Competition and
Monopolies
Perfect Competition
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Market Structure: the extent to which
competition prevails in particular markets
Market structures are a way to categorize
businesses by the amount of competition they
face.
Four basic market structures in the American
economy are: perfect competition, monopolistic
competition, oligopoly, and monopoly.
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Perfect Competition: market situation in which
there are numerous buyers and sellers, and no
single buyer or seller can affect price
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For perfect, or pure, competition to take place five
conditions must be met:
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A Large Market: Numerous buyers and sellers must exist
for the product.
A Similar Product: The good or service being sold must
be nearly identical
Easy Entry and Exit: Sellers already in the market cannot
prevent competition or entrance into the market.
Easily Obtainable Information: Information about prices
should be easily obtainable.
Independence: The possibility of seller or buyers
working together to control the price is almost
nonexistent.
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The agriculture market is close to a perfectly
competitive industry.
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No single farmer has control over price.
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Supply and demand determine price.
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Individual farmers have to accept the market price.
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Demand for agriculture is unique and inelastic.
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Price will drop to a level that benefits both
consumer and entrepreneur.
Economically efficient
Resources are used in the most productive
manner.
Monopoly, Oligopoly,
Monopolistic Competition
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Most industries are a form of imperfect
competition.
There are 3 types of imperfect competition that
differ in how much competition and control
over price the seller has.
These 3 types are:
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Monopoly
Oligopoly
Monopolistic Competition
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Monopoly: market situation in which a single
supplier makes up an entire industry for a
good of service with no close substitutes
Characteristics of Monopoly
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A Single Seller
No Substitutes
No Entry
Almost Complete Control of Market Prices
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Barriers to Entry: obstacles to competition that
prevent others from entering a market
Potential barriers include:
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Laws preventing competing businesses from
operating in an area where a company already
provides services.
The cost of starting a business, or excessive money
capital costs, can prevent entry to the market.
Ownership of raw materials can be a barrier.
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There are 4 types of pure Monopolies
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Natural
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Geographic
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Technological
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Government
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Natural monopolies are providers of utilities,
bus services, cable.
They have economies of scale, producing the
largest amount for the lowest cost.
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Economies of Scale: low production costs resulting
from the large size of output
Government has begun making moves to
deregulate and allow more competition.
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Geographic monopolies are created due to
geographic barriers for competition.
Because the potential profits are so small, other
businesses choose not to enter.
These types of monopolies are declining,
however, as competition arises from mail-order
and Internet catalogs and delivery services.
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Technological monopolies are the result of
inventions that are patented and copyrighted.
Patent: exclusive right to make, use, or sell an
invention for a specified number of years
(usually 20)
Copyright: exclusive right to sell, publish, or
reproduce creative works for a specified
number of years (usually 70 years after the
author dies)
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Government monopolies are similar to natural
monopolies but held by the government
The construction and maintenance of roads and
bridges are the responsibility of local, state, and
national government.
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Oligopoly: industry dominated by a few
suppliers who exercise some control over price
Conditions of Oligopoly
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Domination by a Few Sellers
Barriers to Entry
Identical or Slightly Different Products
Nonprice Competition
Interdependence
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Product Differentiation: manufacturers’ use of
minor differences in quality and feature to try
to differentiate between similar goods and
services
Competition is not based on price but product
differentiation is based on consumer
perception of the value of one over the other.
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Interdependent Behavior
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With so few firms in an oligopoly, whatever one
does the other are sure to follow.
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When one airline drops airfares, the others will
follow and a price war ensues.
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This price war is good for consumers until an airline
goes out of business and less competition forces
higher prices.
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Cartel: arrangement among groups of industrial
businesses to reduce international competition
by controlling the price, production, and
distribution of goods
Cartels collude to keep prices high for various
products.
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Monopolistic Competition: market situation in
which a large number of sellers offer similar
but slightly different products and in which
each has some control over price
Conditions of Monopolistic Competition
Numerous Sellers
 Relatively Easy Entry
 Differentiated Products
 Nonprice Competition
 Some Control Over Price
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Monopolistic Competition is the most common
form of market structure in the US.
Examples include brand-name items such as
toothpaste, cosmetics, and designer clothes.
Many of the characteristics of monopolistic
competition are the same as those of an
oligopoly but with a major difference in the
number of sellers.
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Advertising
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Advertising tries to convince consumers of the
superiority of a given product.
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Successful advertising enables companies to charge
more than the market price for a product.
Government Polices
Toward Competition
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John D. Rockefeller monopolized the oil
industry by creating interlocking directorates
and putting Standard Oil people on boards of
the competition.
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Interlocking Directorate: a board of directors, the
majority of whose member also serve as the board of
directors of a competing corporation
Because the same group controlled both
companies, it was less tempting for them to
compete with one another.
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Sherman Antitrust Act
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Antitrust legislation preventing new monopolies or
trusts from forming and broke up existing ones.
Antitrust Legislation: federal and state laws passed to
prevent new monopolies from forming and to break
up those that already exist
Clayton Act
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Sought to clarify the laws in Sherman Antitrust Act
by prohibiting or limiting a specific number of
business practices.
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Most antirust legislation deals with restricting
the harmful effects of mergers.
Merger: a combined company that results when
one corporation buys more than half the stock
of another corporation and, this, controls the
second corporation
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There are 3 types of mergers
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Horizontal
 The merging of two corporations in the same business.
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Vertical
 The merging of two corporations in the same chain of
supply.
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Conglomerate
 The merging of two corporations involved in at least
four or more unrelated businesses.
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Government makes laws regarding business
pricing and product quality and uses
regulatory agencies to oversee that various
industries and services obey these laws.
Deregulation is when the government removes
its regulations to increase competition.
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It was found that in trying to protect consumers
from unfair practices, government regulations had
actually decreased the amount of competition in the
economy.