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Chapter in a Nutshell
When should we consider goods to be part of the same market? Clearly, two identical goods belong to the same market. But what about a pair of goods that are similar -- like a Hershey's bar and a Nestlé's bar? Are they part of the same market? We need to be able to define the relevant market. The first part of this chapter explores how it is possible to identify markets. You'll find that the cross elasticity of demand is a useful measure to help us determine whether or not two goods are part of the same market. The rest of the chapter is devoted to a descriptive analysis of different market structures. The range of market structures extends from markets with one firm -- monopoly -- markets with a few firms -- oligopoly -- to markets with many firms -- monopolistic competition -- to markets with considerable numbers of firms -- perfect competition. You'll come to appreciate the variety in market structures.
After studying this chapter, you should be able
to:
· Use the cross elasticity of demand to define the relevant market.
· Describe the four types of market structures.
· Discuss the conditions necessary for monopoly to exist.
· Contrast oligopoly and monopolistic competition.
· Account for the existence of advertising in many markets.
· Detail the characteristics of perfectly competitive markets.
• Is the U.S. Postal Service (http://www.usps.gov/) a monopoly?
• Why can't two baseball teams succeed in a city like Cincinnati while both the New York Yankees (http://www.yankees.com/) and the New York Mets (http://www.majorleaguebaseball.com/nl/ny/) can succeed in New York City?
• The U.S. Patent and Trademark Office (http://www.uspto.gov/) issues patents in the United States.
• How do Pepsi (http://www.pepsi.com/) and Coca-Cola (http://www.cocacola.com/) use their Web sites to differentiate their numerous colas?
• How does Chrysler (http://www.chrysler.com/) use the Internet to advertise its products? Is Chrysler different from General Motors (http://www.gm.com/) or Ford (http://www.ford.com/)?
Misty Coffman is an engineer who, in her spare time, invents gadgets for around the home. One of Misty's inventions is a mailbox with a light attached to the top. When mail is delivered, the light automatically turns on to alert the recipients that their mail has arrived. Misty has never considered profiting from her inventions, but a mail-order catalog company has expressed interest in selling her mailbox.
Misty has approached Economic Consultants for advice about how to protect the rights to her mailbox invention, yet still profit from it. Prepare a report for Misty that addresses the following issues:
• U.S. Patent and Trademark Office (PTO)
(http://www.uspto.gov/)
The PTO provides general information about patents. Visitors may also search for patents.
• Patents Pending
(http://www.patentspending.com/)
The Office of Patents Pending home page discusses the processes and procedures involved in the issuance
of a patent.
• Identity Research Corporation
(http://www.idresearch.com/)
Identity Research Corporation offers patent, copyright, and trademark services for the inventor, entrepreneur,
company, and attorney.
• IBM Patent Server
(http://patent.womplex.ibm.com/)
The IBM Patent Server provides access to over 26 years of PTO patent descriptions.
• The National Association of Patent Practitioners
(NAPP)
(http://www.napp.org/)
NAPP, a nonprofit organization, supports patent practitioners in matters relating to patent law, its practice,
and technological advances.
• National Patent Association (NPA)
(http://www.nationalpatent.com/)
The NPA contains legal and political information about patents.
Added Perspective: More on the Net
• The Record Exchange (http://www.recordexchange.com/) enables you to buy, sell, or trade new and used CDs online.
• Facial tissues, according to J. Walter Thompson, are a product with low consumer loyalty. What is Kimberly-Clark (http://www.kimberly-clark.com/), makers of Kleenex, doing to increase product differentiation and brand loyalty?
Test your understanding of the chapter's concepts with the interactive quiz. The quiz contains twenty multiple-choice questions, like those found on a typical exam. Questions include detailed feedback for each answer, so that you may know instantly why you have answered correctly or incorrectly. In addition, you may email yourself and/or your instructor the results of the quiz, with a listing of correct and incorrect answers. Finally, check your results versus other students around the world -- previous scores to quizzes are displayed online.
