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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