• Businesses can be big in the sense of making a high percentage of all the sales in their industries.

• An absolute monopoly in one industry may be smaller in size than a much larger company in another industry where there are numerous competitors.

• The incentives and constraints in a competitive market are quite different from those in a market where one company enjoys a monopoly, and such differences lead to different behavior with different consequences for the economy as a whole.

• Another of the general characteristics of big businesses is that they typically take the form of a corporation, rather than being owned by a given individual, family, or partnership.

Corporations:

• Corporations are not all businesses.

• A corporation has a separate legal identity, so that the individual owners of the corporation are not personally liable for its financial obligations.

• The corporation’s legal liability is limited to its own corporate assets—hence the abbreviation “Ltd.” (for limited liability) after the names of British corporations, serving the same purpose as “Inc.” (incorporated) after the names of American corporations.

• This limited liability is more than a convenient privilege for corporate stockholders. It has major implications for the economy as a whole.

• The economies of scale, and the lower prices which large corporations can achieve as a result, and the correspondingly higher standards of living resulting from these economies of scale, enable vast numbers of consumers to be able to afford many goods and services that could otherwise be beyond their financial means.

• Corporate Governance:

  • Executives are put in charge of corporate management, hired and if need be fired by a board of directors who hold the ultimate authority in a corporation.

  • Like limited liability, the separation of ownership and management is a key characteristic of corporations.

  • Complaints about the separation of ownership and control often overlook the fact that owners of a corporation’s stock do not necessarily want the time-consuming responsibilities that go with control.

  • The corporate form enables those who simply want to invest their money, without taking on the burdens of running a business, to have institutions which permit them to do that, leaving the task of monitoring the honesty of existing management to regulatory and laws enforcement institutions, and the monitoring of management efficiency to the competition of the marketplace.

  • The economic fate of a corporation, like that of other business enterprises, is ultimately controlled by innumerable individual consumers.

  • Different countries have different laws regarding the legal rights of corporate stockholders and very different results.

• Executive Compensation:

  • Some critics have claimed that corporate executives, and especially chief executive officers (CEOs), have been overly generously rewarded by boards of directors carelessly spending the stockholders’ money.

  • What has provoked special outcries are the severance packages in the millions of dollars for executives who are let go because of their own failures.

  • In the corporate world, it is especially important to end a relationship quickly, even at a cost of millions of dollars for a “golden parachute,” because keeping a failing CEO on can cost a company billions through the bad decisions that the CEO can continue to make.

Monopolies and Cartels:

• A monopoly means literally one seller, however, a small number of sellers—an “oligopoly,” as economists call it—may cooperate with one another, either explicitly or tacitly, in setting prices and so produce results similar to those of a monopoly.

• Where there is a formal organization in an industry to set prices and output—a cartel—its results can also be somewhat like those of a monopoly, even though there may be numerous sellers in the cartel.

• Sometimes one company produces the total output of a given good or service in a region or a country.

• Most big businesses are not monopolies and not all monopolies are big business.

• Monopoly Prices vs Competitive Prices:

  • Many people object to the fact that a monopolist can charge higher prices than a competitive business could.

  • When a monopoly charges a higher price than it could charge if it had competition, consumers tend to buy less of the product than they would at a lower competitive price.

  • In short, a monopolist produces less output than a competitive industry would produce with the same available resources, technology and cost conditions.

  • From the standpoint of the economy as a whole, monopolistic pricing means that consumers of a monopolist’s product are foregoing the use of scarce resources which would have a higher value to them than in alternative uses.

  • Cartel is a group of businesses which agree among themselves to charge higher prices or otherwise avoid competing with one another.

• Governmental and Market Responses:

  • Private businesses that are not part of the cartel have incentives to fight them in the marketplace.

  • One way to keep out potential competitors is to have the government make it illegal for others to operate in particular industries.

  • In the absence of government prohibition against entry into particular industries, various clever schemes can be used privately to try to erect barriers to keep out competitors and protect monopoly profits.