Topic 4

Competition, Market Structures, the Role of Government, &

Business Organizations

What do you think a market structure is?

What types of market structures do we have in our economy?

Warm-Up

Market Structure:

The type & degree of competition that exists among companies in a certain industry

http://www.econedlink.org/interactives/index.php?iid=208&type=student

http://www.youtube.com/watch?v=9Hxy-TuX9fs

Barriers to Entry

Market Structures Chart

• Directions: With a partner, utilize the textbook to fill in the chart about market structures. Look in the index for page numbers. This is your notes for market structures.

Perfect competition

(Pages 153-154)

Monopoly

(Pages 156-161)

MonopolisticCompetition

(Pages 166-170)

Oligopoly

(Pages 169-170)

# of sellers

Control over prices

Information

Variety of products

Barriers to entry

Major Points

Examples

Pure (Perfect) Competition

Simplest market structure

Freedom

Four Conditions of Perfect Competition:Many buyers and sellers participate in the marketIdentical products

No brand namesSame qualityNo need to advertise

Buyers and sellers are well informed about the products No barriers to entry (can enter and exit freely)

http://www.youtube.com/watch?v=61GCogalzVc

Perfect Competition

Supply and demand determine price

A lot of competition between firms (businesses in the same industry)

Prices are usually kept low due to competition

Imperfect Competition

If one of the 4 conditions (of perfect competition) is not met you have…

Monopolistic Competition, a monopoly, or an oligopoly

Monopolistic Competition

Many companies compete in an open market to sell similar but NOT identical products

Monopolizing a Small part of the market Four Characteristics of Monopolistic Competition:

Many firms Few artificial barriers to entry Slight control over prices (slight price

differences) Differentiated products leads to NON-PRICE

competition (Location, advertising, packaging)

http://www.youtube.com/watch?v=T3F1Vt3IyNc

Differences Between Monopolistic Competition and Perfect Competition

Difference between perfect and monopolistic competition is that monopolistically competitive firms sell goods and services similar enough to be substituted for one another.

Non-Price Competition

Advertising

Catchy slogans

Location                                              

http://www.mcdonalds.com/usa/ronald/happy.html

                        

Product Differentiation

•Some influence on Price: decision mainly based on output

•A LOT of competition between firms

•Can Lead To: Price leadership; Price wars; Collusion; Cartel

Major Points:

•Standardized Oligopoly: identical goods produced

•Differentiated Oligopoly: products are differentiated

•Generally Higher Prices

Oligopolies

http://www.youtube.com/watch?v=ElBF2D7IHAI

Monopoly

No Competition-No other firms

Extensive control in the market

High Prices

Four Types of Monopolies

Natural

Geographic

Technological

Governmental

http://www.youtube.com/watch?v=7UWgKZsKZOc

Natural Monopolies

A monopoly that occurs naturally

Ex. Public utilities, franchise, regulation, economies of scale Telephone Public transportation

Geographic Monopoly

Occurs because of isolation or abundance of a natural resource

Government Monopoly

Involves products that private industry may not adequately provide Ex. Gov’t monopoly on research

marijuana; FAA bills that protect gov’t workers from competition; postal system; schools

Technological Monopoly

• New invention or technique – no competitors yet OR patents or copyrights

Dangers of Monopolies

Can cause artificial shortages

High prices

Denies benefit of competition

Not dependent on the market

Can gain political power

Market Failures

Warm-Up:1.What are the four types of market structures?2.What do you think a market failure is?

Key Terms

Cartel: group of firms that gets together to make output & price decisions Firms join to increase their market power

Collusion: an agreement among members to set prices & production levelsPrice War: competitors cut their prices very low to win businessPrice fixing: agreement among firms to sell at the same or very similar prices

Price Wars

Hess vs. USA gas in Ballston SpaMonday Hess $4.09 USA $ 4.08

Tuesday Hess $4.15 USA $4.10

Wednesday Hess $4.03 USA $ 4.04

Market ConditionsMarket Conditions

Markets work under the following 4 Markets work under the following 4 conditions…conditions…

Ideal Market Conditions

1. Adequate competition in all markets

2. Buyers & sellers are informed

3. Reasonable prices

4. Free movement of resources

Market Failures occur if one of the four ideal market conditions are altered

significantly.

