPETITION
MC
Long-Run Equilibrium
ATC
Normal
Profit
Only
P3
= A3
D
MR
Q3
Quantity
24
Oligopoly
– “the chosen few”
(3 or 4) firms control 70% of the market.
Monopoly – 1 firm industry
(Cable TV)
Duopoly – 2 firm industry.
(Coke & Pepsi)
[P&G (47%) & Kim-Clark
(30%) in diapers]
“Oligo” – few in an industry.
(“Big 3 or 4” or even “Big 5 or 6”)
Two Types of Oligopolies
25 Pure (Undifferentiated) Oligopoly – 3 or 4 producers
dominate the production of an identical product (steel, zinc,
copper, aluminum, lead, cement, industrial alcohol)
Differentiated Oligopoly – 3 or 4 producers dominate the
production of differentiated (similar) products. [typewriters,
tires, soap, cigarettes, refrigerators, cereals, TVs & autos]
Duopoly – when 2 firms dominate an industry.
Coke products have 43% of the market and Pepsi products have 32%.
1. Coke Classic
2. Pepsi Cola
3. Diet Coke
4. Mountain Dew
5. Diet Pepsi
6. Sprite
7. Dr. Pepper
8. Caffeine Free Diet Coke
9. Diet Dr Pepper
10. Sierra Mist
Pepsi’s first commercial in 1939 became so popular, it became
a hit record and was played in jukeboxes. A 12-ounce bottle sold
For a nickel. Here it is.
Big 3 Subscribers[mil.]
51.6 M
Cingular
Wireless
47.4 M
Verizon
Wireless
Oligopoly Examples
40.4 M
Sprint
Nextel
Market Share of Phone Sales
Nokia
34% Siemens
7%
Motorola 16% L.G.Telecom 7%
Samsung 11% Sony
6%
Autos – “Big 3” – GM, Ford, Daimler-Chrysler-Benz
Athletic Shoes–“Big 4”–Nike, Reebok, New Balance, Adidas,
[Nike made $10 billion in 2004] Shox is Nike’s latest
Beer – “Big 3” – Anheuser-Busch, hot seller. It is modeled
on a 10,000 year old
Miller, & Coors sandal discovered in
an Oregon cave.
Cereals – “Big 3” – Quaker Oats,
General Mills, & Kelloggs
TV Networks – “Big 4” – NBC, CBS, ABC & Fox
There are also oligopolies in chewing gum,
light bulbs, typewriters, photocopiers, and
sewing machines.
Four Market Conditions For Oligopolies
1. A few sellers control over 70% of market.
2. Firms offer identical or differentiated
products (real or imaginary). Advertising important.
3. Product information must be easily available. They
use informative advertisement (price, quality, and
special features) to introduce new products.
4. There are huge barriers to entry into the industry.
The three major barriers are technological
knowledge, money, & brand name loyalty.
In 1980, it cost Ford $3 billion to equip a factory
that would produce two new subcompacts.
Entry is difficult because many have patents or
own essential raw materials. This makes it difficult for
new firms to try to compete.
Oligopoly and Price
Oligopolies control price to some degree by creating
brand name loyalty and using non-price competition.
26 Price Leadership – when one firm, usually the largest
and most powerful in the industry, offers a new product at a
certain price. The others then follow because they fear a
price war or because they would be better off financially by
doing so.
In other words, oligopolists play the game, “follow the leader”.
Price leadership is legal (unlike collusion) because it does
not involve any agreement among competitors. If the
competition does not follow the leader’s price, the leading firm
may be forced to change its price and fall in line with the prices
of the competition.
27 Collusion – a formal price agreement among competitors.
This is illegal because it presents a danger to free competition.
Even one email from one manager to another is illegal.
