CHAPTER
7
COMPETITION
- MARKET STRUCTURE
GENERAL INFORMATION http://www.usnews.com
-
GOVERNMENT INVOLVEMENT IN THE
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GOVERNMENT IS TYPICALLY LIMITED TO
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PROTECTION OF PRIVATE PROPERTY
o
ENFORCING CONTRACTS
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SETTLING OF DISPUTES
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PROTECTING BUSINESSES FROM PREDATORY PRACTICES
EITHER INTERNAL OR EXTERNAL
TYPES OF MARKETS AND THEIR
IMPACT UPON PRICE..\scanned
articles\markets.htm
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PURE COMPETITION
o
DOESNT EXIST IN REALITY BUT IS USED AS A BENCHMARK FOR
PURPOSES OF COMPARISON
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CHARACTERISTICS
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LARGE NUMBER OF BUYERS AND SELLERS
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IDENTICAL PRODUCTS
§
BUYERS AND SELLERS ACT INDEPENDENTLY
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BUYERS AND SELLERS ARE REASONABLY INFORMED
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BUYERS AND SELLERS ARE FREE TO ENTER AND EXIT THE
MARKET
o
THE CLOSEST THING TO THIS TYPE MARKET TODAY IS A
MARKET IN IMPERFECT
OR NEAR COMPETITION
§
FARMERS AND TRUCKING COMPANIES ARE CLOSEST TO THIS
BENCHMARK
·
FARMERS DO FORM CO-OPS IN AN ATTEMPT TO GAIN A
DEGREE OF CONTROL ON PRICE
7/2
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THERE IS NO CONSUMER LOYALTY
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THE ENTIRE INDUSTRY SETS THE PRICE NOT THE
INDIVIDUAL S & D SETS THE PRICE
o
MONOPOLISTIC COMPETITION
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HAS CHARACTERISTICS OF BOTH A MONOPOLY AND PERFECT
COMPETITION
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EACH COMPETITOR HAS A LOYAL CLIENTELE THAT HE
TRIES TO KEEP HAPPY AND STEAL CUSTOMERS FROM HIS COMPETITORS
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PRODUCT DIFFERENTIATION IS A HALLMARK OF THIS TYPE
MARKET
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ADVERTISING IS USED TO INCREASE DEMAND
·
EXAMPLE JEANS AND SNEAKERS
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OLIGOPOLY ..\scanned
articles\oligopolies.htm
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MARKET COMPROMISED OF A FEW LARGE COMPETITORS
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ALWAYS A DANGER OF COLLUSION
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PRICE WARS SELDOM ERUPT
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HOW ARE PRICES DETERMINED?
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INDEPENDENT PRICING WITH PRICE LEADERSHIP
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THE LARGEST COMPETITOR USUALLY SETS A PRICE AND IT
IS MATCHED BY THE OTHER COMPETITORS
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IF ONE OFFERS REBATES, DISCOUNTS OR BONUSES, THE
OTHERS WILL DO THE SAME
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THE EQUILIBRIUM PRICE IS USUALLY HIGHER THAN
MONOPOLISTIC COMPETITION
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THERE IS ALWAYS THE DANGER OF PREDATORY PRICING
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CHARGING LOWER PRICES IN AN ATTEMPT TO ELIMINATE
COMPETITION
7/3
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CARTELS ARE OLIGOPOLIES WHICH HAVE COLLUDED
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OPEC IS A CLASSIC EXAMPLE
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OLIGOPSONY
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A MARKET CONTROLLED BY A
FEW LARGE CONSUMERS
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LIKE AN OLIGOPOLY IN THAT
PRICE CAN BE INFLUENCED BY FROM THE DEMAND SIDE
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MONOPOLY THEORETICAL NEAR MONOPOLIES DO EXIST
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FACTORS THAT WORK AGAINST MONOPOLIES
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THEY ARE ILLEGAL
·
AVAILABILITY OF SUBSTITUTES TECHNOLOGY WILL ATTEMPT
TO FIND SUBSTITUTES
§ TYPES OF MONOPOLIES
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NATURAL (GOVERNMENTAL SANCTIONED MONOPOLIES)
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EXAMPLE UTILITY COMPANIES, MASS TRANSIT
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WHY ARE THEY CREATED?
