How Businesses How Businesses CompeteCompete

Chapter 11Chapter 11

CompetitionCompetition

Market Competition-Market Competition- When When businesses compete with one businesses compete with one another to excel in free markets.another to excel in free markets.

Entrepreneurs & business owners try Entrepreneurs & business owners try to get ahead by offering goods & to get ahead by offering goods & services they hope people want to services they hope people want to buybuy

When Businesses CompeteWhen Businesses Compete

Consumers benefit in numerous ways:Consumers benefit in numerous ways: 1. lower prices1. lower prices 2. better quality2. better quality 3. higher wages3. higher wages 4. more job opportunities 4. more job opportunities KAYAK - Cheap Flights, Hotels, Airline KAYAK - Cheap Flights, Hotels, Airline

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What is Market Structure?What is Market Structure?

It is a way to analyze the level of It is a way to analyze the level of competition in an industrycompetition in an industry

There are 2 descriptions of market There are 2 descriptions of market structuresstructures

A) Price taker-a business must accept the A) Price taker-a business must accept the price established by the market forces of price established by the market forces of supply and demandsupply and demand

B) Price searcher-a business who goes into B) Price searcher-a business who goes into the market and seeks out the right price to the market and seeks out the right price to charge for their good (Monopolistic charge for their good (Monopolistic Competition, Oligopoly, & Monopoly)Competition, Oligopoly, & Monopoly)

Types of Market StructureTypes of Market Structure

1. Pure Competition-1. Pure Competition- Characteristics Characteristics a. many buyers & sellers (literally a. many buyers & sellers (literally

1000s to millions)1000s to millions) b. b. standardized or identical standardized or identical

product-product- one companies product is one companies product is exactly the as every other companiesexactly the as every other companies

c. easiest market to enter & exit as a c. easiest market to enter & exit as a producerproducer

Types of Market StructureTypes of Market Structure

d. No Government restrictions to prevent the d. No Government restrictions to prevent the company from openingcompany from opening

e. consumers can obtain complete e. consumers can obtain complete information about the product & stores in this information about the product & stores in this marketmarket

f. f. no control over the products price!no control over the products price! g. examples: g. examples: -1. most agricultural products-1. most agricultural products -2. florist-2. florist -3. bakery-3. bakery

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Anticipatory SetAnticipatory Set

Day 2Day 2

What is a price taker?What is a price taker?

Monopolistic CompetitionMonopolistic Competition

A) many small firms in the market A) many small firms in the market (1,000s-10,000s)(1,000s-10,000s)– A highly competitive marketA highly competitive market

B) Sell a very similar B) Sell a very similar but notbut not identical identical productproduct

C) C) Product differentiation—Product differentiation— what what makes products differentmakes products different

Product DifferentiationProduct Differentiation

1. Product name1. Product name 2. Trademarks2. Trademarks 3. Warranties3. Warranties 4. Services4. Services 5. Customer Service5. Customer Service

Monopolistic CompetitionMonopolistic Competition

D) since products are not identical, D) since products are not identical, businesses can control the quantity businesses can control the quantity and thus slightly control the price and thus slightly control the price they charge they charge (Minimal control over (Minimal control over price)price)

Easy entry & exit into the market Easy entry & exit into the market F) examples F) examples

– Restaurants, department stores, etcRestaurants, department stores, etc

OligopolyOligopoly

A) When 2 or more firms dominate A) When 2 or more firms dominate an industryan industry

B) severe barriers to entry & exit into B) severe barriers to entry & exit into the marketthe market

C) Products are usually similar, yet C) Products are usually similar, yet not identicalnot identical

D) High levels of “Non-price D) High levels of “Non-price competition”competition”

OligopolyOligopoly

E) E) Collusion- Collusion- When firms secretly When firms secretly get together in order to control both get together in order to control both the product price & quantity of their the product price & quantity of their goodsgoods– This is illegal in the United States This is illegal in the United States

(why?)(why?)– It establishes monopoly power in It establishes monopoly power in

the market!the market!

OligopolyOligopoly

F) Product information is plentiful the F) Product information is plentiful the more competitive the oligopolymore competitive the oligopoly

G) How does the Government G) How does the Government distinguish between a monopoly, distinguish between a monopoly, completive market and an oligopoly?completive market and an oligopoly?

H) H) Concentration RatioConcentration Ratio- If the 4 - If the 4 largest firms in the industry an largest firms in the industry an account for 40% or more of total account for 40% or more of total output of the product.output of the product.

OligopolyOligopoly

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QuestionsQuestions

What other fields are susceptible to What other fields are susceptible to becoming oligopolies?becoming oligopolies?

What things do you think are What things do you think are necessary for an oligopoly to work?necessary for an oligopoly to work?

What have you heard about What have you heard about monopolies? monopolies?

Are there any dangers to a Are there any dangers to a monopoly?monopoly?

How is a monopoly different from an How is a monopoly different from an oligopoly?oligopoly?

