Warm-up: Look at the NFL on p. 160...How can a monopoly control output or price in an industry?

• Warm-up: Look at the NFL on p. 160...How can a monopoly control output or price in an industry?

• In a capitalist society, when is it ok for the government to regulate business?

• • Does new technology provide for the better good of all Americans?

• • Why do only a few people become extremely wealthy?

• • Can an individual be forgiven for misdoings if they give away a lot of money?

2006

• Top 10 Largest American Companies Industry • 1 Wal-Mart Retailing • 2 Exxon-Mobil Oil & Gas Operations

• 3 General Motors Automobile • 4 Chevron Oil & Gas Operations

• 5 Ford Motor Co. Automobile • 6 ConocoPhillips Oil & Gas Operations

• 7 General Electric Conglomerates • 8 Citigroup Banking • 9 AIG Insurance • 10 IBM Software

• RankCompanyRevenues($ millions)ProfitsWal-Mart Stores 2Exxon Mobil 284,650.019,280.0 3Chevron 163,527.010,483.0 4General Electric 156,779.011,025.0 5Bank of America Corp. 150,450.06,276.0 6ConocoPhillips 139,515.04,858.0 7AT&T 123,018.012,535.0 8Ford Motor 118,308.02,717.0 9J.P. Morgan Chase & Co. 115,632.011,728.0 10Hewlett-Packard

• Key Concepts/Definitions: • Monopoly: exclusive control of a commodity or service in a

particular market, or a control that makes possible the manipulation of prices.

• Dividend: a sum of money paid to shareholders of a corporation out of earnings.

• Shareholder: a holder or owner of shares, esp. in a company or corporation.

• Captain of Industry: the head of a large business firm. • National Market: a region in which goods and services are bought,

sold, or used. • John D. Rockefeller: United States industrialist who made a

fortune in the oil business and gave half of it away (1839-1937) • Andrew Carnegie: 1835–1919, U.S. steel manufacturer and

philanthropist, born in Scotland.

Ch 7Market Structures

Section 1

Perfect Competition

Perfect CompetitionA market structure in which a _____ number of

firms all produce the same product

Perfect Competition assumes that the market is in __________.

• There are four Conditions for Perfect Competition

1. Many buyers and sellers

2. Sellers offer _________

3. Buyers and sellers are well informed

4. Sellers are able to ____________ market

largelarge

equilibriumequilibrium

same productsame product

enter & exitenter & exit

Barriers to EntryLead to __________ Competition

• Barriers to entry may lead to imperfect competition…these include:

• Start-up Costs

• Technology

ImperfectImperfect

Which of the following come close to perfect competition

1. TV’s

2. Bottled Water

3. Pizza

4. School Buses

5. White Socks

6. Baseballs

7. Paper clips

Section 2 Monopoly

• A monopoly forms when ______ prevent firms from entering a market that has a single supplier.

• The problem with monopolies is that they can take _________ of their market power and charge _________. Given the law of demand, this means that the quantity of goods sold is lower than in a market with more than one seller. For this reason, the US has outlawed some monopolistic practices.

barriersbarriers

advantageadvantage

high priceshigh prices

Forming a Monopoly

• Economies of scale: are characteristics that cause a producers average cost to ____ as production ____.

• This is because the large initial fixed costs like the cost of the factory and machinery can be spread out among more and more goods as production rises.

dropdrop risesrises

Monopoly

• Natural Monopoly: is a market that runs most efficiently when one large firm provides all of the output. If a second firm enters the market, competition will drive down the market price charged to customers and decrease the quantity each firm can sell. Not both can cover costs and one or both will go out of business. ex. Public utilities

• Government Monopoly

• A monopoly created by the ________.– Technological Monopoly: ex. _______

• Thomas Edison obtained _____ patents in the US & had a monopoly in the motion picture industry. In 1917, the Supreme Court ruled it was illegal, dissolving Edison’s control.

governmentgovernment

PatentsPatents

1,0931,093

Gov Monopoly cont.

• Franchise: the right for one firm to sell a good or service within an __________: ex. Coke (at school), national parks– License: _________ grants firms the right to

operate a business: ex. Radio/TV– Industrial Organizations: sometimes

government allows companies to _____ number of firms in a market: ex. NFL, MLB

exclusive marketexclusive market

governmentgovernment

restrictrestrict

Price Discrimination

• When monopolists can divide consumers into two or more groups and charge a different price.

• Targeted Discounts– Airlines, Rebates, Senior Citizen, children free

• Division of customers into groups based on how much they will pay for a good– Also done by any company with market power

• The ability to control prices and market output

Limits of Price Discrimination

• Market power (rare in competitive markets)• Distinct customer groups (______)• Difficult resale

• FYI: Price Discrimination on an international scale is known as _______. When this occurs a firm charges ______ price in a foreign market than it does in its home country…sometimes even lower than ____________….Why would a firm engage in dumping? Is it legal or illegal?

elasticityelasticity

dumpingdumping

a lowera lower

production costproduction cost

Section 3Monopolistic Competition and

Oligopoly• Monopolistic competition

– ____ companies compete in an open market to sell products that are similar but _________.

– The difference between perfect competition and monopolistic arise because monopolistically competitive firms sell goods that are similar enough to be ________ for one another but are not identical. Ex. Jeans

ManyMany

not not identicalidentical

substitutedsubstituted

• Four Conditions1.Many Firms (_________)

2.Few artificial barriers to entry (_______)

3.Slight Control over price

4.Differentiated products

small start upsmall start up

no patentsno patents

Non-Price Competition(other than Price)

1. Physical characteristics– Shape, color, size, texture, taste

2. Location– Colleyville v. Garland – Beverly Hills v. Bronx

3. Service Level– Whataburger v. Chili’s

4. Advertising, image, or status– Perception v. reality

Oligopoly• Market dominated by a ________________

firms. Four largest usually supply _____ of product.– ___________ to entry – High start up cost– Ex. Cars, movie studios, airlines– Collusion : an agreement among members of an

oligopoly to set prices and production levels• ___________ (diamonds!) agree to sell at same price• _______: agreement by producers to coordinate prices and

production…illegal in US (trusts are like cartels and they are also illegal)

few large profitablefew large profitable

70-80%70-80%

High BarriersHigh Barriers

Price fixingPrice fixing

CartelsCartels

Baby Formula!

• In 1993 three major producers of baby formula paid $200million to retailers and wholesalers of their products. This was part of the settlement of lawsuits that had been brough against the three firms, claiming they had conspired to fix prices.

Section 4Regulation and Deregulation

• Regulation– Breaks up monopolies (like Rockefellers’

Standard Oil & Carnegie’s US Steel)– _____________ that reduce competition and

lead to higher prices (Grocery Store Scanners)

– Preserve incentives

Blocks Blocks MergersMergers

Deregulation

• Government _______ decides what role each company plays in a market and how much it can charge its customers– Trucking, banking, airlines, railroads, TV, cell

phones

no longerno longer