Overview
Purpose:
To show that many markets are dominated by a small number of firms, and how these try to avoid price competition.
Objectives:
1. Most markets in the U.S. fall somewhere in between perfect competition and monopolies. Either there are only a few large firms in an industry (oligopoly), or there are many firms which sell differentiated products (monopolistic competition). Producers in these industries realize that price competition will only reduce profits for every firm in the industry so they often try to gain market power through non-price competition (e.g., product differentiation, advertising, and aggressive marketing).
2. When there are few firms in an industry, they may attempt to fix prices. This results in higher prices and less production of the good than would occur under perfect competition, and it adversely affects economic efficiency. Unregulated price fixing is illegal.
3. Large firms may be very helpful for stimulating long-term growth through R&D, by capturing economies of scale, by superior management, and through their efforts to grow larger.
4. In some industries (airlines, railroads, trucking) the government has regulated prices to either help the industry grow or to control the pricing behavior of the industry. Generally, the affected industries favor regulation because it saves them from having to compete on the basis of price, but they often become very inefficient and have unnecessarily high costs.
| Key Economic Concepts price leadership, non-price competition, concentration ratio, oligopoly, product differentiation, price collusion, monopolistic competition. |
| Contemporary Issues In the spring of 2003, MasterCard and Visa paid over $3 billion to settle a class action suit brought by Wal-Mart, Sears and other stores. The basis of the suit was a complaint that the credit car issuers were using their market power to 1) exclude the use of cards (specifically debit cards) issued by the retain store chains and 2) to dictate how their products were to be used. Specifically, the stores wanted to switch to a PIN-based system of debit cards, which is cheaper to administer than the signature based system that both Visa and MasterCard favored. How was this outcome and process different than an anti-trust suit brought by the government? |
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