Chapter 7 Firms, Competition and the Market. In Canada consumers generally rely on private businesses to produce goods and services that meet our needs.

Chapter 7Chapter 7Firms, Competition Firms, Competition

and the Marketand the Market

In Canada consumers generally rely on In Canada consumers generally rely on private businesses to produce goods and private businesses to produce goods and services that meet our needs and wants.services that meet our needs and wants.

Businesses in the same industry Businesses in the same industry compete with one anothercompete with one another

MarketMarket – a group of buyers and sellers – a group of buyers and sellers of particular goods and servicesof particular goods and services

Competition = accountability to Competition = accountability to consumersconsumers

Competition leads to lower Competition leads to lower pricesprices

Non-price competitionNon-price competition – – when businesses compete on when businesses compete on anything but the priceanything but the price

Level of qualityLevel of quality WarrantyWarranty ServiceService LocationLocation convenienceconvenience

Product differentiationProduct differentiation How does one firms product differ from How does one firms product differ from

another?another? Product qualityProduct quality Services Services Location and accessibilityLocation and accessibility Promotion and packaging Promotion and packaging

Market StructureMarket Structure

What factors influence what is What factors influence what is produced, how much is produced produced, how much is produced and for whom it is produced?and for whom it is produced?

5 factors help determine the 5 factors help determine the market structuremarket structure

1.1. Number and size of firmsNumber and size of firms

2.2. The degree in which competitors’ The degree in which competitors’ products are similarproducts are similar

3.3. How much control over price How much control over price businesses havebusinesses have

4.4. How easy can a business enter the How easy can a business enter the marketmarket

5.5. The amount of non-price competitionThe amount of non-price competition

The 4 Basic Market The 4 Basic Market StructuresStructures

1. Perfect Competition1. Perfect Competition

2. Monopolistic 2. Monopolistic CompetitionCompetition

3. Oligopoly3. Oligopoly

4. Monopoly4. Monopoly

MM any producersany producersOne ProducerOne Producer

Perfect competitionPerfect competition MonopolyMonopoly

monopolistic monopolistic Oligopoly Oligopoly

competitioncompetition

Perfect CompetitionPerfect Competition

Perfect Competition Perfect Competition Defined by many producers with a Defined by many producers with a

uniform productuniform product

Perfect Competition Perfect Competition ContinuedContinued

Many buyers and sellersMany buyers and sellers All firms sell the same productAll firms sell the same product Must accept priceMust accept price Success depends on cost management Success depends on cost management Efficient use of resources will yield profitEfficient use of resources will yield profit Easy to enter and exit the market (few to no Easy to enter and exit the market (few to no

barriers)barriers) Little no-price competitionLittle no-price competition Large profits can have a negative impact in Large profits can have a negative impact in

perfect competition. Profits attract producers perfect competition. Profits attract producers which drive up supply ultimately reducing which drive up supply ultimately reducing market prices. This benefits consumers as market prices. This benefits consumers as competitive pressures drive down prices for competitive pressures drive down prices for consumers and yield enough profits to make it consumers and yield enough profits to make it worthwhile for producers to keep producing.worthwhile for producers to keep producing.

True perfect competition does not True perfect competition does not existexist

There will always be startup costsThere will always be startup costs non-price competition will always existnon-price competition will always exist

Best examples of perfect competitionBest examples of perfect competition Wheat farmersWheat farmers

Monopolistic CompetitionMonopolistic Competition Occurs when there is product Occurs when there is product

differentiation and numerous differentiation and numerous businesses in the market (ex. businesses in the market (ex. restaurants, shoe companies, clothing restaurants, shoe companies, clothing companies)companies)

Monopolistic CompetitionMonopolistic Competition Large number of competing businessesLarge number of competing businesses Businesses sell similar but not identical Businesses sell similar but not identical

products/services (no perfect products/services (no perfect substitute)substitute)

Individual firms are large enough to Individual firms are large enough to influence the entire marketinfluence the entire market

Non-price competition is significantNon-price competition is significant Is prevalent in service and retail storesIs prevalent in service and retail stores

OligopolyOligopoly A market dominated primarily by a few A market dominated primarily by a few

firmsfirms (Ex. Examples: Indigo-Chapters, (Ex. Examples: Indigo-Chapters,

Canadian Banks, Canadian Wireless Canadian Banks, Canadian Wireless Companies)Companies)

OligopolyOligopoly Market is dominated by a few firmsMarket is dominated by a few firms Firms may produce similar or Firms may produce similar or

noticeably different productsnoticeably different products Hard to enter the market (barriers)Hard to enter the market (barriers) Non-price competition existsNon-price competition exists

CollusionCollusion A secret agreement among firms to set prices, A secret agreement among firms to set prices,

limit output or eliminate/reduce competition.limit output or eliminate/reduce competition. It’s illegal in Canada and the U.SIt’s illegal in Canada and the U.S Collusion can lead to the formation of cartelsCollusion can lead to the formation of cartels A cartel is an arrangement (usually secretive) A cartel is an arrangement (usually secretive)

among independent corporations in the same among independent corporations in the same industry to control distribution, to set prices, industry to control distribution, to set prices, to reduce competition, and sometimes to share to reduce competition, and sometimes to share technical expertise. technical expertise.

