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features of his cars. When he opened his new assembly line factory at
Highland Park, he raised the Model T’s price by $100 – an increase of 12
percent – to help pay for the new plant. Then he decided to paint all Model
T’s black.
2. Henry Ford had market power. It means that he had the ability to
influence the market price of goods and services. For example, Henry Ford
could dictate what color car Americans would buy. And he could raise the
price of Model T’s without fear of losing all his customers. Such power is
alien to competitive firms. Competitive firms are always under pressure to
reduce costs, improve quality, and cater to consumer preferences.
3. Some individuals and firms do have some influence over prices and
thus some degree of market power. For example, American Telephone &
Telegraph Co was the sole supplier of telephone services in most urban
areas of the United States for decades. As a result, it had tremendous market
power. The Coca-Cola Company has an exclusive license to use that
particular brand name. As a result, it is the sole supplier of Coca-Cola and
can exert considerable influence on the price of that product. Coca-Cola’s
market power is diluted , however, by the availability and price of other
thirst quenchers. If Coca-Cola’s price rises too far, more and more people
will switch to Pepsi, cold beer, or, as a last resort, water. Consequently, the
ability of the Coca-Cola Company to alter prices – its market power – is far
from absolute. Other individuals and firms have no influence over the prices
or the products they buy and sell, and thus no market power. The amount of
market power that exists in any given situation depends on several factors.
The determinants of market power include:
• Number of producers (one large producer competing with
seventeen small ones may possess more market power than it would if it
had to compete with only six relatively large firms).
• Size of each firm (when only one or a few producers or suppliers
exist, market power is automatically conferred).
• Barriers to entry (obstacles that make it difficult or impossible for
producers to enter a particular market, e.g. patents, licenses).
• Availability of substitute goods (if a monopolist sets the price of a
product too high, consumers may decide to switch to other products).
4. The extreme case of market power is monopoly, a situation in which
only one firm produces the entire supply of a particular product, and thus
has an immediate impact on the quantity supplied to the market and the
market price. There are industries wherein technological and economic
realities make the existence of competitive markets impossible.
Transportation, communication, cable television, electric, water and other
utilities are illustrations of such industries which are called natural
monopolies. These industries are generally given exclusive franchises by
government. But in return for this sole right to supply electricity, water, or
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bus service in a given geographic area, government reserves the right to
regulate the operations of such monopolies to prevent abuses of the
monopoly power it has granted.
5. Despite the strong and general case to be made against market
power, it is clear that it might be of some benefit to society. One of the
arguments made for concentrations of market power is that monopolies
have greater ability to carry out expensive research and development
functions because they have resources (monopoly profits). Another is that it
creates a great incentive for invention and innovation. A third argument in
defense of monopoly is that large companies can produce goods more
efficiently than smaller firms. Finally, it is argued that even monopolies
have to worry about potential competition and will behave accordingly.
6. Monopolies may have unfavorable effects on prices, output,
technological advance, and the distribution of income. For this reason
monopolies are strictly regulated by the state. Federal government can enact
a series of antimonopoly or antitrust laws to prevent or regulate
concentrations of market power. Very often the decisions as to whether a
monopoly is useful or anti-social depends on circumstances and therefore
varies from one period to another. Moreover, if legislation is proposed, the
term “unfair competition” has to be closely defined in rigid legal terms.
Where the monopoly is detrimental to customers it can be prohibited by
legislation. When it is important not to destroy the advantages of a
monopoly, the problem may best be solved by the state’s taking it over
completely. The public then appears to be effectively protected. The state
could reduce the period for which patents are granted or make their renewal
more difficult. Alternatively the state could outlaw attempts to eliminate
competition, whether by unfair practices, the formation of cartels or
restrictive agreements.
