Market StructuresECONOMICS CHAPTER 7

Perfect Competition

Pure Price Competition: occurs when there are so many sellers in the market and each seller accounts for a very small part of the total market. No single seller can manipulate market price. Businesses in pure price markets are known as price takers.

Perfect competition has four conditions:

Many buyers and sellers;

Similar products/no product differentiation;

Easy entry (existing sellers can’t bar entry);

Complete information (prices, supply, etc. easy for buyers and seller to obtain)

Example: Farmer’s Market

Commodity: Product considered same no matter who produces it (gas, milk, etc.)

Buyer will always pick the lowest price

Imperfect Competition

Imperfect Competition occurs when any one or a group buys or sells a good or service in large enough amounts to affect price. Businesses in imperfect price markets are known as price searchers.

The most extreme form of imperfect competition is called a Pure Monopoly.

The characteristics of a pure monopoly are as follows:

A single seller;

No substitutes/no product differentiation;

No entry: Barriers to entry include legal issues, cost of getting started, and ownership of raw materials.

Economies of Scale (Curve pg. 164)

Factors that cause a producer’s average cost per unit to decrease as output increases

Large fixed start-up costs, spread over more output so that overall costs decreases with time

http://www.investopedia.com/terms/d/diseconomiesofscale.asp

Primary Types of Monopolies

The two primary types of monopolies are:

Natural: Most efficient for production to be concentrated in a single firm

Government: Govt agency is sole provider of good or services OR monopoly is allowed by the govt

Patent

Copyright

Trademark

Examples of Govt Monopolies: Utility companies, Postal Service, etc.

Characteristics of Monopolistic Competition

In Monopolistic competition, a large number of sellers offer similar but slightly different products. The characteristics of monopolistic competition are as follows:

numerous sellers;

relative ease of entry;

differentiated products;

non-price competition (competition based on things other than price)

Examples: Attract customers through style, customer service, location, convenience, advertising, etc.

Examples of Monopolies

Past: Standard Oil Company, US Steel, DeBeers Diamonds

Present: Forbes defines as controlling 50% or more of the market for a good or service

Monsanto: Agrochemical and agricultural biotechnology corporation

Creator of GMOs; 80% of corn in America, 93% of soybeans

https://www.youtube.com/watch?v=GNvW-uGBTSk

Microsoft: Controls 90% of operating system market

Intel: Controls 80% of microchip market

Facebook: Controls 70% of social media market

Netflix: Controls 61% of digital streaming market

Google: Controls 90% of search engine market https://www.youtube.com/watch?v=v1uyQZNg2vE

https://www.youtube.com/watch?v=ftouPdU1-Bo

Oligopoly

In an Oligopoly an industry is dominated by a few suppliers that exercise some control over price. Usually it is defined as two to four firms producing 70-80% of the output. The characteristics of an oligopoly are as follows:

domination by a few sellers;

substantial barriers to entry;

identical or slightly different products;

non-price competition (competition based on things other than price)

Examples: Coke or Pepsi

OPEC (pg. 178)

Organization of Petroleum Exporting Countries: International cartel and intergovernmental organization created in 1960

Purpose: To secure fair and stable prices, efficient and steady supply, and fair returns for investors

Members include Iraq, Indonesia, Iran, Kuwait, Libya, Angola, Algeria, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.

They produce 40% of world’s oil supply and control 75% of reserves

Members meet to set quotas for output

Most agree there is not sufficient supply to meet increased demand https://www.youtube.com/watch?v=67xnH4xjZyQ

Oligopoly

Threes ways a firm in an oligopoly can control a market:

Price Leadership: Set price for the market, leads to price war Predatory Pricing: Set price below cost for a period of time to drive out competition

Collusion: Illegally group together to set prices and output, leads to price fixing

Cartel: Formal agreement to set price and output

All must agree; if one cheats and increases output then prices fall and others lose money

If some dropout of cartel that changes the price: Usually short lived

Drug Cartels: Use force/threats to deter cheating or dropping out

Trusts: Similar to cartel-illegal grouping

Mexican Drug Cartels

How do these cartels effect the citizens of Mexico?

What role does America play in the success of the cartels?

