CHAPTER 11 COMPETITION AMONG BUSINESSES Market Structures Characterized

CHAPTER 11 COMPETITION AMONG BUSINESSES

Market Structures � Characterized by the degree of competition among business in the same industry Types of Competition: � Pure Competition � Monopolistic Competition � Oligopoly � Monopoly

PERFECT COMPETITION

Perfect (Pure) Competition � A market structure in which a large number of firms all produce an identical product under four conditions 1) 2) 3) 4) There should be many sellers Identical goods & services Complete information exists Free entry

Characteristics of a Pure Monopoly A monopoly is a market structure with only one seller in the market �A single seller � No close substitutes � Barriers to entries

Perfect Competition � Under a Perfect Competition �Supply and demand set the equilibrium price �Each firms sets a level of output that will maximize its profits at that price � Imperfect Competition �Refers to market structures that lack one or more of the four conditions

4 Types of Legal Monopolies � Natural monopolies – public utilities (regulated by government) & mass transit systems � Government licenses – Grants a particular business the right to operate without direct competition

4 Types of Legal Monopolies � Patents as monopolies – Gives inventors the private property right to a new product or idea for 17 years � Copyrights and trademarks as monopolies – A copyright is a special monopoly for the lifetime of the author plus 50 years

Natural Monopoly � More efficient for only one business to produce the goods �Ex: Marta, Water co. ○ Government gives permission

Geographic Monopoly � No other business chooses to compete in that area �Ex: Small town drugstore, Dollar General, grocery stores (Burton’s)

Technological Monopoly � Results from new discoveries and inventions. � The government grants these monopolies through the issue of patents and copyrights �Patents: inventions �Copyrights: publish

Government Monopoly � Involves products people need that private industry might not adequately provide

Monopolistic (Imperfect) Competition A market structure with many firms that offer similar but not identical products (clothing & restaurant industries) � Differentiated products �Real or imagined differences between competing products in the same industry (“new & improved”) � Customer services �Advertising, giveaways, promotional campaigns Warranties & support � Prestige – use highly visible labels to differentiate their products �

Oligopoly A market structure in which a few large businesses supply most or all products in a market. Examples: � Breakfast cereals � Soft drinks � Major appliances

How Oligopolies Restrict Competition 1) Collusion – an agreement in which companies restrict production to raise prices and profits (Organization of Petroleum Exporting Countries or “OPEC”) 2) “Price-fixing” – all firms in a market agree to charge the same or similar prices

Business Mergers � Vertical mergers – a combination of 2 or more companies involved in different steps of a production process (Disney’s merger with Capital Cities/ABC) � Horizontal mergers – the combination of 2 or more companies engaged in the same business (Wells Fargo & Norwest Banks; Starbucks & Seattle’s Best Coffee)

Business Mergers Conglomerate mergers – Combines 2 or more unrelated companies under single management (Liggett & Meyers, a cigarette manufacturer merged with Alpo Dog Food; General Mills owns Izod Lacoste clothing � Joint ventures – Some firms in an oligopoly establish joint ventures with other companies (Toyota & General Motors teamed up to produce the Pontiac Vibe) �

Marketing � Marketing – everything that takes place between production and purchase (brings buyers & sellers together) � The 4 P’s of Marketing: 1) Product 2) Price 3) Promotion 4) Place

4 P’s of Marketing Product – The product must be one that consumers want � Price – Companies have to search for the price that enables them to earn the most profit (they must find the break-even point and not overprice their product) � Promotion – companies must make their product stand out (differentiation) � Place – Location is crucial; customers have to be able to get the product �

Types of Advertising � Informational advertising – tells potential customers about product characteristics & prices (lower cost & helps consumers make informed decisions) � Persuasive advertising – attempt to persuade consumers to purchase products by offering unrealistic promises