Lesson 2.10: Imperfect Competition and Government Regulation

Flashcards made from a presentation segment created as a lesson on imperfect competition and government regulation.

Monopolistic competition

A market structure in which many firms sell products that are similar but not identical

• Many firms with low start-up costs

• Few barriers to entry, making it easy to enter the market

• Little price control, as consumers may go elsewhere

• Differentiated product offerings for greater revenue from production differences

Differentiation

Making a product different from other similar products

Non-price competition

A way to attract customers through style, service, or location rather than a lower price

• Can use physical characteristics, location, level of service, or status

Price war

A series of competitive price cuts that lower the market price below the cost of production

Cartel

A formal organization of producers that agree to coordinate prices and production

Oligopoly

A market dominated a few large, profitable firms like an imperfect firm of monopoly

• Sometimes defined as the four largest firms producing 70-80% of the output

• Can be created by technological or governmental barriers to entry, as in the video game and airline industries which have high start-up costs

• May seem like a monopoly to a government despite not truly acting as one

  • Governments still try to regulate these firms for more competition, however

Price leadership

Situation where a market leader can start a round of price cuts or increases by making its plants clear to other sellers

• Depends on other members going along with the policy; disagreement among members can spark a price war

Collusion

An agreement among members to illegally set prices and production levels, also known as price-fixing

Cartel

An agreement by a formal organization of producers to coordinate prices and production, permitted in other countries but illegal in the United States

• Seen with OPEC (the Organization of Petroleum Exporting Countries) coordinating oil prices and production levels

Predatory pricing

Selling a product below cost for a short period of time to drive competitors out of the market

Antitrust laws

Governmental policies that keep firms from controlling the price and supply of important goods

• Used to promote competition and lower prices

Trust

An illegal grouping of companies that discourages competition, similar to a cartel

Merger

When two or more companies join to form a single firm

Deregulation

The removal of government controls over a market in response to counterproductive regulation to increase competition

• Seen with the Motor Carrier Act of 1980 as well as the Airline Deregulation Act

Market power

A firm’s ability to control prices and production; desired to increase profits