OLIGOPOLY BEHAVIOR
A Game-Theory Overview
RareAir’s Price Strategy
Uptown’s Price Strategy
High
A
$12
Low
B
$15
High
$12
C
$6
$6
D
Low
$15
$8
$8
OLIGOPOLY BEHAVIOR
A Game-Theory Overview
RareAir’s Price Strategy
Uptown’s Price Strategy
High
A
$12
Low
B
$15
High
$12
C
$6
$6
D
Low
$15
$8
$8
Greatest
Combined
Profit
OLIGOPOLY BEHAVIOR
A Game-Theory Overview
RareAir’s Price Strategy
Uptown’s Price Strategy
High
A
$12
Low
B
$15
High
$12
C
$6
$6
D
Low
$15
$8
$8
Independent
Actions
Stimulate
Response
OLIGOPOLY BEHAVIOR
A Game-Theory Overview
RareAir’s Price Strategy
Uptown’s Price Strategy
High
A
$12
Low
B
$15
High
$12
C
$6
$6
D
Low
$15
$8
$8
Independent
Actions
Stimulate
Response
Gravitating
to the
Worst Case
OLIGOPOLY BEHAVIOR
A Game-Theory Overview
RareAir’s Price Strategy
Uptown’s Price Strategy
High
A
$12
Low
B
$15
High
$12
C
$6
$6
D
Low
$15
$8
$8
Collusion
Invites a
Different
Solution
OLIGOPOLY BEHAVIOR
A Game-Theory Overview
RareAir’s Price Strategy
Uptown’s Price Strategy
High
A
$12
Low
B
$15
High
$12
C
$6
$6
D
Low
$15
$8
$8
Collusion
Invites a
Different
Solution
OLIGOPOLY BEHAVIOR
A Game-Theory Overview
RareAir’s Price Strategy
Uptown’s Price Strategy
High
A
$12
Low
B
$15
High
$12
C
$6
$6
D
Low
$15
$8
$8
Collusion
Invites a
Different
Solution
But, the
incentive
to cheat
is very
real
The Prisoner’s Dilemma
Strategic behavior characterizes
oligopoly. The most well-known
example is the prisoner’s dilemma.
2 people have been arrested for a crime,
but the evidence against them is weak.
There is not enough evidence to convict
either without the testimony of the other. They can get a lighter
sentence if they confess & testify against their partner in crime.
The sheriff keeps the prisoners separated and offers each a
special deal. If one confesses, he can go free as long as only
he confesses, and the other will get 10 or more years in prison.
If both confess, each will receive a reduced sentence of two
years in jail. The prisoners know that if neither confesses they
will be cleared of all but a minor charge and will serve only two
days in jail. The problem is that they do not know what deal the
other is offered or if the other will take the deal.
The Prisoner’s Dilemma
The options available are shown.
Prisoner B’s options are shown
along the horizontal & A’s along
the vertical. In the upper left cell
is the result if both confess.
In the lower left if B confesses but A does not. In the upper
right, A confesses but B does not. In the lower right, neither
confesses. The dominant strategy for both is to confess and
to receive 2 years of jail time.
If the prisoners had been loyal to each, they would have
received a much smaller penalty.
Both chose to confess so each is worse off than if each
had known what the other was doing. In the contest of
interdependence of the decisions, each made the best
choice.
Price-fixing
In 1996, Archer Daniels Midland Company, one
of the country’s most influential corporations,
pleaded guilty to criminal price-fixing charges
and was fined $100 million. That fine was by
far the largest ever obtained by the Justice
Department in a price-fixing case. The charge
was that Archer Daniels conspired to fix the
prices of lysine, a feed additive, and citric acid,
used in a number of food products.
Price-Fixing Fines
Vitamin Makers
Hoffman La Roche 40% $500 million fine
BASF AG
20% $225 million fine
Rhone-Paulene
15% Spilled the beans on co-conspirators
Both had to pay a total fine of $725 million because of massive
price-fixing that inflated the cost of everything from breakfast
cereal to hamburgers over the past decade. The suits were
brought by livestock farmers and other purchasers of bulk
vitamins who allege they were forced to pay illegally inflated
prices. It hurt every American consumer who took a vitamin,
drank a glass of milk, or had a bowl of cereal.
What was the result of the MIT
1993 Price-Fixing Case?
Eight Ivy League schools agreed
to stop colluding to fix prices, and
MIT was found guilty of price fixing.
DART
Basic Cable Rate
Forney High
Greyhound
Waste
Management
DART
Government Monopoly
Owned & operated by G
Ex: U.S. Mail
State Highways
U.S.Mail
“Price Makers”
Monopoly
Rubik’s
Cube
Natural Monopoly
Competition would be
chaotic. It is natural
to give it to one co.
Ex: Utilities
Cable TV TXU
[mono(1) poly (seller)]
Control over price: Total
Product: unique
Cable TV
Ex: Comcast Cable TV
Technological Monopoly
“Patent”
Ex: Rubik’s Cube
Cable TV
Geographic Monopoly
Only seller in a specific area
Example: Remote Store
Monopoly – the “power of one”
7 Pure Monopoly – one firm industry [“monopolist”]
Pure Monopoly’s Market Condition
1. One firm is the only seller. Advertising promotes image.
2. No close substitute goods are available.
8 3. Prohibitive barriers to entry in the industry. High investment costs and technological expertise prevent others from
entering the market. Legal restrictions make entry in
government-supported monopolies nearly impossible.
