Chapter 7 Vocabulary
Competition
and
Market Structures
• Laissez-faire
• The philosophy that government
should not interfere with business.
(French word meaning allow them to
do)
• A good example is the Danish
government, the Danish can smoke
marijuana and are allowed open
prostitution and other things that other
democratic and autocratic
governments could not do.
• Market structure
• The degree of
competition among firms
operating in the same
industry.
• Perfect competition (market structure 1)
• A large number of well-informed
buyers and sellers who exchange
products.
• The agriculture industry is the most commonly used
example of perfect competition.
• There are a large number of buyers and sellers in a
massive market.
• It is easy to buy a farm and equally easy to sell it.
• Farmers know the current market prices for
agricultural goods as they are frequently published.
• Farmers produce a range of homogeneous goods.
• Monopolistic
competition (market
structure 2)
• The competitor tries to
attract more customers
and monopolize a small
portion of the market.
• After driving the Model S onto the stage,
Musk exited his seven-passenger sedan
along with seven other occupants (and
their luggage), three from decidedly
unconventional spaces: two children
climbed out of optional rear-facing bucket
seats and through the rear hatch, and a
surprising eighth guy popped out from
beneath the hood carrying a backpack.
Check out the video:
• Product differentiation
• Differences between
competing products in the
same industry. (examples:
shoes, computers, store
location, store design,
manner of payment,
packaging)
• Nonprice competition
• The use of advertising, giveaways, or
other promotional campaigns to
convince buyers that the product is
better than other brands. (this takes
the place of price competition.
Monopolistic competitors usually
advertise heavily to make their
products seem different from
everyone else’s.
• Oligopoly (market structure 3)
• A few very large sellers
dominate the industry.
(examples: Pepsi, Coke,
McDonald’s, Burger
King, Wendy’s)
• The automobile industry
in the United States is an
oligopoly because only
six firms (General
Motors, Ford, Chrysler,
Honda, Toyota, and
Nissan) account for
almost 90% of U.S.
automobile sales.
•Collusion
•A formal agreement to
set prices or behave in
a cooperative manner.
• Price-fixing (a form of
collusion)
• Agreeing to charge the same
or similar prices for a product.
• These prices are higher than
those determined under
competition.
• Collusion is usually against the
law.
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Monopoly (market structure 4)
One seller of a product.
Very few if any exists.
We usually dislike monopolies and we try
to outlaw them.
• New technologies often introduce products
that compete with existing monopolies.
Fax machine competes with the post
office. Then they both compete with email.
• Microsoft had established first MS-DOS and
later Windows as the dominating operating
system for personal computers. Once it had
achieved a position of strength in the market,
would-be competitors faced insurmountable
hurdles. Software developers face large costs
for every additional operating system to which
they adapt their applications. Because Microsoft
had the dominant operating system, any rival
personal computer operating system would
have only a handful of applications, compared
to tens of thousands of applications for
Microsoft's Windows system.
•Externality
•Unintended side effect
that either benefits or
harms a third party not
involved in the activity
that cause it.
• Negative externality
• The harm, cost, or inconvenience
suffered by a third party because
of actions by others.
• The noise and inconvenience
people suffer when an airport
expands.
• Positive externality
• A benefit received by someone
who had nothing to do with the
activity that generated the
benefit.
• Someone living on the other
side of town benefits from the
additional jobs generated by
the airport.
• Public goods (supplied by the
government)
• Products consumed by everyone, and
whose use by one individual does not
diminish the satisfaction to others.
• Example: police and fire protection,
national defense.
• Shows that the market is good at
satisfying individual wants and needs
while it may fail to satisfy them on a
collective basis.
• Public disclosure
• The requirement that
businesses reveal
information to the public.
• FDA labels on food and
medicine.