Price Fixing and Competition

1. Price Fixing and Competition

2. The Gas Station Game Step 1 - Find a partner. Step 2 – Each person needs 2 pieces of paper. One piece says CUT and one piece says HOLD Step 3 - Decide who will be Chester and who will be Fiona Step 4 – Close your mouths!!! This role play is entirely silent. You cannot discuss ANYTHING with your partner or the people sitting next to you.

3. Step 5 – You will need to create a score sheet that looks like this…

4. The Situation Fiona Chester You and your partner each owns a gas station.

5. In the gas station world, competition is fierce. Your task is to try and get the most amount of customers. We will have 10 rounds. In each round you must choose to either CUT your price OR to HOLD your price. Your goal is to try and maximize your profits.

6. The Scoring System

7. Practice Round Step 1: Make sure you have both pieces of paper (CUT and HOLD). Step 2: Choose CUT or HOLD. Make sure your partner cannot see your choice. Step 3: Reveal your card and score your points. I will ask you to hand in your final score sheet. The winner gets a bonus mark on their Unit 2 test.

8. Ok, Start for Real Listen to my instruction to know what to do. There needs to be total silence for this to work. You cannot give your partner any indication of what you will be doing.

9. Follow up Questions Answer Individually in Your Notes What was the logical resolution to the gas station game? Why? How did you feel toward the other gas station owner? What was your plan to maximize your profit? What did you think the others players strategy was? How close is this game to reality? How does it reflect the way in which two gas station owners are likely to react to each other’s attempts to attract more customers?

10. Tacit Bargaining when communication is not possible, or extremely difficult. People must make their decisions on how they expect the other party to behave, OR in reaction to how they perceive them to be behaving.

11. Where would you meet? (you have no cell phones in these scenarios!) You have lost your friend at Square 1 and did not agree on a meeting place if you became separated. Where would you meet? CIE3M agrees to go meet in Toronto on Saturday but did not agree on a place or time (silly class!). Where and when would you meet?

12. 3. You and a friend decided to go sky diving. Both of you have a copy of the map below. You didn’t have time to discuss a meeting place before jumping out of the plane.

13. Learning Goals 7. I will be able to explain and give examples of Price Fixing. 8. I will be able to identify and compare the characteristics of competition in perfectly and imperfectly competitive markets (monopoly and oligopoly)

14. Price Fixing • Definition • an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price. E.g. we will only sell chairs for $20 a chair. • Ceiling Prices • The highest price that can legally be charged for a good or service. E.g. rent controls • Floor Prices • The minimum price below which it is illegal to buy or sell a good or service e.g. minimum wage.

15. In your islands, decide on a solution to the following problem U of T has received 500 applications from students who wish to enroll in its economics program. The university has space for only 200 applicants to this program. All 500 applicants have the same grades and all have sent in their $5000 tuition cheques. Decide how the university should decide who to accept.

16. Problem 2 – Rent Control Definition – A government law that sets a maximum price on how much a landlord can charge for rent. Read the attachment on my webpage (labeled Rent Control) and answer the following question. What are 2 more advantages and disadvantages of rent control? Do you agree with rent controls? Why or why not?

17. Learning Goal #7 I will be able to explain and give examples of Price Fixing

18. Substitution effect • The idea that as prices rise (or incomes decrease) consumers will replace more expensive items with less costly alternatives. E.g. the price of Iphone has risen so now you decide to buy a HTC smart phone instead. OR, you just lost your job and need to replace your car. Which type of car will you choose?

19. Learning Goal #8 I will be able to identify and compare the characteristics of competition in perfectly and imperfectly competitive markets (monopoly and oligopoly)

20. Competition the effort of two or more parties acting independently to sell their products/services to customers by offering the most favorable terms. What might be some examples of “favourable terms”?

21. Types of Competition Perfect/Pure Competition Pure Monopoly Oligopoly (Homogenous) Oligopoly (Differentiated) Monopolistic Competition

22. Perfect/Pure Competition • markets in which the same goods are bought and sold. • The prices are generally known • Competition is between many buyers and sellers • No group of buyers or sellers attempts to fix prices.

23. Supply and Demand curves we have been doing in class are based on Perfect Competition. • Sellers are called “Price-Takers” because they don’t have any power to change the price. Sellers have no reason to buy from anyone in particular because the products are all the same. • It’s easy to set up a new business because there are no barriers • Perfectly Competitive Markets are rare but one example would be the stock market. It doesn’t matter where we buy the stock, it will be the exact same price.

24. Pure Monopoly Situation in which there is only one producer of a good or service and many buyers. E.g. electricty, natural gas, MiWay Transit As the only supplier, a monopoly has considerable control over price – a “price maker” In general monopolies are illegal in Canada When a few companies come together to form a monopoly it is called collusion. These new groups are called cartels and are illegal. Legal Monopolies are closely monitored by the government to ensure fair pricing and good service.

25. Oligopoly A kind of market in which a few business supply most of the goods and services. E.g. the cell provider companies Bell, Rogers, Telus Oligopolies tend to exist in markets when start up costs are very large. Businesses use various forms of non-price competition such as advertising. Because there are only a few businesses in the market, each business is very aware of what the others are doing. If one business cuts their prices to take more of the market share, the other businesses will tend to follow. If there is a lot of cooperation among a few businesses prices are likely to be high, tending to compare with a monopolistic market (too much cooperation is illegal!) If cooperation is low and competition high among the oligopoly firms, prices will be lower and more similar to those you find in a perfectly competitive market.

26. 2 Types of Oligopolies Homogenous Oligopoly – an oligopolistic market that has products that are so similar they are almost identical. E.g. gas – Shell and Esso basically have the same product. Differentiated Oligopoly – an oligopolistic market where companies try and make their products different or distinctive. E.g. breakfast cereal. This is called Product Differentiation

27. Monopolistic Competition A market situation in which there are many sellers providing a similar but not identical good or service. E.g. hair cuts. Entry into the market is relatively easy. Prices tend to resemble the prices of a perfectly competitive market. Most monopolistic competition is in the service industries E.g. the restaurant industry. Each restaurant competes with all the others in the area. BUT, each restaurant has a monopoly of the food it serves and the way it serves it.