CHAPTER 11:
Competition Among Businesses
WHY IT MATTERS?
Business competition influences the price,
quality, and quantity of ALL the retail products
YOU purchase in the marketplace
 The number of firms in the market and their
size determine the prices you pay as a
consumer AND the quality of the products you
are provided

MARKET STRUCTURE


Market structure: a set of conditions that describes
the characteristics of a market in which a business
firm competes
4 major characteristics:





Number of firms
Ability of a business to set product price
Product differentiation
Ease of entry into a market
4 major market structures:




Perfect competition
Monopolistic competition
Oligopoly
monopoly
PERFECT COMPETITION

Perfect competition: market structure in which a large number of
firms all produce an identical product

Many sellers: hundreds or more businesses produce the same
product and each business supplies only a small fraction of the
entire market’s production


Identical goods or services: one producer’s product is
indistinguishable from another’s



Only reason to buy one product rather than the other is price difference
Complete information exists: buyers and sellers know all there is to
know about the product and its price


No ONE business can influence the market price for the product by
changing production levels because there are so many sellers
Also know about the competitor’s products
Free entry: sellers can enter or leave the market whenever they wish
with relatively SMALL costs
SUCCESSFUL businesses in perfectly competitive markets MUST
TAKE or ACCEPT, the PRICE DETERMINED by the MARKET and
decide HOW MUCH TO PRODUCE at that price
MONOPOLY
Monopoly: opposite of a perfectly
competitive market
 Pure monopoly: a market structure with only
ONE SELLER in the market
 No close substitutes: No other firm offers a
similar product
 Barriers to entry: potential rivals are unable
to enter a market because of LEGAL
RESTRICTIONS or HIGH INVESTMENT COSTS

LEGAL MONOPOLIES

Legal monopolies:
 Natural monopolies: telephone, electric, and water companies
 Often called public utilities
 Markets regulated by government
 Determine the services the utilities provide and how much
they are permitted to charge
 Government licenses: grants a particular business the right to
operate without direct competition
 Patents as monopolies: gives the inventor the private property right
to a new product or idea for 17 years
 Copyrights and trademarks: through the Federal Copyright Office, the
government gives the authors of original writing and artistic work a
copyright
 A special monopoly for the lifetime of the author, plus 50 years
 Trademarks: special designs, names, or symbols that identify a
product, service, or company
MONOPOLISTIC COMPETITION



Monopolistic competition: a market structure with many firms that offer similar but not identical
products
 Also called: imperfect competition
 Many firms in this type of competition
 Each firm can raise or lower its price to alter its sales
 Differentiated products: emphasize distinctive features of their products to differentiate
them from competitors’ products
 Describe their products: “new and improved”, “used by professionals”, or “the best
value for the lowest price”
 Customer service: special services that businesses provide to attract you as a customer
 Warranties and support: will convince you to buy one product rather than another
 Prestige: use highly visible labels to differentiate their products
 People who purchase a popular brand of sunglasses are often interested in more than
simply protecting their eyes from the sun
Good EXAMPLES of monopolistic competition:
 Clothing and restaurant industries
Relatively easy to enter or exit these markets BUT competition is INTENSE, and businesses
must work hard to create a special demand for their products
OLIGOPOLY AND COMPETITION

Oligopoly: a market structure in which a few large
businesses supply most or all products in a market
Examples: cereals, major appliances, carbonated soft
drinks
 Has a HIGH CONCENTRATION RATIO

 Concentration
ratio: percentage of industry’s sales accounted
for by its four largest firms; for Oligopoly the percentage is
60% or MORE

Businesses in Oligopoly are able to adjust their prices
 If
one company reduces its price, the others are likely to
reduce prices to keep their customers

As a result, all companies may end up with lowers prices and
earnings
OLIGOPOLY AND COMPETITION CONT…

Restricting competition: strong temptation to
restrict price competition so they all can earn
higher profits
 Collusion:
an agreement in which companies
restrict production to raise prices and profits
 May
result from an explicit agreement among
companies, or it can occur in unspoken understandings
that businesses will behave in certain ways
 One form of collusion: PRICE FIXING

Price fixing: all firms in a market agree to charge the same or
similar prices
OLIGOPOLY AND COMPETITION CONT……

Obstacles to successful collusion:




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Companies in an oligopoly must agree on how much higher the price should
be than it would be in a competitive market


Companies with lower production costs may want smaller price increases than
those with higher costs
Companies must agree on the amount by which each will reduce production