Market Failures

Inadequate Competition

Corporate mergers: 1 company acquires another or when 2 join to form a new companyEnable corporations to expand from

local, to regional, to state, national, or even international scope

Inadequate Information

Buyers & sellers are no longer informedMarket structuresSalariesProfit

Unreasonable Prices

Price wars & cartels cause unreasonable prices Ex. Gas Prices immediately after Hurricane Katrina-

Current Gas Prices= $4!!!!

Cereal industry practices collusion to set prices on cereal- that’s why they’re so close together

Resource Immobility

Recap! What are the 4 factors of production?

4 factors of production are unable to move freely

There are two types of externalities:

1. Positive Externalities

2. Negative Externalities

Externalities

Positive Externalities

• Public goods generate benefits to many people, not just those who pay for the goods

Negative Externalities

Some decisions to produce goods & services generate unintended costsCauses part of the cost of producing a good or service to be paid for by someone other than the producer Ex. Pollution, traffic from producing a corporation in a

neighborhood, crime

Public Goods

Shared good/service for which it would be inefficient or impractical to make consumers pay individually & to exclude non payers

How Public Goods are Created:

•Legislation

•Community activism

•Necessity (firehouse, ambulance, etc.)

The Role of Government

http://www.youtube.com/watch?v=C6xpsZDm60E

Why do we need it?

Control the market power; prevent large firms from taking over

To prevent cartels, mergers, or predatory pricing

Predatory Pricing: set the market price below their costs for the short term to drive competitors out of business.

The Two Groups that Control Anti-Trust Legislation:

1. Federal Trade Commission

2. Department of Justice (Antitrust Division)

What is the purpose of anti-trust legislation?

To make sure that businesses do not unfairly force out its competitors

Five Major Anti-Trust Laws

Anti-Trust LegislationAnti-Trust Legislation

1. Sherman Anti-Trust Act (1890): outlawed mergers & monopolies that limit trade between states Gave gov’t power to regulate industry Stop firms from forming cartels or

monopolies Break up existing monopolies

2. Clayton Anti Trust Act (1914): Outlawed practices that limit competition or lead to monopoly

3. Federal Trade Commission Act (1914): Established the FTC to regulate unfair methods of competition in interstate commerce by issuing cease & desist orders

Anti-Trust LegislationAnti-Trust Legislation

Anti-Trust LegislationAnti-Trust Legislation

4. National Recovery Act (NRA)-(1933-1935): designed to strengthen trade associations, and raise prices, profits and wages at the same time.

5. The Robinson-Patman Act -1936 sought to protect local retailers against the onslaught of the more

efficient chain stores, by making it illegal to discount prices.

Government Regulation of Mergers:

The government can block mergers (prevent) in order to avoid the creation of a monopoly.

Public Disclosure Laws

Require companies to give consumers important information about their products Ex. Fuel efficiency labels on new cars

Consumers use information to evaluate aspects of a product Nutrition Facts

Goals of Gov’t Regulation

regulate industries whose goods & services affect the well-being of the public

environmental protection rules

Negative Effects of Gov’t Regulation

Costly to implement=cutting into profits, slowing growth, & forcing businesses to charge unnecessarily high prices

Stifle competition

Raises government spending

http://www.youtube.com/watch?v=lKdeul0_sMk

http://www.youtube.com/watch?v=g2KjLioQXxM

SECSEC

SEC

FCC

FDA

EPA

NLRB

FTC

ICC

Securities & Exchange Commission

Federal Communications Commission

Food & Drug Administration

Federal Trade Commission

Interstate Commerce Commission

Environmental Protection Agency

Regulates & supervises the sale of listed and unlisted securities and the brokers, dealers, & bankers who sell them.

Licenses & regulates radio & television stations & regulates interstate telephone rates & services.

Enforce laws to ensure purity, effectiveness and truthful label of drugs, food, and cosmetics.Administers federal labor-management relations laws; settles disputes; prevents unfair labor practices.