7. The case of absolute powerlessness is referred to as perfect
competition. Perfect competition is perfect in the sense that no buyer or
seller of a particular product has any direct influence on the market price of
that good. Between the two extremes of perfect competition and monopoly
lies most of the real world, which is imperfectly competitive. In imperfect
competition, individual firms have some power in a particular product
market. Two forms of imperfect competition are noteworthy: oligopoly and
monopolistic competition. Oligopoly is a situation in which only a few
firms have a great deal of power in a product market. A more limited degree
of market power is possessed by firms engaged in monopolistic
competition. In this case, there are many firms supplying the market, not
just a few. Each firm has its own identity (brand name and image) in the
market and can increase the price of its own output without losing most of
its customers. Table 4.1 summarizes the characteristics of these market
structures.
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Market
structure
Perfect
competition
Monopolistic
competition
Oligopoly
Monopoly
Table 4.1. Types of market structure
Characteristics
A market consisting of many powerless firms. The
production decisions of any single firm have no effect
on other firms or the market price of the product it sells.
Barriers to entry are minimal. Individual farmers are
classic examples of perfect competition.
A situation in which many firms sell similar products,
each of which is perceived by consumers as being in
some way unique. Although each firm has some
influence over the price at which its own output (brand)
is sold, the production decisions of any single firm do
not directly affect the sales or selling price of other
firms (brands). Examples include supermarkets,
restaurant fast-food chains (McDonald’s, Burger King),
gas stations.
A market in which a few firms control such a large
share of total industry output that they can influence
market price. In a perfect oligopoly, all firms produce
an identical good (e.g., cement, paper clips). In an
imperfect oligopoly, each firm’s product has a unique
identity (e.g. cigarettes, breakfast cereals), although all
are basically the same. In either kind of oligopoly, the
production decisions of any single firm affect all other
firms and the market price of the product sold. The car
industry is a good example of an oligopoly.
A market with only one supplier, who therefore controls
the quantity supplied to the market and its price.
2. Scan the text and write the number of the paragraph where
you find the following information. Do it as quickly as possible:
___ oligopoly
___ definition of market power
___ Ford and its history
___ arguments in defense of monopoly
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___ gradations in market power
___ perfect competition
___ antitrust legislation
___ monopolistic competition
___ unfair competition
___ degrees of market power
___ AT&T
___ barriers to entry
___ disadvantages of monopoly
___ competitive firms
___ natural monopolies
___ twofold car sales increase
COMPREHENSION CHECK
1. Match a line in A with a line in B to define the following terms.
A B
1. Monopoly
2. Antitrust policy
3. Market power
4. Natural
monopoly
5. Market share
6. Market structure
a) The ability to influence the market price of a
good or services.
b) One firm in the industry which thus faces no
competition at all from inside the industry
(although it may face competition from firms in
related industries).
c) Government intervention to influence market
structure.
d) A description of the behavior of buyers and
sellers in the market.
e) Obstacles that make it difficult or impossible
for potential producers to enter a particular
market.
f) Industries wherein technological and
economic realities make the existence of
competitive markets impossible.
7. Entry barriers
8. Cartel
something at the same price so that they can all
make profits without competing with one
another.
h) The percentage of total market output
produced by a single firm.
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2. Fill in the blanks using the words from the list in the bottom
A. What is monopoly? Broadly defined, it is 1) __________ wherein
the number of sellers becomes small enough for each seller to influence
total 2)__________ and therefore the price of the commodity. Through their
ability to influence total supply, monopolists can artificially restrict the
output of products and enjoy higher 3) ________ and economic profits.
These prices and profits are in direct conflict with the interests of
4) __________. The result is that resources are allocated in terms of
interests of monopolistic sellers rather than in terms of 5) ________ as a
whole.
a) prices, b) the situation, c) consumers, d) the wants of society,
e) supply.
B. In an 1) __________ any number of sellers or 2) __________ can
offer goods for sale. An efficient producer, who keeps costs low, can set a
low price for goods that other companies find it difficult to 3) ______ with.