What are other barriers to solving this problem in Mexico? https://www.youtube.com/watch?v=dt92f2LAo5I

Media in America

The Government’s Role

In the U.S. media is owned privately, not by the government

The Corporation for Public Broadcasting (PBS) is privately owned but partially funded by the Government (about 15%)

The Federal Communication Commission (FCC) regulates the broadcast airwaves

NOT Cable or Satelite

Broadcasting Monopoly pg. 182

So Who Owns the Media? 5 Companies own 90% of Media in the US

So Who Owns the Media? Disney

Bob Iger – CEO

ABC, Disney, ABC Family,

10 local stations, ESPN,

Part of Hulu, Lifetime, A&E, History

Walt Disney, Touchtone, Hollywood Pictures, Miramax Films, Buena Vista, Walt Disney and Pixar Animation Studios, Muppets

Theme Parks

Hyperion Books, 100’s of magazines, production facilities, international cable, radio and internet sites, software, Baby Einstein,

So Who Owns the Media? News Corp

Rupert Murdoch – CEO

Owns everything with Fox in title

Fox, FoxNews, local tv stations, Fox Sports, FX, National Geographic Channel

Harper Collins, Zondervan Books

Print – NY Post, Wall Street Journal, numerous UK and Australian publications

20th Century Fox Films, Fox Television Studios, American Idol

MySpace, Photobucket, part of Hulu

So Who Owns the Media? Viacom

Sumner Redstone – Chairman

Split with CBS

MTV, VH1, Comedy Central, TV Land, Nickelodeon, BET

Viacom International, Paramount Motion Pictures

So Who Owns the Media? CBS

Sumner Redstone – Chairman

Les Moonves, CEO

CBS, part of CW, Showtime, local tv stations

CBS Records, Radio and films

CNET reviews, Simon and Schuster publisher

Paramount Parks

Westinghouse

So Who Owns the Media? Time-Warner

Jeff Bewkes – CEO

CNN, TNT, TBS, TCM, Cartoon Network, HBO, Cinemax, WB, part of CW, Hanna Barbara, Looney Tunes

AOL, Mapquest, NASCAR.com

Warner Bros, New Line Cinema, Castle Rock

Time Magazine, Sports Illustrated, Entertainment Weekly, People, Fortune, Life, DC Comics, more than 150 magazines

So Who Owns the Media? General Electric

Jeffrey Immelt – CEO

MSNBC, NBC, local stations, CNBC, Bravo, SyFy, USA, Weather Channel,

Telemundo, TiVo, part of Hulu, A&E, History,

Universal Studios and theme parks

GE Aviation, Military Systems, Finance, Healthcare, Energy, Transportation, Consumer products

So Who Owns the Media? Clear Channel

Largest owner of Radio Stations in US

Over 900 stations

Radio home of Rush Limbaugh, Sean Hannity, Glenn Beck, Michael Savage, Jim Rome

Most stations carry Fox News Radio

So Who Owns the Media?

Gannett owns USA Today, Arizona Republic, Cincinnati Enquirer

Tribune Company owns LA Times, Chicago Tribune, Baltimore Sun, Orlando Sentinel

Hearst Corp owns Houston Chronicle

Washington Post also owns Newsweek

New York Times also owns Boston Globe

So What?

Who published Sarah Palin’s Book?

Harper Collins = News Corp = Fox

So when she is interviewed on Fox is it “news” or “advertising”?

Who published Hillary Clinton’s “Living History”

Simon and Schuster = CBS

“So if Katie Couric reported a positive story on her is it “news” or are they trying to sell books?

When Fox uses a Wall Street Journal poll or CNN uses one from Time is it credible?

So what should you do?

Don’t rely on one source of information

Be an educated consumer of knowledge

Research your news sources, hosts, reporters

Fact check

Get your news from more than one

Form of media – Print, TV, Internet

Company

Viewpoint

Anti-Trust Laws

Govt steps in to limit monopolistic power and regulate predatory tactics Break up trusts and limit or block mergers, restore competition

Why: Monopolies hurt consumers and small businesses Lower quality, no incentive for innovation or improvement

Higher prices and less choices

http://www.npr.org/player/v2/mediaPlayer.html?action=1&t=1&islist=false&id=436958200&m=436966818

Examples: Sherman Antitrust Act (1890), Clayton Antitrust Act (1914) created the Federal Trade Commission (FTC) to police violations 1982: Govt broke up AT&T into 7 regional phone companies

2000: Govt allowed AOL and Time Warner to merge but with various conditions to protect competition

Deregulation

Govt chooses to no longer decide what role each company can play in the market and pricing

1970s and ‘80s: Some begin to believe that antitrust laws are actually reducing competition

Airlines, trucking, banking, railroad, gas, TV, etc.

