Chapter 11: How Businesses Compete

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Information about Chapter 11: How Businesses Compete

Published on March 3, 2008

Author: matt

Source: slideshare.net

ECONOMICS CHAPTER 11 How Businesses Compete

Competition & Coordination Competition Businesses for consumers; Consumers for goods & svcs (remember scarcity?) Coordination In US, within a free-market system It’s all voluntary! Everyone can benefit from coordination! (Remember circular flow)

Competition

Businesses for consumers;

Consumers for goods & svcs (remember scarcity?)

Coordination

In US, within a free-market system

It’s all voluntary!

Everyone can benefit from coordination! (Remember circular flow)

Market Structure Characteristics of a market in which a firm competes Important Elements: Number of Firms Ability to set price Product Differentiation Ease of Entry See p. 181 - REALLY important Chart!

Characteristics of a market in which a firm competes

Important Elements:

Number of Firms

Ability to set price

Product Differentiation

Ease of Entry

See p. 181 - REALLY important Chart!

Pure Price Competition Number of Firms? Ability to set price? Product Differentiation? Ease of Entry?

Number of Firms?

Ability to set price?

Product Differentiation?

Ease of Entry?

Pure Price Competition (aka Pure Competition) Number of Firms: Many Ability to set Price: None - You take what you can get - Price-Taker Product Differentiation: None Ease of Entry: Relatively Easy Complete Info. about Product Example: Agriculture goods

Number of Firms: Many

Ability to set Price: None - You take what you can get - Price-Taker

Product Differentiation: None

Ease of Entry: Relatively Easy

Complete Info. about Product

Example: Agriculture goods

Monopolistic Competition Number of Firms? Ability to set price? Product Differentiation? Ease of Entry?

Number of Firms?

Ability to set price?

Product Differentiation?

Ease of Entry?

Monopolistic Competition Number of Firms: Many Ability to set Price: Limited - Many Substitutes Product Differentiation: Yes - to specific market demands Sprint Verizon AT&T T-Mobile Boost Ease of Entry: Relatively Easy Example: Cell Phones Other Examples?

Number of Firms: Many

Ability to set Price: Limited - Many Substitutes

Product Differentiation: Yes - to specific market demands

Sprint

Verizon

AT&T

T-Mobile

Boost

Ease of Entry: Relatively Easy

Example: Cell Phones

Other Examples?

Monopolistic Competition: Businesses offer similar (not identical) products, distributors/vendors are usually small & many Because each product is different, biz can increase or decrease price to alter sales Occurs w/ many biz selling similar items; easy to enter/exit; competition is fierce & biz needs to create a "niche" for product Differentiation: uniqueness of goods are emphasized (Big Mac vs. Western Double Bacon Cheeseburger) Customer Service: price of product many increase or decrease depending on how it is sold (full service is more expensive than self serve) Warranties & Support : paying to protect the life of produce costs more Prestige : paying for "good" label product costs more

Businesses offer similar (not identical) products, distributors/vendors are usually small & many

Because each product is different, biz can increase or decrease price to alter sales

Occurs w/ many biz selling similar items; easy to enter/exit; competition is fierce & biz needs to create a "niche" for product

Differentiation: uniqueness of goods are emphasized (Big Mac vs. Western Double Bacon Cheeseburger)

Customer Service: price of product many increase or decrease depending on how it is sold (full service is more expensive than self serve)

Warranties & Support : paying to protect the life of produce costs more

Prestige : paying for "good" label product costs more

Oligopoly Number of Firms? Ability to set price? Product Differentiation? Ease of Entry?

Number of Firms?

Ability to set price?

Product Differentiation?

Ease of Entry?

Oligopoly Number of Firms: Few Large Bus. Ability to set Price: Yes - but need to be consistent with competitors! Product Differentiation: Necessary Ease of Entry: Difficult - Expensive Example: Automobiles Concentration Ratio: % of sales controlled by top 4 companies For Oligopoly, top 4 > 60% of sales

Number of Firms: Few Large Bus.

Ability to set Price: Yes - but need to be consistent with competitors!

Product Differentiation: Necessary

Ease of Entry: Difficult - Expensive

Example: Automobiles

Concentration Ratio: % of sales controlled by top 4 companies

For Oligopoly, top 4 > 60% of sales

Oligopoly: Fierce competition between 3 - 5 large businesses Advertisement used to create attraction to product Easier to influence price (though companies working together to increase price is illegal in the US--”Collusion” & “Price Fixing”) Obstacles to successful collusion: Price: tough to force companies to sell @ higher price when they can sell more @ lower prices Production: companies must all agree which will sell more or less to push up price Enforcement: as market price increases, it's tough to keep all from producing more @ higher price New Entrants: as prices increase, it encourages others to enter market. Oligopoly tries to prevent this, by offering complex, expensive products or services.

