Perfect Competition and Monopoly

• Firms in perfect competition produce the same product for the same price, making it the simplest market structure.
• Relatively few markets exhibit perfect competition because most businesses face barriers to entry.
• In a perfectly competitive market, numerous buyers and sellers ensure no single entity controls the price.
• Commodities are products that are the same regardless of the producer, like low-grade gasoline.
• A farmer's market is a real-world example of a perfectly competitive market.
• Complex technology, such as that required for an auto repair shop, can create a barrier to entry due to the advanced technical skills and equipment needed, increasing start-up costs.
• Perfectly competitive markets influence output by having each firm adjust its production to cover costs, including profit.

Monopoly

• A monopoly forms when barriers prevent firms from entering a market with a single supplier.
• Economies of scale are factors that cause a producer's average cost to decrease as production rises; examples include an automobile assembly plant and a ranch expanding its herd without adding land.
• Governments issue patents to allow companies, like drug companies, to recoup the money spent developing a drug.
• Price discrimination involves companies pricing differently to maximize profit.

Monopolistic Competition

• The main difference between monopolistic competition and perfect competition is that the products are differentiated.
• Prices will be higher in a monopolistic competitive market.
• Non-price competition examples include offering a higher level of service or highlighting how one's jeans are superior to others.
• Additional non-price competition tactics include making pencils in a new color or building a video store next to a grocery store.
• Cartels can only operate effectively if all members maintain their agreed output.

Government Regulations

• The government uses deregulation and antitrust laws to increase competition.
• Market power is the ability of a firm to control prices and total market output.
• The Sherman Act outlaws mergers and monopolies that limit trade between states.
• Governments might grant antitrust exemptions to sports leagues to maintain team play stability.
• Deregulation can lead to increased rates from customers, as with cable TV, but may also lower prices in some industries by reducing resource spending.
• The government can prevent monopolies by blocking mergers.
• A government might approve a merger if it lowers costs and consumer prices or results in a better product.

Definitions

• Commodities: Products are the same, no matter who produces or sells them.
• Barriers to entry: Factors that make it difficult for a new firm to enter a market.
• Monopoly: A market where barriers prevent firms from entering and there is only one supplier.
• Economies of scale: Factors that cause a producer's average cost to drop as production rises.
• Natural Monopoly: A market that runs most efficiently when one large firm provides all the output.
• Patent: Grants a company exclusive rights to sell a new good or service for a particular time.
• Franchise: A contract giving a single firm the right to sell its goods within an exclusive market.
• Price Discrimination: Grouping consumers based on how much they will pay for a good.
• Differentiation: Adding a unique ingredient to a product to distinguish it from others.
• Monopolistic Competition: Many companies compete in an open market to sell similar but not identical products.
• Oligopoly: A market structure dominated by a few large, profitable firms.
• Collusion: An agreement among members of an oligopoly to illegally set prices and product levels.
• Price Fixing: An agreement among firms to sell at the same or very similar prices, which is illegal in the US
• Cartels: Formal organizations of producers that agree to coordinate prices and production.
• Predatory Pricing: Selling a product below cost for a short time to eliminate competitors.