Competition, Market Structure and Business Firm Organization In the American Economy, we are...

Competition, Market Structure andBusiness Firm Organization

In the American Economy, we are primarily a Market System, but we do not have a pure

market.Since our market system is not pure, we know it is a mixed system. The mix includes aspects of the

Command system. The term “Market Structure” refers these different

mixed versions of the market. The markets for different classes of products behave differently, so

there is a broad range of possible market organization.

Market Structure

We rank different market structures according to the degree of competition present. The least competitive structures are the

different forms of monopoly.

Market Structure

Pure Monopoly is the most restrictive form.There are four requirements for a Pure Monopoly.

1. One seller

Market Structure

1. One seller2. Good with no close substitute

Market Structure

3. Seller controls the supply

Market Structure

3. Seller controls the supply4. Seller controls the price

Market Structure

3. Seller controls the supply4. Seller controls the price

Pure Monopoly does not exist in the real world, but there are different forms of monopolies that do occur.

Market Structure

•Natural (regulated) monopoly- Businesses that would naturally tend to become a

monopoly if they were allowed to compete.

Market Structure

•Natural (regulated) monopoly-Businesses that would naturally tend to become a

monopoly if they were allowed to compete.-Typically, these are utilities, airports, refineries

and other large, complicated firms with expensive investments in infrastructure.

Market Structure

Natural (regulated) monopoly-Businesses that would naturally tend to become a

monopoly if they were allowed to compete.-Typically, these are utilities, airports, refineries

and other large, complicated firms with expensive investments in infrastructure.

-To protect consumers, State and Federal governments regulate the prices charged by these firms, in exchange for allowing them to operate as

monopolies.

Market Structure

•Natural (regulated) monopoly•Geographic (regional) monopoly

Market Structure

- A business that has a monopoly in a limited geographic area.

Market Structure

-A business that has a monopoly in a limited geographic area.

-Can be due to geography (on an island, in the mountains, etc) or due to business arrangements (exclusive contracts,

distribution territories).

Market Structure

•Government monopoly

Market Structure

•Government monopoly-A business that the government wishes to run without

competition. -Legislation is passed forbidding competition.

Market Structure

•Government monopoly-A business that the government wishes to run without

competition. -Legislation is passed forbidding competition.

-Examples include the US Post Office, Air Traffic Control, Federal Reserve.

Market Structure

•Government monopoly•Technological monopoly

Market Structure

•Government monopoly•Technological monopoly

-Monopolies granted by the government to protect the rights of those who invent, create, compose, design or

otherwise contribute original work to be sold.-- Technological monopolies take three forms, all issued

and controlled by the US government.

Market Structure

Technological monopolies1. Patents

• A patent is government protection that gives “the right to exclude others from making, using, offering for sale, or selling” the

invention.

1) Utility patents may be granted to anyone who invents or discovers any new and useful process, machine, article of manufacture, or

composition of matter, or any new and useful improvement thereof;

2) Design patents may be granted to anyone who invents a new, original, and ornamental design for an article of manufacture; and

3) Plant patents may be granted to anyone who invents or discovers and asexually reproduces any distinct and new variety of plant.

Market Structure

•Technological monopolies1. Patents

• Patents are issued by the US Patent and Trademark Office. If the office determines that an invention is

sufficiently original and commercially viable, then it issues a patent that confers the patent s to that

invention for 20 years.• Once a patent is issued, the patentee must enforce the

patent without aid of the USPTO.

Market Structure•Technological monopolies

1. Patents2. Copyrights

- Copyrights are registered by the Copyright Office of the Library of Congress.

- Copyright protection granted to creators of “original works of authorship” including literary, dramatic,

musical, artistic, and certain other intellectual works, both published and unpublished.

Market Structure•Technological monopolies

- Copyrights are registered by the Copyright Office of the Library of Congress.

- Copyright protection is granted to creators of “original works of authorship” including literary, dramatic,

musical, artistic, and certain other intellectual works, both published and unpublished.

- Copyright law generally gives the copyright owner the exclusive right to reproduce the copyrighted work, to prepare derivative works, to distribute copies, or to

perform or display the work in public.

Market Structure• Technological monopolies

Author Owned Copyright (since 1978) – Life of creator plus 70 years.

Corporate (anonymous, pseudonymous, “works made for hire”)95 years from publication, or

120 years after creation, whichever is shorter

Prior to 1923 – Expired

Copyright can be renewed upon application and justification.

Market Structure

• Technological monopoly1. Patents2. Copyrights

3. Trademarks and Servicemarks-• Trademark is a word, name, symbol, or device that

is used to identify the producer of the goods and to distinguish them from the goods of others.

• Servicemark is the same as a trademark except that it identifies and distinguishes the source of a service

rather than a product.• Registered with the US Patent and Trademark Office

Market Structure

•Technological monopoly1. Patents

2. Copyrights3. Trademarks and Servicemarks-

Trademarks do not expire, but can be lost through abandonment, dilution or common use.