Administers anti-trust laws forbidding unfair competition, price-fixing, and other deceptive practices.Regulates rates & other aspects of commercial transportation by railroad, highway, and waterway.

Coordinates federal environmental programs to fight air and water pollution.

Abbreviation Name Function

SEC     

FCC     

FDA     

NLRB 

National Labor Relations Board

  

FTC     

ICC     

EPA     

Corporate Leadership on Trial

Tyco International Ltd.

Jury selection began Sept. 29 and the trial is likely to continue through this month in State Supreme Court in Manhattan.

Defendants: L. Dennis Kozlowski, 56, former chief executive; Mark H. Swartz, 43, former chief financial officer.

Charges include grand larceny and enterprise corruption.

Potential sentence: Each faces up to 30 years in jail.

Judge: Michael J. Obus, a former public defender who has overseen a fraud case involving a Broadway producer.

Lead prosecutors: Gerard Murphy, who prosecuted the head of a New York brokerage firm accused of a $175 million stock scam; Kenneth Chalifoux, who helped prosecute Canadian lawyer Harry Bloomfield for a stock scam that bilked investors out of millions of dollars.

Key issues/evidence: Kozlowski and Swartz argue the $600 million in cash and loan forgiveness from Tyco was approved by board members and blessed by independent auditors.

Martha Stewart

Jury selection begins Jan. 20 in U.S. District Court in Manhattan.

Defendants: Martha Stewart, 62, founder and chief creative officer of Martha Stewart Living Omnimedia; Peter Bacanovic, 41, Stewart's former broker at Merrill Lynch & Co.

Charges include making false statements, obstructing an SEC proceeding and conspiring to lie about the reasons for Stewart's personal sale of ImClone Systems Inc. stock in December 2001; Bacanovic is charged with perjury; Stewart faces securities fraud charges for allegedly lying to investors in her company about her stock sales.

Potential sentence: Stewart faces up to 30 years in prison; Bacanovic faces up to 25 years.

Judge: Miriam Goldman Cedarbaum, who recently oversaw a high-profile civil case over rights to the name and dances of the late Martha Graham.

Lead prosecutors: Karen Patton Seymour, head of the criminal division of the U.S. Attorney's office; Michael Schacter prosecuted former ImClone chief executive Samuel D. Waksal for insider trading.

Key issues/evidence: Stewart and Bacanovic are charged with a coverup, but neither has been charged criminally for the underlying alleged insider trading. Stewart's lawyers plan to argue that her stock sales were legal and that she is being prosecuted for asserting her innocence.

WorldCom Inc.

Jury selection begins Feb. 4 in U.S. District Court in Manhattan.

Defendant: Scott D. Sullivan, 42, former chief financial officer of WorldCom.

Charges include conspiracy, securities fraud, bank fraud and false filings with the SEC. Prosecutors allege Sullivan and others at WorldCom improperly reported operating expenses as capital expenditures to pump up the company's bottom line.

Potential sentence: More than 100 years in prison.

Judge: Barbara S. Jones, who presided over an federal antitrust lawsuit against credit card issuers Visa and MasterCard.

Lead prosecutors: David Anders, who is also prosecuting investment banker Frank P. Quattrone; Bonnie Jonas, who prosecuted the executives of Aurora Foods.

Key issues/evidence: Sullivan's lawyers have said they intend to argue that other telecommunications firms also treated so-called "line costs" as capital expenses.

Adelphia Communications Corp.

Jury selection begins Feb. 23 in U.S. District Court in Manhattan.

Defendants: John J. Rigas, 78, founder and former chief executive of Adelphia; Timothy J. Rigas, 46, John's son and former chief financial officer; Michael J. Rigas, 48, John's son and former vice president of operations; and Michael C. Mulcahey, 45, a former director of internal financial reporting.

Charges include misappropriating hundreds of millions of dollars of corporate funds.

Potential sentence: Each faces up to 100 years in prison.

Judge: Leonard B. Sand, who presided over the case of four men convicted of the 1998 bombings of U.S. embassies in Africa.

