ECONOMICS

CHAPTER 6

Characteristics Perfect Competition

# of Firms In Each Industry

Many

Market Concentration Low

Type of Product Similar or Identical

Availability of Information

Much (Advertising)

Entry Into Industry Very Easy

Control Over Prices None

Examples Agriculture/Candy

Characteristics Monopolistic Competition

# of Firms In Each Industry

Many

Market Concentration Low

Type of Product Similar or Identical

Availability of Information

Much (Advertising)

Entry Into Industry Fairly Easy

Control Over Prices Little

Examples Airlines/Blue Jeans

Characteristics Oligopoly

# of Firms In Each Industry

Few

Market Concentration High

Type of Product Similar or Differentiated

Availability of Information

Much (Advertising)

Entry Into Industry Difficult

Control Over Prices Some

Examples Cereal/American Autos

Characteristics Monopoly

# of Firms In Each Industry

One

Market Concentration Absolute

Type of Product Unique (No Substitutes)

Availability of Information

Some (Advertising)

Entry Into Industry Difficult/Prohibitive

Control Over Prices Complete

Examples Electricity/Gas

MONOPOLY

OLIGOPOLY

MONOPOLISTIC COMPETITION

PERFECT COMPETITION

B.

• 1. Define product differentiation.• When sellers point out differences

between their product and another seller’s product.

B.

• 2. Provide an example of product differentiation (outside of the textbook).

• Quality, size, comfort, fit, taste, etc.

B.

• 3. Define non-price competition.• Competition between firms that is

based on something other than price.

B.

• 4. Provide an example of non-price competition (outside of the textbook).

• Use of celebrities in advertisements, brand names, warranties, guarantees, service, etc.

B.

• 5. How do oligopolies use non-price competition?

• Through advertisements and brand name loyalty.

B.

• 6. How do sellers in oligopolies maintain a degree of control over price?

• Through interdependent pricing, responding to price changes of their competitors.

B.

• 7. Explain the most common form of interdependent pricing.

• Price leadership, a large seller takes the lead at setting a price.

B.

• 8. a. What is a price war?• Sellers aggressively undercut each other’s

prices in order to gain a larger share of the market.

• b. What causes a price war?• Failed pricing policies of sellers.• c. Explain what occurs when price wars

end?• Loss of profits, business go under.

B.

• 9. Define collusion.• The illegal action of sellers in an

industry secretly agreeing to set production levels or prices.

B.

• 10. a. What is a cartel?• An organization of sellers of similar

products. • b. Why are cartels illegal?• They fix prices/interfere with the market.• c. Why are cartels short-lived and

unstable?• Members may not adhere to their

agreements.

B. 11.

Type ofMonopoly

Definition Example

a. Natural Efficient producer

Gas Co./ Electric Co.

b. Geographic Location Lumber Mill

c. Technological

Patent/Copyright

iPod

d. Government

Public Service/ Goods

Post Office

B.

• 12. Explain three forces that limit the seller’s control over prices.

• Consumer demand• Potential competition (more sellers

enter the industry)• Government regulation of the

industry or product

B.

• 13. How did the relationship between government and business change in the late 1800s?

• Trusts held too much control over the market, so the government began to regulate them.

B.

• 14. a. Interstate Commerce Act• Created the Interstate Commerce

Commission to regulate railroad rates, so that railroad companies would not take advantage of farmers who had to transport their goods.

B.

• 14. b. Sherman Antitrust Act• Prohibited any agreement that would

interfere with interstate trade or cause a monopoly to form.

B.

• 14. c. Clayton Antitrust Act• A follow-up to the Sherman Antitrust

Act: Prohibited price discrimination, mergers that would reduce competition, and exclusive sales contracts.

B.

• 14. d. Free Trade Commission Act• Created the Free Trade Commission

to investigate charges of unfair competition.

B.

• 14. e. The Robinson-Patman Act• A follow-up to the Clayton Antitrust

Act: Prohibited price discrimination. Wholesalers cannot charge small sellers higher prices than large sellers.