4. Almost complete control of market price.
9 Monopolist have much control over price because they are
the only seller. A higher price would hurt demand. The state
may control the price on some legal monopolies. These single
suppliers are “price makers.”
Four Types of Legal Monopolies
11 1. Natural Monopoly – where competition would be
chaotic, it is natural to give the business to one firm. Imagine
the confusion if 5 different busses raced each other
to the corner to pick up a passenger. Competition
would be impractical, inconvenient, & unworkable.
Greyhound
12 Examples: Public Utilities (electric & gas) – privately owned
companies (buses-Continental Trailways) but regulated by the
government. Comcast Cable TV in Plano. The government
monitors the natural monopolies to ensure that they provide
quality service at reasonable rates.
AT&T had a long-distance telephone natural monopoly for
75 years.
Waste Management
TXU Electric
Natural Monopoly
• Where competition
• Ex’s are utility companies would be chaotic,
and cable TV
therefore, it is natural
to give the business
to one firm
• They are privately
owned, but regulated
by the government
• Market where
average costs are
lowest when all
output is produced by
a single firm
13 Government Monopoly – monopoly owned
and operated by the government.
The difference between natural [privately owned]
& government monopolies [government owned] is
that these monopolies are owned operated by any
level of government.
Examples would be interstate highway system,
public libraries, public schools, Postal Service, & DART.
In most cases, government monopolies deal with
economic products needed for the public welfare
but which people would not be provided adequately
by private industry. Most tend to provide goods that
enhance the general welfare rather than seek profits.
Pilot Point High
[Local G]
State G
Federal G
Dart
Dart
Examples of Government Monopoly
• The Government has
control over:
• U.S. Mail,
• State highways, and
• Public schools
Another mugging
at Bryan Adams
Bryan
Adams
14
Geographic Monopoly – when a firm is the
only seller of a good in a specific location.
The “Last Chance Gas Station” is the last one within
50 miles of Mexico. A general Store in a remote
community has a monopoly because the area can’t
support two stores. Geographic monopolies are not
guaranteed.
Examples of Geographic Monopoly
• “Last Chance Gas
Station”
Last Chance Gas
• A general store in the
middle of nowhere
14 4. Technological Monopoly – results from the
invention of a new product (patent) or when
technology changes the way a good is produced.
General Dynamics is the only defense contractor
with the technology to build Trident Submarines.
16 A patent gives an individual
or firm exclusive right to produce, use or dispose of an
invention or discovery for
20 years from the date of filing.
To obtain a patent, you must go to the Patent
Office after doing research to make sure the
patent has not already been patented. Then
You hire a patent lawyer to file your patent.
All of this takes about 18 months. The total
cost for a patent runs about $5,000.
17 It is very expensive to wage a patent
infringement suit, around $300,000.
Polaroid’s camera
patent prevailed
& won $929 million.
Polaroid had accused
Kodak of infringing
on 7 instant photo
patents & it took 10
years to make it to
the Supreme Court.
Fiscal Year
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Applications Filed
116,427
121,611
126,407
137,069
151,331
163,571
167,715
172,539
174,553
186,123
221,304
191,116
220,773
240,090
261,041
293,244
326,081
333,688
333,452
355,527
384,228
Patents Filed
Each Year
Richardson’s Heeling won a patentinfringement lawsuit against Skechers
which had to stop shipment of its
3Wheelers shoes. The dispute was
over the combo athletic shoe and
one-wheel skate that allows the
wearer to both walk and roll.
Drox
Sunshine agreed to change its Drox character so it
will look less like a doughboy and Pillsbury agreed
not to pursue a lawsuit, which saves dough.
18 Copyright – gives the author or artist the
exclusive right to publish, sell or produce his work
for his life + 50 years. So, copyrights protect
written works of art.
Top-Earning Dead Celebrities
1.
2.
3.
4.
5.
6.
7.
Kurt Cobain
$50
Elvis Presley
$42
Charles Schulz
$35
John Lennon
$24
Albert Einstein
$20
Andy Warhol
$19
Theodor Geisel (Dr. Seuss) $10
8. Ray Charles
$10
9. Marilyn Monroe $8
10. Johnny Cash $8
11. J.R.R. Tolkien $7
12. George Harrison $7
13. Bob Marley
$7
14. Jerry Garcia
$5
http://www.nucleusinc.com/animation.php
Around 266,000
total knee replacements & 160,000
artificial hip implants
will be done this
year.
