Competition, Market
Structures, and the Role of
Government
Market Structures
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What is the primary aim/goal of businesses?
To maximize profits
What is competition?
Striving against others to reach an objective
4 Types of Market Structure
1. Pure/Perfect Competition
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Large number of buyers and sellers
Identical product
Well informed buyers and sellers
More Competition
Less Competition
Pure/Perfecct Competition
Many buyer/sellers +
QuickTime™ and a
TIFF (Uncompressed) decompressor
are needed to see this picture.
Identical Products
Monopolistic Competition
• Meets all condition of perfect competition except for
identical products.
– Product differentiation
• Monopolistic competitors use nonprice competition
– Advertising, giveaways, or other promotions
More Competition
Less Competition
Monopolistic Competition
Gap
Levis
Lucky
Same as pure competition except for product differentiation
Monopolistic Competition
Are these shampoos/conditioners different?
Pantene $14.50
Frederic Fekkai $54
Monopolistic Competition
Are these mascaras different?
Maybelline
Sisley
$4
$43
Oligopoly
• A few very large sellers dominate the industry
• Oligopolists act independently by lowering prices
soon after the first seller announces the cut
• Collusion: formally agree to set prices
• Engage in price wars
More Competition
Less Competition
Oligopoly
Ipod
Zune
Oligopoly
Few producers control supply and price
Coca-Cola Classic
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Coca-Cola classic
Sprite
Dasani
Barq's
Dannon
Nestea
Rockstar
Evian
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Fanta
Fresca
Minute Maid
Mr. Pibb
Powerade
Seagrams Ginger Ale &
Mixers
• TAB
Pepsi-co
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Aquafina
Pepsi
Mountain Dew
Sierra Mist
Sobe
Lipton Brisk Tea
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MUG Root Beer
Slice
Gatorade
Dole Juice
Tropicana
Cadbury Schweppes
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7 Up
Canada Dry
Clamato
Dr Pepper
Hawaiian
Punch
• Mott's
• Orangina
• Snapple
Toyota
• Toyota
• Scion
• Lexus
Chrysler
• Chrysler
• Jeep
• Dodge
General Motors
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Chevrolet
Buick
Pontiac
GMC
Saturn
Hummer
SAAB
Cadillac
Monopoly
• Only one seller of a particular product
• Few monopolies
Monopoly
• One seller dominates the market with no close
substitutes
More Competition
Less Competition
Monopoly
• Natural Monopoly efficient production by
a single supplier
Monopoly
• Geographic Monopoly
- small town
Monopoly
1. Technological
Monopoly - new
invention
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Patent: exclusive
right for 17 years
Segway
Monopoly
1. Technological
Monopoly - new
invention
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Copyright: lifetime
+ 50 years
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Monopoly
1. Government
Monopoly government owned
businesses
A. Antitrust (anti-monopoly) laws
1.
Sherman Act of 1890
2.
Clayton Act of 1914
3.
Federal Trade
Commission Act
-- Monopolists tend to produce less and charge more.
-- Regulatory Agencies control economic behavior (Dept of Justice, Fed T
-- Sherman Act outlawed collusive price fixing and monopolies.
-- Strengthened the Sherman Act.
Sherman Antitrust Act
• 1890 – used in early
• Outlaws monopolies
19000’s
• First government law to
limit monopolies
• Gave federal gov’t power
to investigate trusts and
companies suspected of
violating the Act
• “Antitrust” really means
“competition law”
Trusts
DEF: A combination
of firms or
corporations formed
by a legal agreement
 Especially in order
to reduce competition
 Standard Trust –
came after Standard
Oil
Clayton Antitrust Act
• 1914
• Strengthened Sherman Act
• Prohibit “anticompetitive
practices”
– Mergers/Acquisitions that
lessen competition
– One person being a director
of competing companies
B. Cases
1.
Standard Oil case (1911) – broke-up.
2.
U.S. Steel case (1920) – ‘rule of
reason’ by Supreme Court that
unreasonably restrain trade.
John D. Rockefell
controlled nearly a
trade for oil and ga
The Supreme Cou
used the Sherman
Act to break up
Standard Oil into 3
Other cases…
•
In an out-of-court settlement,
AT&T divested itself into 22
regional phone-operating
companies in 1982.
• AT&T’s deal to buy T-Mobile
USA for $39 billion is shaping
up to be a heated regulatory
battle. It would create the
nation’s largest cellular carrier.
Lawmakers are already
denouncing the deal, saying it
will reduce competition in an
already consolidated industry.
Countries with Antitrust Laws
shown in red
C.
Mergers
1. Horizontal
2. Vertical
3. Conglomerate
-- Horizontal: merger of two competitors that sell similar products in the
same
geographic market. Examples are Chase & Chemical Bank,
Exxon & Mobile.
-- Vertical: firms at different stages of production process. Examples are
PepsiCo with
Pizza Hut, Taco Bell, and KFC.
-- Conglomerate: not horizontal or vertical, different firms in different
geographic areas.
Effectiveness of Antitrust Laws
Types of Mergers
Automobiles
Blue Jeans
Conglomerate Merger
Autos
B
A
T
U
C
V
E
D
W X
Y Z
Glass
Horizontal Merger
F
Blue
Jeans
Denim
Fabric
Vertical Merger
-- Most Vertical mergers are approved by regulators.
Top 10 M&A deals worldwide by value (in mil.
USD) from 2000 to 2010:
Year
Purchaser
Purchased
Ran
k
Transaction value (in mil.
USD)
1
2000
Fusion: America Online Inc.
[23][24]
(AOL)
Time Warner
164,747
2
2000
Glaxo Wellcome Plc.
SmithKline Beecham Plc.
75,961
3
2004
Royal Dutch Petroleum Co.
Shell Transport & Trading Co
74,559
4
2006
AT&T Inc.
BellSouth Corporation
72,671
5
2001
Comcast Corporation
AT&T Broadband & Internet Svcs
72,041
6
2009
Pfizer Inc.
Wyeth
68,000
7
2000
Spin-off: Nortel Networks Corporation
8
2002
Pfizer Inc.
[25][26]
[27]
59,974
Pharmacia Corporation
59,515
Bank One Corp
58,761
9
2004
JP Morgan Chase & Co
10
2009
Technofist Inc.
Goldspark IT Solution PVT LTD, Inc
11
2008
Inbev Inc.
Anheuser-Busch Companies, Inc
N/A
52,000