All companies try to gain the biggest 4) _________ possible, and compete
aggressively with their main competitors to do this. Companies with the
biggest market share for a product, the 5) ________, may compete with
their rivals on quality, image, brand loyalty or price. Major companies
compete across borders in the 6) _________ to try to 7) ___________ in
countries where they do not have a presence.
a) global market place, b) enter new markets, c) open market,
d) market share, e) compete, f) competitors, g) market leaders.
3. Scan the text to find information to answer the questions.
1. What is market power?
2. What does market power depend on?
3. What makes a monopolist engage in extensive advertising?
4. How are monopolies regulated by the state?
5. When can monopolies be prohibited?
6. When does the state take over a monopoly?
7. What are antitrust laws aimed at?
8. What is the purpose of patent granting?
9. What is meant by perfect competition?
10. What forms of imperfect competition are known?
11. What differs a perfect oligopoly from an imperfect one?
12. What kind of competition can petrol stations, restaurant fast-food
chains, supermarkets can be referred to?
13. Which form of competition has minimal entry barriers?
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4. Choose the answer from the alternatives.
1. Pure monopoly means:
a) a standardized product being produced by many firms;
b) a single firm producing a product for which there are no close
substitutes;
c) a large number of firms producing a differentiated product.
2. A purely monopolistic industry:
a) is characterized by significant entry barriers;
b) produces a product or service for which there are no close
substitutes;
c) is characterized by all of the above.
3. Monopolistic competition means:
a) many firms producing differentiated products;
b) a few firms producing a standardized or homogeneous product;
c) a large number of firms producing a standardized or homogeneous
product.
4. In which of the following industry structures is the entry of new
firms the most difficult?
a) pure monopoly;
b) oligopoly;
c) monopolistic competition.
5. Imperfect (differentiated) oligopoly refers to the situation wherein
a small number of firms are:
a) producing goods which differ in terms of quality, design, and so
forth;
b) producing identical products;
c) setting price and output independently.
6 Perfect (homogeneous) oligopoly refers to the situation wherein a
small number of firms are:
a) producing differentiated products;
b) setting price and output independently;
c) producing identical products.
7. Oligopolistic firms:
a) may produce either standardized or differentiated products;
b) always produce differentiated products;
c) always produce standardized products.
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8. Which of the following is an illustration of differentiated
oligopoly?
a) the aluminum industry;
b) the steel industry;
c) the typewriter industry.
9. Which of the following industries is an illustration of
homogeneous oligopoly?
a) cigarettes;
b) aluminum;
c) typewriters.
10. Which of the following industries most closely approximates
perfect competition?
a) agriculture;
b) clothing;
c) railroads.
VOCABULARY
1. Find English equivalents of the following Russian word
combinations:
1) коммунальные услуги
2) конкурентный рынок
3) взаимозаменяемые товары
4) недобросовестная конкуренция
5) свободная конкуренция
6) эффект масштаба, повышение
эффективности от роста масштабов
производства
7) форма конкурентной борьбы, в которую
вступают только несколько производителей
8) входные барьеры
9) такой вид конкуренции, при котором
небольшое число производителей могут
диктовать свои цены покупателям
10) специальный вид лицензирования, когда
компания, владеющая известной торговой
маркой, предоставляет другой компании
право ставить эту торговую марку на свою
продукцию, но при этом получает право
контроля за качеством и т.д. продукции
a) economies of scale
b) barriers to entry
c) competitive market
d) utilities
e) franchising
f) perfect competition
g) unfair competition
h) substitute goods
i) oligopoly
j) monopolistic
competition
компании-франчайзера
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2. Look through the text (p. 82) and find the words which mean
the following:
a) a series of actions or events that together show how things
normally happen or are done (1);
b) completely different from what you usually do, feel or know (2);
c) to provide people with something they want or need, especially
something unusual or special (2);
d) an official document that gives someone permission to do or use
something (3);
e) a formal agreement for someone to sell a company’s products or
services in a particular place, in exchange for a payment or part of the
profits (4);
f) a set of facts and arguments that you can state for and against
something (5);
g) an official document that gives someone who has invented
something the legal right to make or sell that invention for a particular
period of time, and prevents anyone else from doing so (6);
h) harmful or damaging (6);
i) worth giving special attention to (7).
