Competition and Market Structures
Supplementary resources for high school students
Definitions and Basics
Competition, from the Concise Encyclopedia of Economics
“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….
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….
The main kind of monopoly that is both persistent and not caused by the government is what economists call a “natural” monopoly. A natural monopoly comes about due to economies of scale—that is, due to unit costs that fall as a firm’s production increases. When economies of scale are extensive relative to the size of the market, one firm can produce the industry’s whole output at a lower unit cost than two or more firms could. The reason is that multiple firms cannot fully exploit these economies of scale. Many economists believe that the distribution of electric power (but not the production of it) is an example of a natural monopoly. The economies of scale exist because another firm that entered would need to duplicate existing power lines, whereas if only one firm existed, this duplication would not be necessary. And one firm that serves everyone would have a lower cost per customer than two or more firms.
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.
OPEC faces the classic problem of all cartels: overproduction and cheating by members. At the higher cartel price, less oil is demanded. That is why OPEC assigns output quotas. Each member of the OPEC cartel has an incentive to produce more than its quota and “shave” (cut) this price because the cost of producing an additional barrel of crude is typically well below the cartel price. The methods available to shave official OPEC prices are numerous. Credit can be extended to buyers for periods longer than the standard thirty days. Higher grades (or blends) of oil can be sold for prices applicable to lower grades. Transportation credits can be given. Buyers can be offered side payments or rebates….
Industrial Concentration, from the Concise Encyclopedia of Economics
Industrial concentration occurs when a small number of companies sell a large percentage of an industry’s product. The most widely used measure of concentration is the so-called four-firm concentration ratio, which is the percentage of the industry’s product sold by the four largest producers. If, for example, four firms each sell 10 percent of an industry’s product, the four-firm concentration ratio for that industry is 40 percent….
In the News and Examples
Postrel on Style. EconTalk podcast episode, November 2006.
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….
Should everything be traded in markets? Cowen on Liberty, Art, Food and Everything Else in Between. EconTalk podcast episode, March 2007.
0:38-7:41 Intro, books by Cowen. A listener asked: What are the limits of libertarianism, or perhaps the limits of markets? Cowen’s “Markets in Everything” posts at MarginalRevolution.com touch on moral and legal codes, politics and voting–not everything should be bought and sold in markets. Zelizer podcast. “Markets take on their meaning because not everything is a market.” “What happens when you reject the Aristotelian ideal of moderation?” CDs, iTunes example….
Airline Deregulation, from the Concise Encyclopedia of Economics
The overwhelming majority of the traveling public has enjoyed these lower fares. In 1990, according to the Air Transport Association, 91 percent of all passenger miles traveled were on discount tickets, at an average discount of 65 percent from the posted coach fare. The benefits of the price competition unleashed by deregulation, however, have been unevenly distributed among travelers. That is because the intensity of competition varies from one market to another. Prices per mile are usually much higher on thinly traveled than on densely traveled routes….
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 episode, 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
The markets faced by producers, pipelines, and distributors differ substantially. Because the average producer of gas is a small company—262,483 wells, owned by thousands of concerns, were operating in the United States at the end of 1989—production is intensely competitive. Because many gas fields are reachable by more than one pipeline and because pipelines are extensively interconnected, the buyers’ side of the wellhead market is also competitive. Pipeline technology, however, has attributes of natural monopoly: the cheapest way to transport a given volume of gas is by a single pipeline. Furthermore, most consuming areas can be reached by only one or a very small number of pipelines. Because the cheapest technology for reliable local service is a single network of pipes under centralized control, distribution also has attributes of natural monopoly….
A Little History: Primary Sources and References
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.
Political economists generally, and English political economists above others, have been accustomed to lay almost exclusive stress upon the first of these agencies; to exaggerate the effect of competition, and to take into little account the other and conflicting principle. They are apt to express themselves as if they thought that competition actually does, in all cases, whatever it can be shown to be the tendency of competition to do. This is partly intelligible, if we consider that only through the principle of competition has political economy any pretension to the character of a science….
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….