•Abandonment occurs if a trademark has not been actively used for three years or more.

Market Structure

•Technological monopoly

3. Trademarks and Servicemarks-Trademarks do not expire, but can be lost through

abandonment, dilution or common use. •Dilution happens when competitors adopt very

similar trademarks and the owner takes no action to defend their rights.

Market Structure

• Technological monopoly

3. Trademarks and Servicemarks-Trademarks do not expire, but can be lost through

abandonment, dilution or common use. •Common use refers to the trademarked name

becoming a commonly used name for the product, so that competitors can claim the need to use that

name to describe their product to customers.

Market Structure

•Monopsony

Market Structure

•Monopsony-A market with only one buyer.

Market Structure

•Monopsony-A market with only one buyer.

-In a monopoly, a seller with no competition can dictate higher prices paid by competing buyers.-In a monopsony, a buyer with no competition can

dictate the price charged by competing sellers.-Since price is not freely determined both

situations are considered to be flawed markets.

Market Structure

•Oligopoly

Market Structure

•Oligopoly-A market with few sellers.

Market Structure

-There are so few sellers that the actions of one seller influence the actions of other sellers.

Market Structure

-There are so few sellers that the actions of one seller influence the actions of other sellers.

-In an oligopoly, each seller feels that they are in such tight competition that they must respond to

what their competitors do.

Market Structure

•Oligopsony-A market with few buyers.

-There are so few buyers that the actions of one buyer influence the actions of other buyers.

Market Structure

•Oligopsony-A market with few buyers.

-There are so few buyers that the actions of one buyer influence the actions of other buyers.

-Oligopsony does not generally occur at the consumer level, but does sometimes occur at the

producer level. .

Market Structure

•Monopolistic Competition

Market Structure

•Monopolistic Competition-Competition between several different producers

of similar (but not identical) products.

The individual products are protected under the narrow monopolies created and protected by

patents, copyrights and trademarks.

Market Structure

•Monopolistic Competition-Competition between several different producers

of similar (but not identical) products.-Markets in monopolistic competition are

characterized by the presence of …1. brand names

2. non-price competition

Market Structure

•Pure CompetitionTheoretical market which involves the highest

possible degree of competition.

There are five requirements for a pure market.

Market Structure

•Pure Competition1. Many Buyers and Sellers

Market Structure

2. No barriers to Entry or Exit

Market Structure

2. No barriers to Entry or Exit3. No Government Intervention

Market Structure

4. Homogenous Goods

Market Structure

4. Homogenous Goods5. Perfect Knowledge of the Market

Market Structure

•Pure CompetitionIn a pure competition situation, price will be the

only factor considered when deciding which products to buy.

Competition

In the US economic system, we depend upon competition to provide us with the benefits of

lower prices and higher quality.

As consumers, competition is highly beneficial, but to producers, it requires harder work and

less profit.

As a result, producers have always tried to find ways to avoid competition.

Competition

Historically, the oldest form of competition avoidance is Collusion.

Competition

Collusion is simply an agreement between two or more firms to avoid competition.

It can be a simple handshake agreement, or an extremely complex arrangement.

Competition

The market systemsof Europe werebasedon Collusion, includingvarious Guilds, Leagues and Unions.

Competition

When the US was formed, there were attempts to force competition. As early as

1792, there was a city ordinance in Philadelphia outlawing “price fixing”.

This brought about the Covenant, which is simply a collusive agreement held in secret.

Competition

With the advent of industrialization and mass production, new forms of competition

avoidance are developed.

The Cartel is a method of collusion involving dividing a market.

Competition

In the post-Civil War era, the Trust developed as the highest form of anti-competitive

organization.

The Railroad industry was the first to be controlled by a trust, but eventually there

would be dozens of trusts controlling almost all major industries.

Competition

There are many different forms of trusts, but basically the trust takes advantage of the

legal form of the corporation, wherein the ownership of a corporation is expressed in terms of stock. The corporation exists as a

separate legal entity. No one owns a corporation, rather you own stock in a

corporation.

This structure allows the trust to exist.

Competition

In it’s simplest form, a trust is a corporation that owns shares of stock in other

corporations.

This allows formerly competing companies to be controlled by a single trustee, who directs

them as if he was running a monopoly.

Competition

Anti-Trust LawAlthough states and localities had laws

enforcing competition, the federal government maintained a laissez faire

approach until 1890.

Competition

Anti-Trust Law1890 – Sherman Anti-Trust Act

“Collusive Oligopolies deemed to be in restraint of trade shall be illegal”

Competition

“Collusive Oligopolies deemed to be in restraint of trade shall be illegal”

The Sherman Act left open avenues for non-competitive behavior, including price-

discrimination and interlocking directorates.

Competition

1914- Clayton Amendment

Competition

1914- Clayton Amendment

The Clayton amendment closed loopholes in the Sherman act and specifically forbade

price discrimination, interlocking directorates, and the use of the Sherman act to enjoin

labor union activities.