Competition and the Market Structure
The Government’s Record
Of Regulating The Economy
This is a Senate
Of the Monopolists
By the Monopolists
For the Monopolists
Antitrust Legislation
Since the 1880s, the federal government had aided competition. To promote
efficiency, certain legal monopolies have been allowed to exist.
28 Trusts – legally formed combinations of corporations or companies.
In the latter half of the 1800s, cutthroat competition and mergers created trusts
in steel, meatpacking, oil, sugar, coal, and tobacco. They were actually large cartels.
By the 1880s, the government passed laws to protect competition.
Anti-trust legislation – designed to monitor and regulate big business,
prevent monopolies and break up existing monopolies.
1. Interstate Commerce Act-1887 – created the ICC to oversee railroad
rates. Today it regulates railroads, motor vehicles, & other freight carriers.
29 2. Sherman Anti-trust Act-1890 – the “cornerstone of anti-trust legislation.”
It prohibited any agreements, contracts or conspiracies that would
restrain interstate trade or cause monopolies to form. This act protected trade
against unlawful restraint & monopoly. It was the 1st significant act against
monopolies. Later legislation defines the principles in this act.
The Sherman Anti-trust’s failure to define key terms such as “trusts” and
30 “restraint of trade” made it somewhat ineffective. It was not clear what was
legal or illegal. This act also ran contrary to the economic theory of
laissez-faire (hands-off by the government) attitude of the past 100 years.
Progressive Era (1901-1920) Legislation (A Reform Minded Era)
1.Clayton Antitrust Act – 1914 spelled out specific illegal
businesses practices. It gave the government power against
monopolies. It outlawed price discrimination-charging customers
different prices for the same product – where it might lessen
competition or lead to monopolies. Large retail outlets had gotten
price breaks. The Clayton put some teeth into the Sherman Act
by specifying what acts were in restraint.
Federal Trade Commission Act – 1914 – created the
FTC to investigate charges of unfair methods of competition.
(false and misleading advertising)
Robinson-Patman Act (Anti-price Discrimination Act) – 1936
It strengthened the Clayton Act on price discrimination. It
protected small retail businesses by prohibiting wholesalers
from charging small retailers higher prices than they charged
large chain stores and by prohibiting large retailers from setting
artificially low prices. All rebates had to be available to all.
Celler-Kefauver Act (Celller Anti-merger Act)–1950 – prevented
mergers and the purchase of competitor’s assets when such
acquisition would reduce competition.
By the Early 1890s, a number of businesses
were convicted under the Sherman Antitrust
Act. In 1911, the Supreme Court declared
that the Standard Oil Company was practicing
unreasonable “restraint of trade” and
ordered that its 90% monopoly be broken
up into 34 smaller companies. They became
known as Exxon, Mobil, Chevron, Amoco, etc.
Broken up were American Tobacco,
Standard Oil, and Northern Securities.
American Tobacco was charged with using predatory pricing
[underselling others until they were driven out of business, then raising prices]
and other means to monopolize the cigarette business. It was
split into 16 firms like R.J. Reynolds & British American Tobacco.
AT&T was accused of using its monopoly of local phone service
to exclude competitors from the related long-distance and
telephone equipment markets. The two sides settled in 1982.
They agreed to spin off seven local phone companies known
as the “Baby Bells.”
And What About Microsoft?
Should They Be Broken Up Into The “Baby Bills”?
Microsoft was accused of forcing
computer makers to install its
browser [Internet Explorer] as a
condition of licensing Windows.
31. Economies of Scale [“economies of mass production”]
Exist when firms are large enough to take advantage of mass
production techniques. Or, “Why it may cost only a little more
to produce twice as much.”
Variable costs may not change
Fixed cost
don’t change
much if workers were underworked and the oven was not
being used to capacity.
Third-Party Costs and Benefits (Externalities)
32 [Externalities are the effects of production (pollution) or consumption
(smoking) of a product on people external (3rd parties) to the transaction]
Supplier
Consumer
The transaction above (buying donuts from Shipley’s) doesn’t
affect a third party. Shipley’s Donuts, the supplier is happy.
Shipley’s and the consumer bear all the costs and benefits.
A third party external to the buyer and seller is not impacted.
