Competition and MonopoliesChapter 7

Market Structure is the amount of competition in a particular market.

4 basic market structures in the American economy

Perfect CompetitionMonopolistic competition

Oligopolymonopoly

Perfect Competition

These 4 conditions must be met for it to be perfect competition.

1. Large Market-many buyers and sellers

2. Nearly identical product3. Easy entry and exit4. Easily obtainable information

Rarely exists in the real world.

Example:

Monopoly exists when a single seller controls the supply

of a good or service and largely determines its price.

Characteristics:A single sellerNo substitutesBarriers to entry (cost of getting

started)Almost complete control of the

market price

Examples:

ESPNNo other network is devoted to sports for

24 hours- broadcasts in 200 countries

MonsantoSoybean and corn 98% of market in U.S.

4 types of monopoliesNatural (City bus service, cable,

utilities- government grants exclusive rights)

Geographic (country store)Technological (patent and

copyrights)Patent- 20 yearsCopyrights- 70 years past death of

writerGovernment (construction and

maintenance of roads and bridges)

Oligopoly- dominated by several suppliers who exercise some control over price

Characteristics:Domination by a few sellersBarriers to entryIdentical or slightly different productsNonprice competition- advertising emphasizes

minor differencesInterdependence- one change will require a

change with competitionExamples- Car companies, kitchen appliances,

airline travel

Economists would classify the top 3 as oligopolies.

Monopolistic Competitionexists when a large number of sellers offer similar but slightly different products and each firm has some control over price.

Most common in the U.S.Examples- toothpaste, make-up,

clothes

Characteristics:Numerous sellersRelatively easy entryDifferentiated products-

advertising is importantNonprice competitionSome control over price- building

loyal customer base

Of the four basic market structures, perfect competition and monopolies are rare, while monopolistic competition and oligopolies are much more common.

Sherman Antitrust Act of 1890Was passed because of John D.

Rockefeller's monopoly with Standard Oil

Was passed to prevent new monopolies or trusts from being formed and break up existing ones.

Clayton Act -1914- passed to sharpen antitrust laws

Most legislation deals with mergers

Mergers-two or more companies combine into one

HorizontalConglomerate

Vertical