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THEY ARE MORE PRACTICAL
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THEY ARE MORE COST-EFFICIENT
· GEOGRAPHIC
· TECHNOLOGICAL
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PATENTS, COPYRIGHTS, AND TRADEMARKS
· GOVERNMENT
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POST OFFICE, STATE STORES, LOTTERY
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MONOPOLISTS ARE PRICE MAKERS
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THEY CONTROL PRICE BY CONTROLLING SUPPLY
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MONOPSONY
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A MARKET CONTROLLED BY A SINGLE CONSUMER
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EX GOVERNMENT MAY BE THE ONLY CONSUMER FOR A
PRODUCT EX TANKS OR B52S
7/4
MARKET FAILURES
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def WHENEVER A PRODUCTIVE RESOURCE DOESNT REACH
MAXIMUM POTENTIAL
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CAUSES OF MARKET FAILURES
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INADEQUATE COMPETITION
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CAUSES
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ARTIFICIALLY HIGH PRICES
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INEFFICIENT USE OF RESOURCES
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UNDUE ECONOMIC POWER CAN LEAD TO UNDUE POLITICAL
POWER
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EXAMPLE NATIONAL TICKET COMPANY, NRA
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INADEQUATE COMPETITION CAN ALSO OCCUR ON THE DEMAND
SIDE
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MONOPSONY def A MARKET WHERE THERE IS A SINGLE OR PREDOMINANT
BUYER
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HOW MANY F15 FIGHTERS AND M1 TANKS ARE IN DEMAND
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MOST GOVERNMENTAL AGENCIES ARE GEARED TOWARD INCREASING COMPETITION THAN REGULATING A LESS
COMPETITIVE MARKET
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INADEQUATE INFORMATION
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RESOURCE IMMOBILITY
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LABOR NOT WILLING OR NOT FREE TO MOVE
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EXPENSE INVOLVED IN MOVING RAW MATERIALS TO REMOTE
AREAS
7/5
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EXTERNALITIES
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Def AN ECONOMIC SIDE EFFECT EXPERIENCED BY A THIRD
PARTY NOT DIRECTLY INVOLVED IN THE ECONOMIC ACTIVITY
§
THESE ARE CONSIDERED AS MARKET FAILURES BECAUSE ALL
DO NOT SHARE EQUALLY IN THE BENEFIT OR DETRIMENT
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EXAMPLES OF NEGATIVE EXTERNALITIES
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NOISE OF ELYSBURG GUN SHOOT
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EXCESS TRAFFIC CAUSED BY KNOEBELS IN THE SUMMER
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EXCESS NOISE OF A NEW AIRPORT
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EXAMPLES OF POSITIVE EXTERNALITIES
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INCREASED TRAFFIC FOR LOCAL BUSINESSES DURING THE
SUMMER GAS STATIONS
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SCI THOSE WHO PROVIDE WATER FOR THE PRISON
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THE NEED FOR PUBLIC GOODS
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THE MARKET OFTENTIMES FAILS TO SATISFY THE NEEDS ON
A COLLECTIVE
BASIS
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EXAMPLES
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AIR AND WATER POLLUTION
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THE SCARED LANDSCAPE OF THE COAL REGION
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NATIONAL DEFENSE
ROLE OF GOVERNMENT
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RESTRICTIONS IMPOSED BY GOVERNMENT ARE INTENDED TO
BRING ABOUT A MORE EFFICIENT USE OF RESOURCES
7/6
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ANTI-TRUST LEGISLATION
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INTENDED TO BREAK UP TRUSTS OR MONOPOLIES
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CLAYTON ANTI-TRUST ACT 1914
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INTENDED TO BREAK UP HOLDING COMPANIES AND
INTERLOCKING DIRECTORATES
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OUTLAWED PRICE DISCRIMINATION 2 TIERED PRICING
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FEDERAL TRADE COMMISSION ACT 1914
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EMPOWERED TO ISSUE CEASE AND DESIST ORDERS
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Def AN ORDER TO STOP AN UNFAIR BUSINESS PRACTICE
IN INTERSTATE COMMERCE
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ROBINSON-PATMAN ACT 1935
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PROHIBITED COMPANIES FROM OFFERING PREFERENTIAL
DISCOUNTS TO CUSTOMERS EXAMPLE REBATES
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PUBLIC DISCLOSURE
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PROVIDES INFORMATION WHICH PRE-EMPTS MARKET FAILURE
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GOVT. CAN REQUIRE THAT COMPANIES PROVIDE INFORMATION
TO THE PUBLIC
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FDA CAN REQUIRE LABELING
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SEC CAN REQUIRE THAT CORPORATIONS BARE THEIR BOOKS AND
PROVIDE ANNUAL REPORTS
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FED CAN REQUIRE BANKS TO PUBLISH THEIR BALANCE SHEETS
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RESTRICTIONS ARE PLACED UPON ECONOMIC FREEDOM NOT TO
PREVENT THE BENEFITS OF COMPETITION BUT TO BRING ABOUT MORE EFFICIENT USE OF
RESOURCES
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FEDERAL REGULATORY AGENCIES
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ICC 1887 REGULATES INTERSTATE COMMERCE (PUBLIC
TRANSPORTATION)
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FDA 1906 ENFORCES LAWS THAT REQUIRE FOOD, DRUGS AND
COSMETICS TO BE SAFE
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FCC 1934 LICENSES AND REGULATES RADIO, TV, AND TELEGRAPH
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SEC 1934 REGULATES THE BUYING AND SELLING OF SECURITIES
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NLRB 1935 ADMINISTERS LAWS THAT DEAL WITH LABOR/MANAGEMENT
RELATIONS
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FAA 1958 REGULATES AIR COMMERCE
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EEOC 11964 INVESTIGATES CASES INVOLVING DISCRIMINATION BY
LABOR UNIONS AND EMPLOYERS
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EPA 1970 CO-ORDINATES AND ENFORCES LAWS THAT DEAL WITH AIR
AND WATER POLLUTION
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NHTSA 1970 PROMOTES VEHICLE SAFETY AND FUEL EFFICIENCY
7/7
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OSHA 1970 PROTECTS EMPLOYEES IN THE WORKPLACE
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CPSC 1972 SETS AND ENFORCES RULES FOR CONSUMER SAFETY
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NRC 1974 LICENSES AND REGULATES CIVILIAN USE OF NUCLEAR
POWER
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FERC 1977 SETS RATES AND REGULATES INTERSTATE
TRANSPORTATION AND