Lead prosecutors: Christopher J. Clark, who prosecuted several securities fraud cases; Richard D. Owens, chief of the fraud section in the U.S. attorney's office in Manhattan; Judd C. Lawler, who has worked on the Adelphia bankruptcy and terrorism law cases.

Lead defense attorneys: For Rigas, Peter Fleming Jr., whose clients have included boxing promoter Don King.

For Mulcahey, Steven M. Cohen, a former prosecutor and SEC lawyer who now represents Napster.

Key issues/evidence: Lawyers for several of the defendants have said they will argue that loan programs and other steps were done with the blessing of accountants and lawyers

                                                                                                                                                         

Topic 6: Business Organizations

What is a business organization?

A business organization is an establishment formed to carry on commercial enterprise.

Key Terms

Business License- Authorization to start a business issued by the local government.

Zoning Law- Law in a city or town that designates separate areas for residency and for business.

Liability- The legally bound obligation to pay debts.

Fringe Benefit- Payment other than wages or salary.

Diversification- Spreading out investments to reduce risk.

• Sole Proprietorship• Conglomerate• Partnerships• Corporation• Multinationals• Franchise• Cooperative

Types of Business Organizations

Business Organizations Chart

• Directions: With a partner, utilize the textbook to fill in the chart about business organizations. This is your notes for business organizations.

Business Organization

Advantages Disadvantages Additional Information

Sole Proprietorship(Pages 185-188)

Partnerships(Pages 190-193)

Corporations(Pages 195-198)

Conglomerates(Pages 198-199)

Business Organization

Advantages Disadvantages Additional Information

Multinational Corporations (Pages 199-200)

Franchises (Pages 201-202)

Cooperatives(Pages 202-203)

Nonprofit Organizations

(Page 203)

Professional, Business, Trade,

and Labor Organizations(Pages 203-204)

Sole Proprietorship

A business owned and managed by a single individual

Individual earns all the profits and is responsible for all the debts

Most popular business organization in the US-75% all businesses in US

Advantages: Simple to establish Almost anyone can establish Total control of business Least regulated business form, however must abide by some

government regulation Easy to discontinue or end business Need to obtain:

Business license Site Permit Business Name

Sole Proprietorship

Disadvantages: High degree of responsibility Unlimited personal liability Limited access to resources/capital Limited skills (education, training, etc.) May have to turn down work due to limited human capital Can be personally and financially exhausting A limited life-when owner dies or shop closes the

business ceases to exist

Sole Proprietorship

Conglomerate Mergers

A conglomerate occurs when firms buy other companies that produce totally unrelated goods or services (three or more businesses). Result from 1 corporation buying another in a completely different industryCorporation X buys Corporation Y to add to its financial assets & overall profitsX may absorb Y or allow Y to operate independently as a subsidiary with X taking Y’s profits

Partnerships

A partnership is a business organization owned by two or more persons who agree on a specific division of responsibilities and profits. Three categories: general partnerships, limited partnerships, and limited liability partnerships

PartnershipsAdvantages: easy and inexpensive to establish no written agreement required (however it is advised), & little

government regulation, shared decision making and specialization, larger pool of assets, and no additional taxation

Disadvantages: Potential for conflict Many of the same disadvantaged as sole proprietorships Unlimited liability

General Partnerships

Most common type of partnershipBoth partners are equally liableExamples: Most doctor offices Lawyers Accountants Farms Etc.

Limited Partnership

Only one partner is required to be a general partner (unlimited liability) The remaining partners contribute only money-and only can lose amount investedMain advantage is being a general partner of the business Drawbacks: the extent of liability

Limited Liability PartnershipNew type of partnershipAn LLP functions like a general partnership, except that all partners are limited from personal liability in certain situations: such as another partner's mistakes.Only certain types of businesses are allowed to register as LLPs: Attorneys Physicians Dentists Accountants

Corporations Legal entity, or being, owned by individual stockholders, each of whom faces limited liability for the firm's debtsMost complex business organizationStockholders own stock, a certificate of ownership in a corporation-stockholders are part ownersCorporation pays taxes, may engage in business, make contracts, sue others, and get sued20% of all US businesses-90% of all products sold in US are from corporations70% of nation’s income comes from corporations

