Competition

Chapter 7

Think Back to Chapter

2
Benefits of Competition
1. More selection
2. Lower prices
3. Improves quality
4. Develop new products

Competiti
o

Perfect Competition
Four characteristics of a perfect competition
1. There are many buyers and many sellers
2. All firms sell identical goods
3. Informed buyers and sellers (prices, quality,
etc.)
4. There is easy entry into the market and easy
exit out of the market
EX. Stocks, eBay, crops

How it Works
In perfect competition, sellers are price

takers, meaning a seller can sell all its output

at the equilibrium price, but none at any
other price.
Ex. Driver-Side Mirror

In imperfect competition, sellers are price

searchers, meaning a seller can sell some of

its output at various prices
EX. Gas

Monopolies
Three characteristics
1. There is a single seller
2. The single seller sells a product for which
there are NO close substitutes
3. There are extremely high barriers to entry
Ex. Water, electric, other utilities

I Win,
You

Continuing with that

Thought
A trust is a combination of firms that

come together to act as a Monopoly

Sooooo anti-trust laws is a piece of legislation that
Control

monopolies
Preserves and promotes competition

Merger is when one company buys more than half

of the stock in the other company

Result

The companies come to act as

one
The Sherman Act makes it illegal for a business to

try become a monopoly or to try to restrain trade.

Its Only Natural

A natural monopoly is a firm that has such a

low total cost that it can out compete all

other firms in their market, and become the
sole survivor.
Ex. Electric, natural gas, etc.

The Public Utilities Commission regulates

these natural monopolies in two ways, price

regulation and profit regulation.

Putting up Barriers
Bad Barriers
Stiff competition
High start-up costs
Gov. granted monopoly rights

Ex. Electricity

Ownership of a scarce resource

Good Barriers
Copyright laws What are copyright laws?
Gives credit for a unique work
Ex. Books, Movies, Music, etc.

Market
Structure
Perfect
Competition

# of
Sellers
Many

Type of
Product
Same

Barriers
to Entry
None

Different Extremely
with NO
hard to
substitute
enter

Price
Control
None

ALL

Examples
Crops,
Stocks,
EBay
Water,
Electric,
Other
Utilities

Monopoly

One

Monopolistic
Competition

????

????

????

????

????

Oligopoly

????

????

????

????

????

Monopolistic Competition
Three characteristics
1. There are many buyers and many sellers
2. Firms produce and sell slightly different
products
3. There is easy entry into and exit from the
market
EX. Retail Outlets, Fast Food

Oligopoly
Three characteristics
1. There are few sellers
2. Sellers produce and sell either identical or
slightly different products
3. There are significant barriers to entry
EX. U.S. Cars, Cereal, Oil Companies

w
e
F
e
h
T

Stick with the Agreement

Cartels
An agreement that specifies that the firms will

work together to reduce the competition among

themselves.

What type of agreements do you think are

illegal?
Price fixing
An

agreement between businesses to change

the price (usually increase) of a product.

Market
Structure
Perfect
Competition

Monopoly

# of
Sellers
Many

One

Monopolistic
Many
Competition
Oligopoly

Few

Type of
Product
Same

Barriers
to Entry
None

Price
Control
None

Different Extremely
with NO
hard to
substitute
enter

ALL

Slightly
Different

None

Little

Same or
Slightly
Different

Very hard
to enter

Some

Examples
Crops,
Stocks,
EBay
Water,
Electric,
Other
Utilities
Retail
Outlets,
Fast Food
U.S. Cars,
Cereal, Oil
Companies