Fierce competition between 3 - 5 large businesses

Advertisement used to create attraction to product

Easier to influence price (though companies working together to increase price is illegal in the US--”Collusion” & “Price Fixing”)

Obstacles to successful collusion:

Price: tough to force companies to sell @ higher price when they can sell more @ lower prices

Production: companies must all agree which will sell more or less to push up price

Enforcement: as market price increases, it's tough to keep all from producing more @ higher price

New Entrants: as prices increase, it encourages others to enter market. Oligopoly tries to prevent this, by offering complex, expensive products or services.

Monopoly Number of Firms? Ability to set price? Product Differentiation? Ease of Entry?

Number of Firms?

Ability to set price?

Product Differentiation?

Ease of Entry?

Monopoly Number of Firms: One Ability to set Price: Yes - you’re only one! Product Differentiation: No Ease of Entry: Very Difficult - Expensive Example: Public Utilities (electricity, water) Types of Monopolies: Natural: Utilities (water, electricity, phone, cable) Gov’t License: vendors at stadium, Paseo del Pasado Patents, Copyrights © , Trademarks TM

Number of Firms: One

Ability to set Price: Yes - you’re only one!

Product Differentiation: No

Ease of Entry: Very Difficult - Expensive

Example: Public Utilities (electricity, water)

Types of Monopolies:

Natural: Utilities (water, electricity, phone, cable)

Gov’t License: vendors at stadium, Paseo del Pasado

Patents, Copyrights © , Trademarks TM

Monopoly Patents: gives inventors of new products exclusive right to offer good or svcs for 17 years Can sell or give away "intellectual property" Encourages creation of substitutes Pharmaceutical & electronic companies are some of biggest beneficiaries Copyright: exclusive right to reproduce or sell original writing, artwork or music Lasts lifetime of the creator + 50 years Trademark: protects ownership of designs, names, symbols associated w/ a product, svcs or company Competitors can't use (even similar); i.e., Coke

Patents: gives inventors of new products exclusive right to offer good or svcs for 17 years

Can sell or give away "intellectual property"

Encourages creation of substitutes

Pharmaceutical & electronic companies are some of biggest beneficiaries

Copyright: exclusive right to reproduce or sell original writing, artwork or music

Lasts lifetime of the creator + 50 years

Trademark: protects ownership of designs, names, symbols associated w/ a product, svcs or company

Competitors can't use (even similar); i.e., Coke

How well did these companies do in creating their “look?”

Brands All Bubblicious Campbell’s Dawn Eggo Frito-Lay Gatorade Hebrew National Icee Jell-o Kool-Aid Lysol M & M’s Nilla Wafers Oreo Pez Q-Tips Reese’s Starburst Tide Uncle Ben’s V-8 Wisk Xtra (laundry detergent) York Zest

All

Bubblicious

Campbell’s

Dawn

Eggo

Frito-Lay

Gatorade

Hebrew National

Icee

Jell-o

Kool-Aid

Lysol

M & M’s

Nilla Wafers

Oreo

Pez

Q-Tips

Reese’s

Starburst

Tide

Uncle Ben’s

V-8

Wisk

Xtra (laundry detergent)

York

Zest

Mergers Combining resources from multiple places to improve and increase production Reasons to merge: Spread risk of company by adding product lines Bigger is better; size matters because you can do more Provide better management to absorbed company Reduce cost by gaining assets (marketing & transportation facilities)

Combining resources from multiple places to improve and increase production

Reasons to merge:

Spread risk of company by adding product lines

Bigger is better; size matters because you can do more

Provide better management to absorbed company

Reduce cost by gaining assets (marketing & transportation facilities)

Three Types of Mergers: Vertical Merger: Merger of companies involved in different steps of production process i.e., Disney (entertainment producer) & ABC/Cap City (distribution company) Horizontal Merger companies who do the same thing i.e., Exxon & Mobile (both oil companies) Conglomerate Merger Companies who are not in the same biz RJ Reynolds (cigarettes) & Nabisco (food)

Vertical Merger:

Merger of companies involved in different steps of production process

i.e., Disney (entertainment producer) & ABC/Cap City (distribution company)

Horizontal Merger

companies who do the same thing

i.e., Exxon & Mobile (both oil companies)

Conglomerate Merger

Companies who are not in the same biz

RJ Reynolds (cigarettes) & Nabisco (food)

Marketing: Process of bringing together producers and consumers In addition to advertising, marketing = buying, selling, transporting, storing, product planning, research, customer service, insuring, etc. An entire industry exists related to bringing buyers and sellers together

Process of bringing together producers and consumers

In addition to advertising, marketing = buying, selling, transporting, storing, product planning, research, customer service, insuring, etc.

An entire industry exists related to bringing buyers and sellers together

Marketing The 4 P's of Marketing: Product: give customers what they want Price: cover cost of producing, but keep it cheap enough to meet customer's interest Promotion: getting info. to consumers through advertising, mailings & personal contact Place: product must be in an accessible place (location, location, location!)

The 4 P's of Marketing:

Product: give customers what they want

Price: cover cost of producing, but keep it cheap enough to meet customer's interest

Promotion: getting info. to consumers through advertising, mailings & personal contact

Place: product must be in an accessible place (location, location, location!)

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