33 If a third party is affected in a negative way, it is called a
negative externality.
34 If a third party is affected in a positive
way, it is called a positive externality.
External Cost [Negative Externality]
Third Party
Product(cigs)
Supplier
Consumer
Wife becomes impotent Hurts asthma
Here, we have an external cost of production. The seller
and consumer have happy faces. The consumer receives the
product and pays the seller. The consumer thinks this voluntary transaction is worthwhile. The seller’s happy face
reflects his satisfaction at the price for the product.
However, the third party is so sad that she is crying
because of a negative externality . [Think cancer from
downstream toxic waste because a company wants to save money]
Examples are pollution, smoking, litterbugs, drunk drivers,
robbers, and aircraft noise. All are a cost because they cause
dirtier air, polluted water, more accidents,
and more policemen, etc.
Another example: “A noisy stereo next door
prevents you from studying “economics.”
External Benefit [Positive Externality]
Education
Third Party
Supplier(A&M)
Consumer
Less crime, fewer police, lower taxes
Here, we have an external benefit of production. The third
party has a happy face because he benefits from a transaction
even though he paid none of the costs of producing the product.
Examples: If your neighbor buys a very large dog,
It may frighten burglars from your house too. A dam
built to generate electric power would also benefit
in flood control and as a lake for recreation. It would
also help in fishing, swimming, and boating. The classic
example is education. It means the government collects more
taxes from college grads. There is less crime and therefore
less demand for policemen.
Let’s Look Some Ways Failure
To Finish High School Affect Us
Poverty – 9% of people live below the poverty level but
22% of those without a high school education live in poverty.
Public assistance – 140,000 welfare recipients in Texas
were high school dropouts. 2 million are in U.S. prisons
and 80% read below a 7th grade level.
Prisons – 100,000 of 151,000 Texas prisoners didn’t finish high
school and 50,000 of the 100,000 were functionally illiterate.
It cost $8,000 a year to get a student thru public high school, it costs $34,000 for a year in prison.
Unemployment – When unemployment was 4%, it was
1% for college grads and 7.1% for high school dropouts.
So, we can educate now or – incarcerate later.
Lost earning power – Average salary for dropouts: $19,000;
For high school grads: $27,000; & for college grads: $44,000.
Some public schools in the inter-city are feeder schools for prisons.
If they hadn’t dropped out… - The 630,000 dropouts in the
D-FW area earn $8,000 less than a high school graduate. In
theory, if those 630,000 had a diploma, the D-FW area would
have had about $5 billion more in income.
The G.I. Bill
[“If you think education is expensive, try ignorance.” – Derok Bok of Harvard]
In 1950, 328,841 Americans graduated from the country’s
colleges – three times greater than the number of graduates
just a decade earlier.
Before the G.I. Bill, a college education was the exclusive
experience of children of affluent parents. Only 5% of Americans over 25 had completed college. Today, it is about 28%.
Harvard President James Conant was adamant in his opposition.
He expressed concern that the arrival of veterans would
inevitably lower academic standards. He feared that the vets
would turn American colleges into “educational hobo jungles.”
Later, Conant admitted his error and called veterans on his
campus “the most mature and most promising students
Harvard has ever had.”
Some 7.8 million veterans, about half of those eligible, enrolled in a
school or job-training program. The cost of the G.I. Bill was around
$14.5 billion but it has been returned at least 7 times over to the
U.S. Treasury in the form of increased tax revenues. It produced
450,000 engineers, 240,000 accountants, 230,000 teachers, 97,000
scientists, 67,000 doctors, 122,000 dentists and – by the early 1960s
- One half of the membership of the U.S. Congress.
ACCOUNTING FOR GROWTH
Changes Educational Attainment U.S. Adult Population
Percent of U.S. Population
100
80
60
40
20
0
1950
1960
College Graduates or More
1970
1980
1990
2000
High School Graduates or More
Source: U.S. Census Bureau
30% of America’s
high school students
will leave without
graduating.
How will they compete
in the global economy?
35% of whites graduate
from college, but only 17%
of blacks and 11% for
Hispanics, and 61% for
Asians.
31% of women graduate
from college, for men it is
only 26%. [5% in 1945]
4-17-2006
96% of Asians graduate
from high school, 93% for
whites, 88% for blacks, &
62% for Hispanics
Who is Smarter? Men or Women
• For every 100,000 men who graduate
college,
• There are 133,000 women who graduate.
• There are 2.7 million in prison.
• Only 7% of them are women.
