Competition, Market Structures, and the Role of

Government

Market Structures

• What is the primary aim/goal of businesses?

• To maximize profits

• What is competition?

• Striving against others to reach an objective

4 Types of Market Structure

1. Pure/Perfect Competition– Large number of buyers and sellers– Identical product– Well informed buyers and sellers

More Competition Less Competition

Pure/Perfecct Competition

Many buyer/sellers +

Identical Products

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Monopolistic Competition

• Meets all condition of perfect competition except for identical products.– Product differentiation

• Monopolistic competitors use nonprice competition– Advertising, giveaways, or other promotions

More Competition Less Competition

Monopolistic Competition

Same as pure competition except for product differentiation

Gap Levis Lucky

Monopolistic Competition

Are these shampoos/conditioners different?

Pantene $14.50 Frederic Fekkai $54

Monopolistic Competition

Are these mascaras different?

Maybelline Sisley

$4 $43

Oligopoly

• A few very large sellers dominate the industry• Oligopolists act independently by lowering prices

soon after the first seller announces the cut• Collusion: formally agree to set prices• Engage in price wars

More Competition Less Competition

Oligopoly

Ipod Zune

Oligopoly

Few producers control supply and price

Coca-Cola Classic

• Coca-Cola classic

• Sprite

• Dasani

• Barq's

• Dannon

• Nestea

• Rockstar

• Evian

• Fanta

• Fresca

• Minute Maid

• Mr. Pibb

• Powerade

• Seagrams Ginger Ale & Mixers

• TAB

Pepsi-co

• Aquafina

• Pepsi

• Mountain Dew

• Sierra Mist

• Sobe

• Lipton Brisk Tea

• MUG Root Beer

• Slice

• Gatorade

• Dole Juice

• Tropicana

Cadbury Schweppes

• 7 Up• Canada Dry• Clamato• Dr Pepper• Hawaiian

Punch• Mott's• Orangina• Snapple

Toyota

• Toyota• Scion• Lexus

Chrysler

• Chrysler• Jeep• Dodge

General Motors

• Chevrolet• Buick• Pontiac• GMC• Saturn• Hummer• SAAB• Cadillac

Monopoly

• Only one seller of a particular product• Few monopolies

Monopoly

More Competition Less Competition

• One seller dominates the market with no close substitutes

Monopoly

• Natural Monopoly - efficient production by a single supplier

Monopoly

• Geographic Monopoly - small town

Monopoly

1. Technological Monopoly - new invention

– Patent: exclusive right for 17 years

Segway

Monopoly

1. Technological Monopoly - new invention

– Copyright: lifetime + 50 years

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Monopoly

1. Government Monopoly - government owned businesses

A. Antitrust (anti-monopoly) laws

1. Sherman Act of 1890

2. Clayton Act of 1914

3. Federal Trade Commission Act

-- Monopolists tend to produce less and charge more.-- Regulatory Agencies control economic behavior (Dept of Justice, Fed Trade Comm)-- Sherman Act outlawed collusive price fixing and monopolies.-- Strengthened the Sherman Act.-- FTC, with Justice Dept., to investigate unfair competitive practices.

Sherman Antitrust Act• 1890 – used in early

19000’s• First government law to

limit monopolies• Gave federal gov’t power

to investigate trusts and companies suspected of violating the Act

• “Antitrust” really means “competition law”

• Outlaws monopolies

TrustsDEF: A combination of firms or corporations formed by a legal agreement Especially in order to reduce competition Standard Trust – came after Standard Oil

Clayton Antitrust Act• 1914• Strengthened Sherman Act• Prohibit “anticompetitive

practices”– Mergers/Acquisitions that

lessen competition

– One person being a director of competing companies

B. Cases

1. Standard Oil case (1911) – broke-up.

2. U.S. Steel case (1920) – ‘rule of reason’ by Supreme Court that unreasonably restrain trade.

John D. Rockefellercontrolled nearly alltrade for oil and gas.The Supreme Courtused the Sherman Act to break up Standard Oil into 34 companies.

Other cases…

• In an out-of-court settlement, AT&T divested itself into 22 regional phone-operating companies in 1982.

• AT&T’s deal to buy T-Mobile USA for $39 billion is shaping up to be a heated regulatory battle. It would create the nation’s largest cellular carrier. Lawmakers are already denouncing the deal, saying it will reduce competition in an already consolidated industry.

Countries with Antitrust Laws shown in red

C. Mergers

1. Horizontal

2. Vertical

3. Conglomerate

-- Horizontal: merger of two competitors that sell similar products in the same

geographic market. Examples are Chase & Chemical Bank, Exxon & Mobile. -- Vertical: firms at different stages of production process. Examples are PepsiCo with

Pizza Hut, Taco Bell, and KFC.-- Conglomerate: not horizontal or vertical, different firms in different geographic areas.

Effectiveness of Antitrust LawsEffectiveness of Antitrust Laws

Automobiles Blue Jeans

Types of Mergers

Autos

Glass

BlueJeans

DenimFabric

A CB D E F

ZYXWVUT

Horizontal Merger

Conglomerate Merger

Vertical Merger

-- Most Vertical mergers are approved by regulators.

Top 10 M&A deals worldwide by value (in mil. USD) from 2000 to 2010:

Rank

Year Purchaser Purchased Transaction value (in mil. USD)

1 2000 Fusion: America Online Inc. (AOL)[23]

[24]

Time Warner 164,747

2 2000 Glaxo Wellcome Plc. SmithKline Beecham Plc. 75,961

3 2004 Royal Dutch Petroleum Co. Shell Transport & Trading Co 74,559

4 2006 AT&T Inc.[25][26] BellSouth Corporation 72,671

5 2001 Comcast Corporation AT&T Broadband & Internet Svcs 72,041

6 2009 Pfizer Inc. Wyeth 68,000

7 2000 Spin-off: Nortel Networks Corporation 59,974

8 2002 Pfizer Inc. Pharmacia Corporation 59,515

9 2004 JP Morgan Chase & Co[27] Bank One Corp 58,761

10 2009 Technofist Inc. Goldspark IT Solution PVT LTD, Inc N/A

11 2008 Inbev Inc. Anheuser-Busch Companies, Inc 52,000