Deregulation forces competition through the removal of barriers to entry and price controls

Weeds out weaker businesses: Encourages growth

Hard on workers and small business owners: Many companies disappear

Market Structure

Number ofFirms

DifferentiatedOr SimilarProducts

Ease of Entry Price-SettingPowers

Non-Price Competition

Examples

Perfect Competition

many similar fee or easy none None wheat, corn, beef, and other agricultural products

Monopolistic Competition

many differentiated relatively easy

some –mostly determined by the market

some fast food, gas, retail stores, toothpaste, cosmetics, designer clothes

Oligopoly few similar or differentiated

substantial barriers

some – price leadership

extensive steel, beer, aluminum, cereal, cars, soft drinks, soap

(Pure) Monopoly

one only product of its kind available

blocked complete control

Image – public relations

utilities, local phone service, diamonds

Business OrganizationsECONOMICS CHAPTER 8

Sole Proprietorships

Characteristics 75% of all businesses are sole props

Managed and owned by a single individual

Most are small, generate only 6% of total US sales

Advantages Ease of start-up and few regulations

Sole receiver of profits

Full control

Disadvantages Unlimited personal liability Limited access to resources

Lack of permanence

Business Partnership

Owned and operated by two or more people Types

General partnership (both partners share equally in responsibility and liability) Limited partnership (only one partner is required to have unlimited personal liability) Limited liability partnership (all partners are limited partners)

Advantages Relatively easy and inexpensive to set-up Little or no govt. regulation and special taxes Shared responsibilities and larger pool of capital

Disadvantages Most of the time, unlimited personal liability Potential for conflict

Corporations

Legal entity owned by individual stockholders, each who has limited liability for the firm’s debts

Can be multinational corporations (MNCs) Greatest amount of sales/revenue: 20% of all businesses, 80% of all sales Types

Closely held (issue stock to only a few people) Publicly held (sell/trade stock on the open market)

Combinations (how companies grow) Horizontal merger: 2+ firms in same market Vertical merger: 2+ firms in different stages of production Conglomerate: 3+ firms that produce unrelated products

Corporations

Advantages

Limited personal liability

Transferable ownership, long-life

Ability to attract capital

Disadvantages

Expensive and difficult to operate

Subject to double taxation, heavy regulation

Easy for owner/founder to lose control

Business Terms

Outsourcing: Contracting with another company to do specific job that would otherwise be done by your company

Offshoring: Moving some of company’s operations to another country

“Glass Ceiling”: Unofficial barrier that sometimes prevents women and minorities from advancing to top ranks of organizations dominated by white men

Labor Union: Organization of workers fighting to protect their rights and improve their conditions, benefits, and pay

White Collar vs. Blue Collar

Arbitration and Collective Bargaining

Other Business Organizations

Franchises

Pay parent company in return for exclusive right to sell

Advantages: training and support, standardized quality, national advertising, financial assistance, centralized buying power

Disadvantages: fees, strict standards, purchase restriction, limited product line

Cooperative: owned and operated by a group of individuals, voluntarily cooperate for mutual social, economic and cultural benefit

Types: Consumer, service, producer

Ex: Land O Lakes

Nonprofit: does not operate for profit, but instead to benefit society (charity)

Examples: Doctors without Borders, Human Rights Campaign, UNICEF, Planned Parenthood, NPR, Sierra Club, Humane Society, Ted Talks, Smithsonian, Livestrong, Boy and Girl Scouts, American Heart Association, Susan G. Komen Breast Cancer Foundation, Habitat for Humanity, Amnesty International, as well as libraries, museums, etc.

https://www.youtube.com/watch?v=dkl44sAEC6c