• Perhaps women are smarter at getting away
with crime.
• OK, women must be smarter.
So, What Should We Do About Benefits and Costs
“If we subsidize,
we get more;
And if we tax,
We get less.”
The End
Greyhound
Natural Monopoly
TXU
Competition would be
chaotic. It is natural
to give it to one co. Waste
Management
Ex: Utilities
Beauty Shops
Barber Shops
Monopolistic Competition
Forney High
Owned & operated by G
Ex: U.S. Mail
State Highways
U.S. Mail
Geographic Monopoly
Only seller in a specific area
Example: Remote Store
Monopoly
[mono(1) poly (seller)]
Control over price: Total
Product: unique
Ex: Comcast Cable TV
Rubik’s
Cube
Cable TV
Perfect Competition
Monopolistic Competition
Market
Perfect
Control over price: None
Competition
Products: Identical
Monopolistic
(Agricultural & fishery)
Competition
Oligopoly
Pure Monopoly
Price Taker
Control
over Price
Structures
[How many sellers]
Very many [100s] of sellers
Many [25-75] sellers
Control over price: Some
Ex: Blue Jeans
Monopoly
Oligopoly
[buyer & seller]
Technological Monopoly
“Patent”
Ex: Rubik’s Cube
[Element of monopoly with
“product differentiation”]
“Price Makers”
DART
Government Monopoly
Blue Jeans
Basic Cable Rate
Perfect Competition
Most Competitive
Oligopoly
Oliogo (few) poly (seller)
[A few control 70% of market
Duopoly
Control over price: Fair Amount
Differentiated or Identical
Reebok
Oligopoly
Differentiated
Differentiated Products
Autos & Sneakers
[undifferentiated]
Pure Oligopoly
Identical Products
(steel)
Name 1. ________________
Name 2.________________ Market Structure Word Scramble
[From the word scramble below, pick out the 5 correct answers for each market structure]
*Write the bold face type.
Oligopoly
1._______________________
2._______________________
3._______________________
Natural, Geographic,
4._______________________
Technological, & Gov.
5._______________________
Perfect Competition
Nike, Reebok, New
1._______________________
Balance, and Adidas
2._______________________
Homogeneous product 3._______________________
4._______________________
[Identical]
5._______________________
Pure Monopoly
Identical (pure) or
differentiated products 1._______________________
2._______________________
3._______________________
Price Leadership
4._______________________
is used
5._______________________
Polaroid Instamatic
Monopolistic Competition
McDonald’s, Wendy’s, 1._______________________
2._______________________
and Burger King
3._______________________
Product differentiation 4._______________________
5._______________________
gives an element of monopoly
A few control 70%
of the market
Very many (100’s) sellers
Price takers
Many [25-75] sellers
One seller
Easiest to enter
Comcast Cable TV
Economics (college)
Textbook Companies
(over 50 of these and they
are differentiated
Black eyed peas
Blue Jean Companies
(dozens and differentiated)
Price Maker
Beauty Shop
Name 1. ________________
Answers
Name 2.________________ Market Structure Word Scramble
[From the word scramble below, pick out the 5 correct answers for each market structure]
*Write the bold face type.
Oligopoly
1. Few control 70%
2. Nike, Reebok, N.Bal., & Adidas
3. Identical or differentiated
Natural, Geographic,
4. Price Leadership
Technological, & Gov.
5. McD’s, Wendy’s, & Burger King.
Perfect Competition
Nike, Reebok, New
1. Easiest to enter
Balance, and Adidas
2. Homogeneous product
Homogeneous product 3. Very many sellers
4. Price Takers
[Identical]
5. Black eyed peas
Pure Monopoly
Identical (pure) or
differentiated products 1. Nat, Geog, Tech, & Gov.
2. Polaroid Instamatic
3. One seller
Price Leadership
4. Comcast Cable TV
is used
5. Price Maker
Polaroid Instamatic
Monopolistic Competition
McDonald’s, Wendy’s, 1. Product differentiation
2. Many sellers
and Burger King
3. Econ Textbook Co’s
Product differentiation 4. Blue jean companies
5. Beauty Shop
gives an element of monopoly
A few control 70%
of the market
Very many (100’s) sellers
Price takers
Many [25-75] sellers
One seller
Easiest to enter
Comcast Cable TV
Economics (college)
Textbook Companies
(over 50 of these and they
are differentiated
Black eyed peas
Blue Jean Companies
(dozens and differentiated)
Price Maker
Beauty Shop