Chapter 7 Firms, Competition and the Market

1. Chapter 7Firms, Competition and the Market

2. In Canada consumers generally rely on private businesses to produce goods and services that meet our needs and wants. • Businesses in the same industry compete with one another • Market – a group of buyers and sellers of particular goods and services • Competition = accountability to consumers

3. Competition leads to lower prices • Non-price competition – when businesses compete on anything but the price • Level of quality • Warranty • Service • Location • convenience

4. Product differentiation • How does one firms product differ from another? • Product quality • Services • Location and accessibility • Promotion and packaging

5. Market Structure • What factors influence what is produced, how much is produced and for whom it is produced?

6. 5 factors help determine the market structure • Number and size of firms • The degree in which competitors’ products are similar • How much control over price businesses have • How easy can a business enter the market • The amount of non-price competition

7. The 4 Basic Market Structures 1. Perfect Competition 2. Monopolistic Competition 3. Oligopoly 4. Monopoly

8. M any producers One Producer Perfect competition Monopoly monopolistic Oligopoly competition

9. Perfect Competition • Perfect Competition • Defined by many producers with a uniform product

10. Perfect Competition Continued • Many buyers and sellers • All firms sell the same product • Must accept price • Success depends on cost management • Efficient use of resources will yield profit • Easy to enter and exit the market (few to no barriers) • Little no-price competition • Large profits can have a negative impact in perfect competition. Profits attract producers which drive up supply ultimately reducing market prices. This benefits consumers as competitive pressures drive down prices for consumers and yield enough profits to make it worthwhile for producers to keep producing.

11. True perfect competition does not exist • There will always be startup costs • non-price competition will always exist • Best examples of perfect competition • Wheat farmers

12. Monopolistic Competition • Occurs when there is product differentiation and numerous businesses in the market (ex. restaurants, shoe companies, clothing companies)

13. Monopolistic Competition • Large number of competing businesses • Businesses sell similar but not identical products/services (no perfect substitute) • Individual firms are large enough to influence the entire market • Non-price competition is significant • Is prevalent in service and retail stores

14. Oligopoly • A market dominated primarily by a few firms • (Ex. Examples: Indigo-Chapters, Canadian Banks, Canadian Wireless Companies)

15. Oligopoly • Market is dominated by a few firms • Firms may produce similar or noticeably different products • Hard to enter the market (barriers) • Non-price competition exists

16. Collusion • A secret agreement among firms to set prices, limit output or eliminate/reduce competition. • It’s illegal in Canada and the U.S • Collusion can lead to the formation of cartels • A cartel is an arrangement (usually secretive) among independent corporations in the same industry to control distribution, to set prices, to reduce competition, and sometimes to share technical expertise. • Cartels are illegal in Canada and the US • Oil Petroleum for Exporting Countries (OPEC)

17. http://cnettv.cnet.com/doj-announces-suit-against-apple-publishers-over-e/9742-1_53-50123006.html?tag=mncol;txthttp://cnettv.cnet.com/doj-announces-suit-against-apple-publishers-over-e/9742-1_53-50123006.html?tag=mncol;txt • http://calgary.ctv.ca/servlet/an/local/CTVNews/20120321/bc_steele_gas_price_fixing_120321/20120321/?hub=CalgaryHome

18. Monopoly • Where one firm has complete control of the entire market. • Ex. NFL, NBA, Canada Post, LCBO, Canada Post

19. Monopolies • Monopoly • A Market completely dominiated by one business • Unique product with no substitutes • They set the price • Significant barriers to entry • Non-price competition doesn’t occur • Local monopolies can exist (Cogeco – Kingston)

20. Natural Monopoly • Exists when products with high costs are more efficiently produced by 1 large company rather than more smaller firms. Ex. Hydro, Enbridge, City of Ottawa Water and Sewer Services (public services)

22. HW • Read page 152-157 • Answer questions on page 160 – Check Your Understanding • #2, 3, 4, 5

23. #2) Price taker vs. Price maker • Price taker – is a firm that has little influence over price. It is usually one of many small suppliers that offer a similar product • Price maker- is a firm that sells a products that is , in some way, considered unique. It may have an advantage of location or patent protection. If the product is a necessity with few or no substitutes that firm will also be a price taker

24. #3 How does the market discourage even a monopolist from charging the highest price • Even monopolists are subject to the law of demand. The quantity purchased will vary inversely with the price charged. Monopolists can raise the price, but this increase will cost them sales as consumers switch to close substitutes or do without.

25. #4 Make a list of ways in which firms engage in non-price competition • Quality • Warranties • Location • Convenience • What else?

26. #5 Compare and contrast the market structures of • (a) monopoly and monopolistic competition • (b) monopolistic competition and oligopoly • See Table from notes