Price
Production cuts
Law enforcement
The potential of new companies entering the industry
Cutting back on production reduces sales
Each company wants the others to bear the brunt of cutting back production =
leaving one company to sell more at the higher price
IF collusion is SUCCESSFUL in raising the price, the higher price will attract
new companies into the industry

In the U.S. it is against the law – SHERMAN ANTITRUST ACT – to restrain trade,
so the LAW presents the greatest obstacle to COLLUSION
BUSINESS MERGERS

Business firms expand in two ways:


Internally: expand their activities by adding facilities,
equipment, and personnel based on current or predicted
demand
Externally: require mergers

Merger: occurs when one business buys another



Following a merger, the acquired firm is either dissolved or becomes a
division of the new firm
Another term for merger: “buyout”
Reasons for merging:




Add new products, gain access to established markets, and/or to diversify
their business therefore, “spreading the risk”
Benefits of increased size
Eliminate a competitor
Reduce costs by acquiring assets like marketing or transportation facilities
TYPES OF MERGERS:


Vertical: combination of two or more companies involved in different
steps of a production process
Horizontal: combination of two or more companies engaged in the
same business


Conglomerate: combines two or more unrelated companies under
single management


Can increase an industry’s concentration ratio by eliminating a
competitor
Allows the company to diversify the range of products it sells so that if
one product does not sell well, the entire company will not fail
Instead of merging, some firms in an oligopoly establish joint
ventures with other companies

Joint Ventures: two companies keep their independence while
cooperating on a particular project

Allows companies to combine resources without experiencing many of the
problems of mergers
MARKETING

Marketing: everything that takes place between
production and purchase
 Differentiate
their products
 Establish competitive prices
 Develop effective promotions
 See that products are available when and where
consumers want them

Figure 11-4 pg. 193 (IMPORTANT) The Major
Marketing Functions
THE FOUR P’S OF MARKETING

Product: must be the one consumers want, features and
quality consumers expect for the price they pay

Questions researchers ask:
Value most?
 Quality standards expected?
 Services desired?


Price: search for the price that enables them to earn the
most profit

Price must cover fixed costs and variable costs

Uses these costs to compute break-even point – the point of
production at which income from sales equals total fixed and total
variable costs


If total variable and fixed costs are not met = company will have a loss
If costs are below total and variable costs = company will make a profit
THE FOUR P’S OF MARKETING CONT…

Promotion: the way that business get their
messages to consumers
 Advertising,
direct mail, personal contact
 If consumers don’t know about a product, they
won’t buy it

Place: for a product to be useful, it has to be in
a place when and where consumers will buy it
 Do
not think of place as a specific
location…internet, mail order catalogs
ECONOMICS OF ADVERTISING

Two kinds of advertising:

Informational: tells potential customers about product characteristics and prices



Low-cost means of helping customers make informed decisions about the choices among
competing products
Argued that it reduces customer search time and reduces their personal costs in comparing
product characteristics and prices
Persuasive: convince you to buy the product for a specific reason (even if it is not
always the truth)

Two concerns by economists:





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Often based on extravagant claims that confuse potential customers and insult their intelligence
Tends to reduce competition and limit the number of firms that are able to compete in a market
Perfect competition: no difference in the product that businesses sells, so
there should be no need to advertise
Monopoly: only one seller and that seller should not need to advertise
because it has no competition
Monopolistic competition: extensive advertising
ULTIMATE GOAL OF MARKETING:



Determine what buyers want
To inform
To persuade
EXAMPLES OF OLIGOPOLY
Steel industry
 Aluminum
 Film
 Television
 Cell phone
 Gas

EXAMPLES OF MONOPOLY
There is a single seller.
 There are no close substitutes for the firm’s
product.
 There are barriers to entry.
 Public utilities such as gas, electric, water,
cable TV, and local telephone service
companies, professional sports teams

EXAMPLES OF MONOPOLISTIC COMPETITION
Monopolistically competitive markets have the
following characteristics:
 There are many producers and many
consumers in the market, and no business has
total control over the market price.
 Consumers perceive that there are non-price
differences among the competitors' products.
 There are few barriers to entry and exit
 Producers have a degree of control over price.

WORKBOOK PAGES 186-187 ANSWERS:
Matching:
1.
2.
3.
4.
5.
6.
7.
8.
E
D
G
A
H
B
F
C
Multiple Choice
1.
A
2.
D
3.
C
4.
B
5.
A
6.
B
7.
D
8.
D
9.
C
10.
C
11.
B
12.
B
13.
D
14.
D