Corporation

Closely held corporations-corporations held within families (privately held corporations)

Publicly held corporations- has many shareholders and they sell stocks on the open market (Stock exchanges)

Corporations have a board of directors-make all major decisions for the corporation

CorporationDisadvantages: Expense and difficulty to start-up Double taxation Potential loss of control by the founders More legal requirements and regulations

Advantages: Limited liability for owners Transferable ownership Ability to attract capital Long life More potential for growth

Multinational Corporations

A corporation that operate in more than one country at a time

Headquarters in one country and branches in another

Must obey laws and pay taxes in each country in which they operate

2000-63,000 multinational firms existed with 690,000 foreign branches

$3 trillion in worldwide assets

Advantages: Provide jobs and products all over the world Spread new technologies and production across the globe Increase Standard of Living in poorer countries

Disadvantages: Can influence the culture and politics in the countries in

which they operate Concerns about low wages and poor working conditions

in third world countries

Multinational Corporations

Franchise

A semi-independent business that pays fees to a parent company and in turn is granted exclusive tight to sell a certain product or service in a given area Parent companies are called franchisers-franchisers develop the products and the business systems

FranchiseAdvantage: Built-in reputation Management and training Standardized quality National advertising programs Financial assistance Centralized buying power

Disadvantage: High franchise fees and royalties Strict operating standards Purchasing restrictions Limited product line

Top U.S. Franchisers

Subway

McDonald’s

7-Eleven

Burger King

Taco Bell

Coverall Cleaning Concepts

KFC

Jackson Hewett• Pizza Hut• Dunkin Donuts• Jazzercise• Jiffy Lube• GNC Franchising

Cooperative

• A business organization owned and operated by a group of individuals for their shared benefit

• Three main categories: consumer or purchasing cooperatives; service cooperatives; and producer cooperatives

• The main benefits of cooperatives are that members can obtain goods/services at discounted prices and when selling g/s they can get the highest prices possible

Nonprofit Organizations

• Function much like a business organization but do not operate for the purpose of generating profit

• Exempt from income taxes• Many operate with partial government support• Provide services rather than goods• Businesses that benefit society

Examples: Museums, Red Cross, hospitals, churches, synagogues YMCA,

labor unions,etc.

Other Nonprofit Organizations• Professional Organizations-nonprofit organization that works

to improve the image, workings conditions, and skill levels or people in particular occupations

• Business Associations-nonprofit organization that promotes collective business interests for a city, state, or other geographical area, or for a group of similar businesses

• Trade Associations-nonprofit organizations that promotes the interests of a particular industry

• Labor Unions-organized group of workers whose aim is to improve working conditions, hours, wages, and fringe benefits.

Business Organizations Matching Activity

• Directions: With a partner, match the correct business scenario to the correct business organization. Raise your hand when you have it completed.

Mergers

Mergers

• The union of 2 or more commercial interests or corporations

• Takes place when 1 company acquires another or when 2 join to form a new company

Horizontal Merger

• One corporation combines with another in the same industry

• Ex. Chrysler bought American Motors in the 1980’s Jeep & Eagle vehicle lines & production facilities were

added to the Chrysler line

Effects of Horizontal Merger

• Increase the market share of the combined firm; competition will be reduced

• Generally prohibited except in cases where 1 participant in the merger is near bankruptcy

Vertical Mergers

• A corporation buys another in a related phase of its business

• Saves $ & adds to productivity• Combine operations that go into making the main

product• Ex. Carnegie built Carnegie Steel by buying

mines & RR’s

Effects of Vertical Mergers

• Increase efficiency• Provide guaranteed source of supply• Enable the streamlining of activities to the special

requirements of the final product• Force other sellers out of business

Undercover Boss: Moe’s Southwest Grill

• Directions: While you watch the segment of undercover boss, take notes on the elements of a franchise that is represented.

http://www.youtube.com/watch?v=wVzp-racjJY