Competition and Market Structures
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In the News and Examples
A Little History: Primary Sources and References
Definitions and Basics
"Competition," wrote Samuel Johnson, "is the act of endeavoring to gain what another endeavors to gain at the same time." We are all familiar with competition—from childhood games, from sporting contests, from trying to get ahead in our jobs. But our firsthand familiarity does not tell us how vitally important competition is to the study of economic life. Competition for scarce resources is the core concept around which all modern economics is built....Competition, from the Concise Encyclopedia of Economics, 2nd ed.
Economic competition takes place in markets--meeting grounds of intending suppliers and buyers. Typically, a few sellers compete to attract favorable offers from prospective buyers. Similarly, intending buyers compete to obtain good offers from suppliers. When a contract is concluded, the buyer and seller exchange property rights in a good, service, or asset. Everyone interacts voluntarily, motivated by self-interest.Monopoly, from the Concise Encyclopedia of Economics
A monopoly is an enterprise that is the only seller of a good or service. In the absence of government intervention, a monopoly is free to set any price it chooses and will usually set the price that yields the largest possible profit. Just being a monopoly need not make an enterprise more profitable than other enterprises that face competition: the market may be so small that it barely supports one enterprise. But if the monopoly is in fact more profitable than competitive enterprises, economists expect that other entrepreneurs will enter the business to capture some of the higher returns. If enough rivals enter, their competition will drive prices down and eliminate monopoly power....Cartels, from the Concise Encyclopedia of Economics
Public policy's traditional hostility to cartels is rooted in the view, summarized by eighteenth-century economist Adam Smith, that rival sellers will almost always prefer to raise their prices in unison than to aggressively compete for customers by undercutting each other's prices. But this statement tells only half the story. The same profit motive that entices sellers to want to collude also creates strong and sometimes uncontrollable temptations to "cheat" on a cartel. This is because any individual seller can usually garner a larger share of the market and earn larger profits by undercutting the cartel's price. If enough other sellers behave in this way, however, then attempts to raise prices artificially will fail under the collective weight of cheating.Industrial Concentration, from the Concise Encyclopedia of Economics
"Industrial concentration" refers to a structural characteristic of the business sector. It is the degree to which production in an industry--or in the economy as a whole--is dominated by a few large firms. Once assumed to be a symptom of "market failure," concentration is, for the most part, seen nowadays as an indicator of superior economic performance. In the early 1970s, Yale Brozen, a key contributor to the new thinking, called the profession's about-face on this issue "a revolution in economics." Industrial concentration remains a matter of public policy concern even so.
In the News and Examples
Author and journalist Virginia Postrel talks about how business competes for customers using style and beauty, going beyond price and the standard measures of quality. She looks at the role of appearance in our daily lives and the change from earlier times when style and beauty were luxuries accessible only to the wealthy....Airline Deregulation, from the Concise Encyclopedia of Economics
Under CAB regulation, investment and operating decisions were highly constrained. CAB rules limiting routes and entry and controlling prices meant that airlines were limited to competing only on food, cabin crew quality, and frequency. As a result, both prices and frequency were high, and load factors--the percentage of the seats that were filled--were low. Indeed, in the early 1970s load factors were only about 50 percent. The air transport market today is remarkably different. Because airlines compete on price, fares are much lower. Many more people fly, allowing high frequency today also, but with much higher load factors--74 percent in 2003, for example....OPEC, from the Concise Encyclopedia of Economics
OPEC is a cartel—a group of producers that attempts to restrict output in order to keep prices higher than the competitive level. The heart of OPEC is the Conference, which comprises national delegations, usually at the level of oil minister. The Conference meets twice each year to assign output quotas, which are upper limits on the amount of oil each member is allowed to produce. The Conference may also meet in special sessions when deemed necessary, particularly when downward pressure on prices becomes acute.Antitrust, from the Concise Encyclopedia of Economics
Before 1890 the only "antitrust" law was the common law. Contracts that allegedly restrained trade (price-fixing agreements, for example) often were not legally enforceable, but such contracts did not subject the parties to any legal sanctions. Nor were monopolies generally illegal. Economists generally believe that monopolies and other restraints of trade are bad because they usually have the effect of reducing total output and, therefore, aggregate economic welfare (see Monopoly). Indeed, the term "restraint" of trade indicates exactly why economists dislike monopolies and cartels. But the law itself did not penalize monopolies. The Sherman Act of 1890 changed all that. It outlawed cartelization (every "contract, combination... or conspiracy" that was "in restraint of trade") and monopolization (including attempts to monopolize)....Don Boudreaux on Market Failure, Government Failure and the Economics of Antitrust Regulation. EconTalk podcast, October 1, 2007.
Don Boudreaux of George Mason University talks with EconTalk host Russ Roberts about when market failure can be improved by government intervention. After discussing the evolution of economic thinking about externalities and public goods, the conversation turns to the case for government's role in promoting competition via antitrust regulation. Boudreaux argues that the origins of antitrust had nothing to do with protecting consumers from greedy monopolists. The source of political demand for antitrust regulation came from competitors looking for relief from more successful rivals.Natural Gas: Markets and Regulation, from the Concise Encyclopedia of Economics
Natural gas is the commercial name for methane, a hydrocarbon produced by the same geological processes that produce oil. Relatively abundant in North America, its production and combustion have fewer adverse environmental effects than those of coal or oil....
A Little History: Primary Sources and References
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.Of Competition and Custom, by John Stuart Mill. Book II, Chap. 4 from Principles of Political Economy
Under the rule of individual property, the division of the produce is the result of two determining agencies: Competition, and Custom. It is important to ascertain the amount of influence which belongs to each of these causes, and in what manner the operation of one is modified by the other.Non-market activity within the family: Gary Becker, biography from the Concise Encyclopedia of Economics
One of Becker's insights was that a major cost of investing in education is one's time. Possibly that insight led him to his next major area, the study of the allocation of time within a family. Applying the economist's concept of opportunity cost, Becker showed that as market wages rose, the cost to married women of staying home would rise. They would want to work outside the home and economize on household tasks by buying more appliances and fast food....
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