ECON Unit 2 Competition

Perfect (pure) competition

Many buyers/sellers

Buyers and sellers are free to enter/exit market

Prices determined solely by supply and demand

Buyers has complete information about products and prices

Capital and labor resources are perfectly mobile 

Identical product 

Imperfect competition

Any market that lasts one or more of conditions necessary for perfect (pure) competition

Monopolistic competition

Structure with many companies offering products that are similar, but not identical 

Product differentiation

Real (or imagined) differences between competing product

Price can reflect differences 

marketing (non-price competition)

Ads, giveaways, sponsorship, etc to draw consumers to their product (instead of price competition)

Oligopoly

Structure where a few large firms dominate the market

Any single firm can cause a significant change in output, price, and sales for entire industry

Horizontal integration

1 company buys all their competition (others that produces same product)

Vertical integration

1 company buys the companies upon which the company depends on

Resources, creation, after market service, etc

Problems with oligopoly

So long when one acts, other must follow

Collusion (Cooperative pricing) (problem with oligopoly) 

Formal agreement to work together

Price filling (Cooperative pricing) (problem with oligopoly) 

Agreeing to charge similar prices

Political control (problem with oligopoly) 

Use power to push for laws/regulations that benefit/protect producers at expense of buyer 

Monopoly

Structure with one seller for a unique product

Natural monopoly

When the government gives company (public or private) the right to operate as the only seller in a market for sale of efficiency

Usually utilities (cost of duplication is prohibitive)(electricity, water, natural gas)

Usually overseen by government regulations

For market efficiency 

Ex. SMUD, PE&E

Geographic Monopoly

Absence of other sellers of a product in a certain geographic region

Technological monopoly

1 company controls a unique technology or manufacturing process of a product

Ex. Google, Microsoft, Meta, Nvidia

Patent

Gives inventors exclusive rights to manufacture, use, or sell any new or useful invention for 20 years

Copyright

Give publishers exclusive control of materials (and/or requires access to be granted for others to republish) for artist/authors lifetime + 70 years

Government monopoly

Created by government action (either by government operating business or granting private company exclusive legal rights to operative service

Created by law, not for efficiency. 

Ex U.S Postal Service

Market failure

When a market fails to sustain itself

Inadequate competition (market failure)

Higher prices, reduced output

Waste of resources

Influence in politics 

Inadequate information (market failure)

Information about prices are hard to find

Inadequate resource mobility/resource immobility (market failure)

FOPS (factor of productions) don’t move easily from 1 market to another

Inadequate public goods/lack of public goods (market failure)

No profit motive to provide (non-exclusive) public goods

Public goods: things used by everyone

If people have to pay, they (often) stop using it

Externalities (spillovers)

Unintended side effects that either benefit or harm a 3rd party not involved in activity that caused it

Failure because cost of side effect not included in price of original thing

Positive externalities 

Benefit to 3rd party

Negative externalities

Harms 3rd party

Anti-trust laws

Tries to promote market competitions by preventing monopolies

Horizontal integration, collusions, price-fixing, etc

Trying to prevent failure from inadequate competition

Public disclosure laws

Require businesses to be transparent and reveal information to public

Requires food labeling, annual disclosure, reports, truth in advertising, etc

Trying to prevent failure from inadequate information

Regulations

Government established rules and requirements that business must follow

Includes: Oversight over natural monopolies, legal boundaries for business conduct, protecting public

Trying to prevent failures from externalities, inadequate resources and public goods