Pure MonopolyPure Monopoly A) Extreme opposite of Pure CompetitionA) Extreme opposite of Pure Competition B) One Seller-The firm is the industryB) One Seller-The firm is the industry C) A product for which there are NO close C) A product for which there are NO close

substitutes substitutes D) Barriers to entry & exit are considered D) Barriers to entry & exit are considered

impossibleimpossible E) Firm has total control over priceE) Firm has total control over price F) Can achieve “Economies of Scale” –F) Can achieve “Economies of Scale” –

Produce mass quantities & specialization Produce mass quantities & specialization which reduces costs of production (also which reduces costs of production (also applies to Oligopolies)applies to Oligopolies)

Types of Legal MonopoliesTypes of Legal Monopolies

1) 1) “Public Legal” “Public Legal” also referred to also referred to as “Natural Monopolies” because it is as “Natural Monopolies” because it is in societies best interest to have a in societies best interest to have a monopoly market in place.monopoly market in place.

Energy, public transportation…Energy, public transportation… 2) 2) “Private Legal”“Private Legal” Protect the Protect the

rights of the individualsrights of the individuals

Day 4Day 4

There are legal monopolies. Is there There are legal monopolies. Is there anything that you think would be anything that you think would be better run if it were a monopoly?better run if it were a monopoly?

Private LegalPrivate Legal

A) A) CopyrightCopyright- exclusive rights to - exclusive rights to something written like a book, poem, something written like a book, poem, music, songs etc, which is good for 28 music, songs etc, which is good for 28 years & is renewable (Beatles songs)years & is renewable (Beatles songs)

B) B) TrademarkTrademark- name or symbol that - name or symbol that represents a productrepresents a product

C) C) PatentPatent- exclusive rights to an - exclusive rights to an invention. Last 17 years.invention. Last 17 years.

Resource MonopolyResource Monopoly

““Resource Monopoly”-Resource Monopoly”- When a firm When a firm owns the rights to a key natural owns the rights to a key natural resource used to make a goodresource used to make a good

A) ALCOA (Aluminum Company of A) ALCOA (Aluminum Company of America)America)– Owns 90% of all known Bauxite reserves Owns 90% of all known Bauxite reserves

in the worldin the worldB) DeBeers Diamonds- Owns 90% of all B) DeBeers Diamonds- Owns 90% of all

the world’s diamond minesthe world’s diamond mines

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What type of monopoly does the NFL What type of monopoly does the NFL have?have?

How did the USFL challenge that?How did the USFL challenge that?

Government monopolyGovernment monopoly

Government itself is the sole producerGovernment itself is the sole producer A) U.S postal Service…A) U.S postal Service… B) Print coins and currencyB) Print coins and currency

MONOPOLIES ARE ILLEGAL IN THE U.S!MONOPOLIES ARE ILLEGAL IN THE U.S! 1)Anti-trust laws make them illegal1)Anti-trust laws make them illegal 2) Sherman Anti-Trust Act-12) Sherman Anti-Trust Act-1stst anti-trust anti-trust

law passed in the U.S. (1892)law passed in the U.S. (1892)

MergersMergers

Merger-Merger- when one company takes when one company takes over anotherover another

Why do firms merge?Why do firms merge? 1) add new products1) add new products 2) a way to reduce costs & spread 2) a way to reduce costs & spread

out risksout risks 3) Benefits of increased size and 3) Benefits of increased size and

efficiencyefficiency

Types of MergersTypes of Mergers

1) 1) Horizontal- Horizontal- a combination of 2 a combination of 2 companies who produce the same companies who produce the same kind of productkind of product– Example- Example- Exon-MobilExon-Mobil

2) 2) Vertical-Vertical- a combination of 2 a combination of 2 companies involved with different steps companies involved with different steps of the production of the same goodof the production of the same good

ConglomerateConglomerate

Conglomerate-Conglomerate- a combination of 2 a combination of 2 unrelated businesses under single unrelated businesses under single managementmanagement

A)A) Example: Liggett & Myers= a cigarette Example: Liggett & Myers= a cigarette Company merged with a dog food makerCompany merged with a dog food maker

Joint Venture-Joint Venture- When 2 companies keep their When 2 companies keep their independence, but cooperate with each other independence, but cooperate with each other for a projectfor a project

A)A) When the project is over the firms disengageWhen the project is over the firms disengage

B)B) Example: Toyota & GM created the chevy novaExample: Toyota & GM created the chevy nova

C)C) worksheetsworksheets

Geographic MonopolyGeographic Monopoly

““Geographic Monopoly” – Geographic Monopoly” – usually usually small in naturesmall in nature

A) Based on the size of a potential A) Based on the size of a potential market where only 1 firm could market where only 1 firm could survivesurvive– 1) example Hardware store, Drugstore1) example Hardware store, Drugstore

How has this changed with Walmart?How has this changed with Walmart?

MarketingMarketing

Marketing-Marketing- consists of everything consists of everything that takes place in a business from that takes place in a business from the production phase to the actual the production phase to the actual sale of the productsale of the product

1) buying & selling, transportation, 1) buying & selling, transportation, storage, market research, customer storage, market research, customer service, advertising, insurance etc. service, advertising, insurance etc.

4 P’s of Marketing4 P’s of Marketing

1) 1) Product-Product- something consumers want, something consumers want, features must meet consumer features must meet consumer expectations for the Price they payexpectations for the Price they pay

2) 2) Price-Price- how much does it cost to make, how much does it cost to make, how much will consumers pay, how how much will consumers pay, how profitable is itprofitable is it

3) 3) Promotion-Promotion- The way businesses get The way businesses get their message to the consumertheir message to the consumer

4) 4) Place-Place- where to sell the good, location where to sell the good, location of your businessof your business