Cartels are illegal in Canada and the USCartels are illegal in Canada and the US Oil Petroleum for Exporting Countries (OPEC) Oil Petroleum for Exporting Countries (OPEC)

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MonopolyMonopoly Where one firm has complete control of Where one firm has complete control of

the entire market.the entire market. Ex. NFL, NBA, Canada Post, LCBO, Ex. NFL, NBA, Canada Post, LCBO,

Canada PostCanada Post

MonopoliesMonopolies

MonopolyMonopoly A Market completely dominiated by A Market completely dominiated by

one businessone business Unique product with no substitutesUnique product with no substitutes They set the priceThey set the price Significant barriers to entrySignificant barriers to entry Non-price competition doesn’t occurNon-price competition doesn’t occur Local monopolies can exist (Cogeco Local monopolies can exist (Cogeco

– Kingston)– Kingston)

Natural MonopolyNatural Monopoly Exists when products with high costs Exists when products with high costs

are more efficiently produced by 1 large are more efficiently produced by 1 large company rather than more smaller company rather than more smaller firms. Ex. Hydro, Enbridge, City of firms. Ex. Hydro, Enbridge, City of Ottawa Water and Sewer Services Ottawa Water and Sewer Services (public services)(public services)

CharacteriCharacteristicsstics

Perfect Perfect CompetitioCompetitionn

MonopolistMonopolistic ic CompetitioCompetitionn

OligopolyOligopoly MonopolyMonopoly

1. Number 1. Number and size of and size of firms in the firms in the marketmarket

Large Large number of number of

firmsfirms

Many firms Many firms but not large but not large

sizesize

Few firms but Few firms but large in sizelarge in size

One large One large firmfirm

2. Degree of 2. Degree of product product similarity in similarity in the marketthe market

IdenticalIdentical Product Product differentiatiodifferentiation (in quality, n (in quality, packaging, packaging, marketing, marketing,

etc.)etc.)

Some product Some product differentiatiodifferentiatio

nn

UniqueUnique

3. A firm’s 3. A firm’s control over control over priceprice

No control; a No control; a price takerprice taker

Some control; Some control; a price a price

influencerinfluencer

Significant Significant control; control; informal informal collective collective pricingpricing

Total control, Total control, price makerprice maker

4. Ease with 4. Ease with which firms which firms can enter or can enter or leave the leave the marketmarket

No barriersNo barriers Some Some barriersbarriers

Many Many barriersbarriers

Almost total Almost total exclusionexclusion

5. Amount 5. Amount of non-price of non-price competitioncompetition

Little Little (location (location

sometimes)sometimes)

Some Some (product, (product, quality, quality,

advertising, advertising, packaging)packaging)

Considerable Considerable (packaging, (packaging, advertising, advertising, brand name)brand name)

Not much Not much

HWHW

Read page 152-157Read page 152-157 Answer questions on page 160 – Answer questions on page 160 –

Check Your UnderstandingCheck Your Understanding #2, 3, 4, 5#2, 3, 4, 5

#2) Price taker vs. Price maker#2) Price taker vs. Price maker Price taker – is a firm that has little Price taker – is a firm that has little

influence over price. It is usually one of influence over price. It is usually one of many small suppliers that offer a similar many small suppliers that offer a similar productproduct

Price maker- is a firm that sells a products Price maker- is a firm that sells a products that is , in some way, considered unique. It that is , in some way, considered unique. It may have an advantage of location or may have an advantage of location or patent protection. If the product is a patent protection. If the product is a necessity with few or no substitutes that necessity with few or no substitutes that firm will also be a price takerfirm will also be a price taker

#3 How does the market discourage #3 How does the market discourage even a monopolist from charging the even a monopolist from charging the highest pricehighest price

Even monopolists are subject to the law of Even monopolists are subject to the law of demand. The quantity purchased will vary demand. The quantity purchased will vary inversely with the price charged. inversely with the price charged. Monopolists can raise the price, but this Monopolists can raise the price, but this increase will cost them sales as consumers increase will cost them sales as consumers switch to close substitutes or do without. switch to close substitutes or do without.

#4 Make a list of ways in which #4 Make a list of ways in which firms engage in non-price competitionfirms engage in non-price competition

QualityQuality WarrantiesWarranties LocationLocation ConvenienceConvenience What else?What else?

#5 Compare and contrast the #5 Compare and contrast the market structures of market structures of (a) monopoly and monopolistic (a) monopoly and monopolistic

competition competition (b) monopolistic competition and (b) monopolistic competition and

oligopolyoligopoly

See Table from notes See Table from notes