Competition

1914- Clayton Amendment1914- Federal Trade Commission Act

Competition

Passed as a companion to the Clayton act. Created the FTC and gave it authority to

investigate, prosecute, and levy penalties in anti-trust cases.

Competition

1936 –Robinson-Patman Act

Competition

1936 –Robinson-Patman Act-Made price discrimination illegal at the

producer level, as well as at the consumer level.

Competition

1950-Celler-Kefauver Anti-Merger Act

Competition

1950-Celler-Kefauver Anti-Merger ActForbade mergers that would “…substantially

lessen competition or tend to create a monopoly”

Business Firm Organization and Competition

Of all the different businesses in our system, there are three basic forms of organization.

These different forms are defined according to how their ownership is expressed.

Each of the three has it’s own set of advantages and disadvantages.

The simplest form of business organization is the Sole Proprietorship.

A Sole Proprietorship is a business firm that is wholly owned by one person.•Most Common Form (74%)

•Earns the smallest share of revenue (11%)

Advantages of the Proprietorship

1. Easiest form to organize or to dissolve.

1. Easiest form to organize or to dissolve.2. No division of responsibility.(Be your own boss)

3. No division of profits.

Disdvantages of the Proprietorship

1. No Division of Responsibility.

1. No Division of Responsibility.2. Limited Life

3. Unlimited Liability.

1. No Division of Responsibility.2. Limited Life.

3. Unlimited Liability.4. Limited sources for funding.

Partnership

A Partnership is a business firm that is wholly owned by two or more people.•Least Common Form (9%)

•Earns more revenue than proprietorships (16%)

Advantages of the Partnership

1. Division of responsibility.

Advantages of the Partnership

1. Division of responsibility2. Multiplication of sources for funds.

Disdvantages of the Partnership

1. Division of Responsibility.

1. Division of Responsibility.2. Moderately Difficult to Organize.

3. Division of Profits.

3. Division of Profits.4. Limited Life.

5. Unlimited Liability.

5. Unlimited Liability.6. Still limited sources for funding.

Corporation

A corporation is a business firm whose ownership is expressed in terms of shares of

stock.•17% of three main types of businesses

•Earns largest share of revenue of three main types (72%)

Corporation

A corporation is a business firm whose ownership is expressed in terms of shares of stock.•17% of three main types of businesses

•Earns largest share of revenue of three main types (72%)

Business Firm Organization and CompetitionCorporation

Shareholders do not own a corporation, rather they own stock in a corporation.

Corporations must be chartered by the government of the State where their operations

are based.The corporation is a separate legal entity from

it’s shareholders. It is considered an “artificial person.”

Business Firm Organization and CompetitionCorporation

Shareholders do not own a corporation, but they direct it’s actions through voting rights.

Most stock carries one vote per share towards a Board of Directors.

Stockholders vote for a Board of Directors

Stockholders vote for a Board of DirectorsThe Board of Directors select (hire) Officers.

Who oversee the day-to-day operations.

Who oversee the day-to-day operations.In order to earn profits

Which are paid out to the stockholders as dividends.

Business Firm Organization and CompetitionAdvantages of the Corporation

1. Limited Liability

1. Limited Liability2. Unlimited Life (and Ease of Transfer)

3. Tax Advantages

3. Tax Advantages4. Two new sources for funding

Two new sources for Funding

1. Stock -selling equity2. Bonds – issuing debt

1. Stock -selling equityEquity means “ownership”

When you sell stock, you are giving away part of the ownership, or control of your company.

The buyer does not gain any real property but they gain voting rights towards the management

of your company.

1. Stock -selling equityStock can be common or preferred.

•Common Stock has voting rights, but is last in line to claim assets.

•Preferred Stock is first in line for payment, but usually has no voting rights.

Sales of stock require the approval of the Securities and Exchange Commission (SEC), a Federal

regulatory agency.Stock may be sold on an exchange where the company is listed and brokers who have the right

to represent customers can arrange sales and purchases.

It can also be sold on the over-the-counter (OTC) market, where sales are made directly from owner to

buyer. Brokers who are members of NASDAQ (National Association of Securities Dealers

Automated Quotation System) facilitate these trades.

2. Bonds – issuing debtSale of bonds is also regulated by the SEC.

Bonds are essentially IOUs. Two main types:

Coupon Bonds - $1000 face value, ten year term, simple interest paid annually

Zero-Coupon Bonds - Sold at discount, ten year term, accrues compound interest monthly until

face value is reached.

Disadvantages of the Corporation

1. Most difficult to organize or dissolve

1. Most difficult to organize or dissolve2. Separation of ownership and control

3. Double Taxation

3. Double Taxation4. Greatest potential division of profits

Special Cases1. Cooperatives

An association of individuals who join together to perform a business function.

a) Producer Co-opsb) Consumer Co-ops

2. Non-Profit Corporation

2. Non-Profit Corporation3. “S” corporation

4. Limited Partnership

4. Limited Partnership5. Limited Liability Company (LLC)

Competition, Market Structure and Business Firm Organization In the American Economy, we are...

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