7-1: WHAT IS PERFECT COMPETITION?

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7-1 WHAT IS PERFECT COMPETITION?
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Competition

• Economists classify markets based on how
  competitive they are
• Market structure an economic model of
  competition among businesses in the same industry

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Perfect Competition

• Definition ideal model of a market economy
• Perfect competition is used as a basis to
  determine how competitive a market is

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5 Characteristics of Perfect Competition

• 1. Numerous buyers and sellers
• This ensures that no single buyer or seller has
  the power to control the price in the market

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5 Characteristics of Perfect Competition
(continued)

• Buyers have lots of options
• Sellers are able to sell their products at market
  price

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• 2. Standardized product
• A product that consumers see as identical
  regardless of the producer
• Example milk, eggs, etc.

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Characteristics of Perfect Competition (continued)

• 3. Freedom to enter and exit markets
• Producers enter the market when it is profitable
  and exit when it is unprofitable

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Characteristics of Perfect Competition (continued)

• 4. Independent buyers and sellers
• This allows supply and demand to set the
  equilibrium price

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Characteristics of Perfect Competition (continued)

• 5. Well-informed buyers and sellers
• Buyers compare prices
• Sellers know what consumers are willing to pay
  for goods

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Price Taker

• When these 5 conditions are met, sellers become
  price takersa business that accepts the market
  price determined by supply and demand

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Imperfect Competition

• Market structures that lack one of the conditions
  needed for perfect competition are examples of
  imperfect competition
• This means there are only a few sellers and/or
  products are not standardized
• Examples corn and beef markets

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7-2 THE IMPACT OF MONOPOLY
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Characteristics of a Monopoly

• Monopoly a market structure in which only one
  seller sells a product for which there are no
  close substitutes
• Pure monopolies are rare

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Characteristics of a Monopoly (continued)

• A cartel is close to a monopoly
• Cartel a group of sellers that act together to
  set prices and limit output
• Example OPEC11 nations hold more than 2/3 of
  the worlds oil reserves

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Characteristics of a Monopoly (continued)

• A monopoly is a price makera business that does
  not have to consider competitors when setting the
  price of its product
• Consumers accept the price of the product

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Characteristics of a Monopoly (continued)

• Other firms struggle to enter the market due to a
  barrier to entrysomething that stops the
  business from entering a market

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3 Characteristics of Monopolies

• 1. Only One Seller
• Supply of product has no close substitutes

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3 Characteristics of Monopolies

• 2. A Restricted, Regulated Market
• In some cases, government regulations allow a
  single firm to control a market (think utilities)

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3 Characteristics of Monopolies

• 3. Control of Prices
• Prices are controlled since there are no close
  substitutes

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Types of Monopolies

• First, not all monopolies are harmful
• Natural monopoly occurs when the costs of
  production are lowest with only one producer

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Types of Monopolies (continued)

• Example of a natural monopoly public utilities.
  It would be inefficient to have more than one a
  water company competing for customers.
• A single supplier would be most efficient
  according to economies of scale when the average
  cost of production falls as the producer grows
  larger

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Types of Monopolies (continued)

• Government monopoly exists because the
  government wither owns and runs the business or
  authorizes only one producer
• Example (U.S. Postal Service), DMV

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Types of Monopolies (continued)

• Technological monopoly occurs when a firm
  controls a manufacturing method, an invention, or
  a type of technology
• Example a patent, where an inventor has
  exclusive rights to that invention or process for
  a certain number of years

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Types of Monopolies (continued)

• Geographic monopoly exists when there are no
  other producers within a certain region
• Example professional sports teams

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Businesses like Monopolies or more Market power

• Cartels
• Mergers
• Predatory Pricing price below costs until
  competitors go out of business
• Require a store to stock all of its products

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Government Promotes Competition

• 1890 Sherman Anti-trust Act
• Outlaws mergers and monopolies that limits trade
  between states
• Companies broken up under the law
• 1911 Standard Oil and Trust
• 1982 ATT

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Microsoft

• 1997 accused of using near monopoly to take over
  operating system market
• 1999 Judge ruled against Microsoft.
• 2001 deal Microsoft can link Internet Explorer
  to their operating system, but cant force
  computer companies to only provide Microsoft on
  new computers.

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Government Promotes Competition

• By preventing mergers
• AOL and Time Warner OK to merge
• Libbey and Anchor Hocking not allowed to merge
• Degregulation
• Some regulations reduce competition
• Airlines, banking, trucking
• More competitors join

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Questions

• 1. Suppose that you went to a farmers market and
  found several different farmers selling
  cucumbers. Would you be likely to find a wide
  range of prices for cucumbers? Why or why not?

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• 2. What would happen to a wheat farmer who tried
  to sell his wheat for 2.50 per bushel if the
  market price were 2.00 per bushel? Why?

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• 3. In 2003, 95 of the households on the U.S. had
  access to only 1 cable TV company in their area.
  What type of monopoly did cable TV companies
  have? Explain your answer.

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• 4. In 2002 the patent on the antihistamine
  Claritin expired. Using the 3 characteristics of
  a monopoly, explain what happened to the market
  for Claritin when the patent expired.