LAWS OF SUPPLY AND DEMAND ARE MOST EFFECTIVE
IN MARKETS THAT HAVE "PERFECT COMPETITION"
But what if a market is not perfectly competitive?
In fact, there are markets with minimal or no competition. Without adequate competition, the market forces necessary to make the laws of supply and demand (especially the second one) fully operative are missing. Let's explore some possible consequences.
MARKET STRUCTURES AND MARKET POWER
Technically, we are talking about market structures (how markets are structured in terms of competition). It turns out that the way that price is determined for a product depends greatly upon the structure of the market to which it belongs (and how competitive it is). The key takeaway has to do with what is called "market power" (the degree to which a company, or firm, can set prices for its products in various markets). Whereas firms operating in a "perfect competition" environment are "price takers" (accepting the equilibrium price, due to the intense competition and other conditions described for that environment), monopolies are "price makers." Since there is only one seller in the market, the firm can (unless there are government restrictions upon it) set its own price without needing to take any natural equilibrium into account. The more important the good or service being provided by a monopolist, the more likely people will pay whatever it takes to get that thing, and reduce their spending in less essential areas to make up the difference (if they can). This is why there is continual debate about whether or not governments should approve mergers of mega-corporations in markets, because they reduce competition and could eventually reduce or end choices for consumers (as well as potentially leave consumers with no choice but to pay higher prices). However, not everyone agrees how big is too big, or at what point (if any) governments should intervene to prevent monopolies from forming.
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1. READ THIS (PDF): Four Levels of Market Competition Summary (the full handout)
four_levels_of_market_competition_summary.pdf | |
File Size: | 551 kb |
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2. READ & RESPOND: Considering a real world example
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Read the Los Angeles Times article (by David Lazarus, March 5, 2019), which is linked to the left. As you read, identify two major effects of what has happened in the eyewear market, and explain whether or not you would have supported government intervention to prevent EssilorLuxottica from becoming a monopoly. If no, explain why not. If so, at which point should governments have stepped in and why?
Write your response in the Eyewear Monopoly discussion thread assignment posted in Canvas. |
OPTIONAL VIDEO EXPLANATIONS
Both of these videos do a great job of explaining concepts of market structures, market competition and market power effectively, so if you have questions, are unsure about anything above, or just want to learn more, check them out.
KHAN ACADEMY: Monopolies and comparison with perfect competition
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CRASH COURSE: Monopolies and Anti-Competitive Markets
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