3. Do these phrases describe the stronger or the weaker
competitor?
a) to claim the lead, b) to outsell, c) to gain supremacy
Complete this sentence using the phrases from the box.
Both Coca-Cola and Pepsi want to 1)__________ in the race,
to 2) _________ the rival’s products in order to 3) _________.
4. Match the words which are very close in their meaning:
1) despite smth
2) supplier
3) power
4) influence
5) to invent
6) therefore
7) dominate
8) to change
9) extreme
10) standardized
a) homogeneous
b) outermost
c) to create
d) to alter
e) strength
f) provider
g) impact
h) in spite of smth
i) prevail
j) so
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5. Match the words having the opposite meaning:
1) strong
2) tremendous
3) entry
4) identical
5) alien
6) advantage
7) to lose
8) to prohibit
9) general
10) urban
a) particular
b) friendly
c) to allow
d) differentiated
e) weak
f) to gain
g) rural
h) drawback
i) minute
j) exit
6. Say what you know about the companies in Table 4.2. Match
the name of the company on the left with the description on the right to
find out what each company producers or provides.
Table 4.2. World famous companies that maintained positions
approaching monopoly for a significant length of time
Company Market Share
1. Western Electric
2. General Motors
3. IBM
4. Eastman Kodak
5. Dow Chemical
6. Xerox
a. Diesel locomotive market share averaging 77
percent between 1956 and 1971.
b. about 90 percent of domestic amateur film
production and roughly 65 percent of all film
sales.
c. 75 to 80 percent of electrostatic copier revenues
during the 1960s, declining to 55 percent by 1978
after key patent expired.
d. about 85 percent of the domestic telephone
equipment market.
e. general-purpose digital computer systems
market share ranged between 72 and 82 percent
during the 1960s and early 1970s.
f. 90 percent of U.S. magnesium production until
new entry took place in 1969.
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7. Read the text and insert the missing words or phrases from the
list below.
MERGERS
A merger is a voluntary union of two companies where they think they
will do better by amalgamating. There are three types of mergers:
horizontal, vertical and conglomerate.
The production process typically has 1)_______. For example, the first
stage might be iron ore extraction, the second stage 2) ______ from iron
ore, and the third stage – production of cars from steel.
By a horizontal merger we mean the union of two firms at the same
production stage in the same industry, for example the merger of two steel
producers or two car makers. By a vertical merger we mean 3) ______ at
different production stages in the same industry, as when a car manufacturer
merges with a steel producer.
Finally, there are conglomerate mergers, where the production
activities of the two firms are 4) _____. For example, a tobacco
manufacturer perceiving that the cigarette market is in 5) _____ might join
forces with a perfume company.
What are potential benefits of mergers? A horizontal merger may
allow exploitation of 6) _____. One large car factory may be better than two
small ones. In vertical mergers it is often claimed that there are important
gains to coordination and planning. It may be easier to make long-term
decisions about the best size and type of steel mill if 7) ____ is taken on the
level of car production to which steel output forms an important input.
Since conglomerate mergers involve companies with 8) ______, these
mergers have only small opportunities for a direct reduction in production
costs.
a) the union of two firms, b) essentially unrelated, c) several stages,
d) completely independent products, e) steel manufacture, f) long-term
decline, g) a simultaneous decision, h) economies of scale.
8. Insert the correct prepositions.
from by in on for to
1. British Rail is a nationalized industry because it is owned and
run ____ the state.
2. Very much depends ____ on circumstances.
3. The decision varies ____ one period ____ another.
4. The term has to be closely defined ____ rigid legal terms.
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