EPF2i. Monopolies and Collusion

Role of Producers & Consumers

in a Market Economy

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Monopolies & Collusion

•Monopolies and collusion among sellers eliminate competition• In industries with less

competition, prices are likely to be higher

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WHAT IS AN INDUSTRY?Essential question:

An industry is:

• A distinct group of productive or profit-making enterprises sharing similar products or services

• Ex. the automobile industry

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WHAT ARE THE CHARACTERISTICS OF COMPETITIVE AND UNCOMPETITIVE MARKETS?

Essential question:

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Competition in Industries:

The level of competition in an industry is affected by :– the ease with which new producers can enter the

industry– And by the availability, price and quantity of

substitute goods and services

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WHAT COLLUSION?Essential question:

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Collusion:• Is when competing firms make a secret

agreement to try to control a market• Collusion (practiced by cartels) is illegal in the

United States• It reduces the level of competition in a market• Is more difficult in markets with large numbers

of buyers and sellers.

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HOW ARE PRICES AFFECTED WHEN MARKETS ARE MORE COMPETITIVE? LESS COMPETITIVE?

Essential question:

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Markets with Perfect Competition

• Have many buyers with perfect information and sellers all selling identical products

• Sellers here have no market power – no control over the market price

• For example, a grower of plain white rice can only sell at the market price – no one will pay more because they can get plain white rice from any supplier at that price

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Less Competitive Markets:Monopolies & Oligopolies

• A monopoly – has one supplier of a product. The seller here has market power and can control both price and quantity.

• An oligopoly – when there are few sellers, competition is limited, and producers are able to gain more control of the market

• A natural monopoly - when 1 producer can supply total output in a market at a cost that is lower than when 2 or more producers divide product, competition may be impossible. In the absence of competition, govt regulations may then be used to try to control price, output and quality.