How to Take the Quiz
Start the quiz, type in
your name (required), your email address (optional), and the email address of your instructor (optional).
Answer the questions (as many or as few as you like, but you need to answer at least one question). Then
hit the submit button and see your results. At the results page, click on the link in the "description"
column to see feedback on your answers. Scroll down the page to see quiz results from students around
the world.
Blood Providers Battered by Perception of Competition: Turf Protection Overtaking Notion of Caregiving
Since bottling its first drop of plasma 50 years ago, the blood bank industry has cut an almost sanctified public profile. It's disaster relief. Fuel for Hospitals. Giver of life. But somewhere along the line, America's most wholesome nonprofit enterprises became infected with politics and competitive fever. The big players - regional blood banks and the American Red Cross - started acting more like big businesses as battles sprung up nationwide over control of the blood supply. Some unleashed aggressive pricing strategies or predatory marketing tactics. The motives? To retire debts and guard turf.
...
The Red Cross controls 45 percent of the U.S. blood supply and is driving for more market share, partly to retire a $300 million debt incurred to improve its blood safety programs. ... As it has launched initiatives, the Red Cross has become a lighting rod for much of the blood industry's in-fighting. Disputes with the $2 billion-a-year charity have spilled into courts, regulatory agencies and political arenas. In Memphis, Tenn., an ailing blood bank says the Red Cross stole one of its biggest donor clients, FedEx. In California, the Red Cross is clashing in court with a blood center over trade secrets. And in Washington, the Justice Department has started an antitrust investigation of the Red Cross. Other skirmishes involving the Red Cross are unfolding in Indiana and Kansas, trade experts say.
Partly because of the blood industry warfare, philanthropies are re-evaluating how they should operate in a world where competition is increasingly saturating nonprofits. ... When the Red Cross burst on the [North Texas] scene three years ago with the idea of serving what it considered an underserved market, it began courting the main operators, Carter Blood center and Dallas BloodCare, with proposals to become affiliates.
Hometown folks were skeptical, but in the eyes of Carter Blood Center executives, such an arrangement was worth talking about, said former chief executive Bill Miller, who now operates a blood center in Milwaukee.
"We were interested mainly in an arrangement where we would preserve our relationships and work in a coordinated way with them," he said. But it became clear that the Red Cross had something else in mind, Miller said. Rigid management guidelines were surfacing in the proposals. The upshot was that the Red Cross would essentially call the shots from Washington. It was close to a hostile take-over attempt, Miller said, and he felt misled.
...
About the same time, Miller contends, the Red Cross was applying outside pressure by offering to provide some Carter clients with blood more cheaply. Richard Cox, regional director of the Red Cross, acknowledged that the Red Cross cut deals with some of Carter's clients, but he said it did not want to take over the entire blood service business. Blood pricing wasn't an issue, he said, because the Red Cross matched the price of Carter products. Source: Miles Moffeit, Knight Ridder Newspapers, March 13, 1999
1. What market structure would you ascribed to the blood-supply industry? How about perfectly competition? After all, the good is identical - blood is blood - or is it? Isn't the Red Cross attempting to make it "safer?" Do its competitors produce less safe blood? That doesn't seem to be an issue in the story. Are blood prices identical? Not at all. Cox makes the point that the Red Cross competed in the Dallas market by dropping price to its competitor's [Carter's] level. Obviously, they price differently. What does this say about the industry being perfectly competitive? Clearly, one of the issues is market share. Would that be an issue in a perfectly competitive industry? What about monopoly? There is more than one firm supplying blood so that market structure must be ruled out. What about monopolistic competition and oligopoly. There doesn't seem to be much product differentiation and there doesn't seem to be many firms competing in the industry. It boils down to oligopoly. And here the evidence seems to be strong. The firms fight for market share. They appear to be rivals, and the competition seems to be quite personal. There is mutual interdependence and even an attempt at merger. Oligopoly seems to fit best of all.
2. Is this a good case for government intervention or not? What issues would you cite in either case? How does your textbook help in clarifying the issues?
Updated 3/19/99
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