{"id":113,"date":"2015-04-22T03:54:57","date_gmt":"2015-04-22T03:54:57","guid":{"rendered":"https:\/\/courses.candelalearning.com\/masterymicro1xngcxmaster\/?post_type=chapter&p=113"},"modified":"2016-07-26T19:58:03","modified_gmt":"2016-07-26T19:58:03","slug":"tradeoffs-of-imperfect-competition","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/atd-herkimer-microeconomics\/chapter\/tradeoffs-of-imperfect-competition\/","title":{"raw":"Reading: Tradeoffs of Imperfect Competition","rendered":"Reading: Tradeoffs of Imperfect Competition"},"content":{"raw":"

Tradeoffs of Imperfect Competition<\/h2>\r\nOligopoly is probably the second most common market structure (monopolistic competition being the first). When oligopolies result from patented innovations or from taking advantage of economies of scale to produce at low average cost, they may provide considerable benefit to consumers. Oligopolies are often buffeted by significant barriers to entry, which enable the oligopolists to earn sustained profits over long periods of time. Oligopolists also do not typically produce at the minimum of their average cost curves. When they lack vibrant competition, they may lack incentives to provide innovative products and high-quality service.\r\n\r\nThe task of public policy with regard to competition is to sort through these multiple realities, attempting to encourage behavior that is beneficial to the broader society and to discourage behavior that only adds to the profits of a few large companies, with no corresponding benefit to consumers. Monopoly and Antitrust Policy discusses the delicate judgments that go into this task.\r\n\r\n
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THE TEMPTATION TO DEFY THE LAW<\/h2>\r\n<\/header>
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Oligopolistic firms have been called \u201ccats in a bag,\u201d as this module\u00a0mentioned. The French detergent makers chose to \u201ccozy up\u201d with each other. The result? An uneasy and tenuous relationship. When the Wall Street Journal<\/em> reported on the matter, it wrote: \u201cAccording to a statement a Henkel manager made to the [French anti-trust] commission, the detergent makers wanted \u2018to limit the intensity of the competition between them and clean up the market.\u2019 Nevertheless, by the early 1990s, a price war had broken out among them.\u201d During the soap executives\u2019 meetings, which sometimes lasted more than four hours, complex pricing structures were established. \u201cOne [soap] executive recalled \u2018chaotic\u2019 meetings as each side tried to work out how the other had bent the rules.\u201d Like many cartels, the soap cartel disintegrated due to the very strong temptation for each member to maximize its own individual profits.<\/p>\r\n

How did this soap opera end? After an investigation, French antitrust authorities fined Colgate-Palmolive, Henkel, and Proctor & Gamble a total of \u20ac361 million ($484 million). A similar fate befell the icemakers. Bagged ice is a commodity, a perfect substitute, generally sold in 7- or 22-pound bags. No one cares what label is on the bag. By agreeing to carve up the ice market, control broad geographic swaths of territory, and set prices, the icemakers moved from perfect competition to a monopoly model. After the agreements, each firm was the sole supplier of bagged ice to a region; there were profits in both the long run and the short run. According to the courts: \u201cThese companies illegally conspired to manipulate the marketplace.\u201d Fines totaled about $600,000\u2014a steep fine considering a bag of ice sells for under $3 in most parts of the United States.<\/p>\r\n

Even though it is illegal in many parts of the world for firms to set prices and carve up a market, the temptation to earn higher profits makes it extremely tempting to defy the law.<\/p>\r\n\r\n<\/section>\r\n

Self Check: Inefficiency in Oligopolies<\/h2>\r\nAnswer the question(s) below to see how well you understand the topics covered in the previous section. This short quiz does not<\/strong> count toward your grade in the class, and you can retake it an unlimited number of times.\r\n

You\u2019ll have more success on the Self Check if you\u2019ve completed the Reading in this section.<\/span><\/p>\r\nUse this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.\r\n\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/676","rendered":"

Tradeoffs of Imperfect Competition<\/h2>\n

Oligopoly is probably the second most common market structure (monopolistic competition being the first). When oligopolies result from patented innovations or from taking advantage of economies of scale to produce at low average cost, they may provide considerable benefit to consumers. Oligopolies are often buffeted by significant barriers to entry, which enable the oligopolists to earn sustained profits over long periods of time. Oligopolists also do not typically produce at the minimum of their average cost curves. When they lack vibrant competition, they may lack incentives to provide innovative products and high-quality service.<\/p>\n

The task of public policy with regard to competition is to sort through these multiple realities, attempting to encourage behavior that is beneficial to the broader society and to discourage behavior that only adds to the profits of a few large companies, with no corresponding benefit to consumers. Monopoly and Antitrust Policy discusses the delicate judgments that go into this task.<\/p>\n

\n

THE TEMPTATION TO DEFY THE LAW<\/h2>\n<\/header>\n
\n

Oligopolistic firms have been called \u201ccats in a bag,\u201d as this module\u00a0mentioned. The French detergent makers chose to \u201ccozy up\u201d with each other. The result? An uneasy and tenuous relationship. When the Wall Street Journal<\/em> reported on the matter, it wrote: \u201cAccording to a statement a Henkel manager made to the [French anti-trust] commission, the detergent makers wanted \u2018to limit the intensity of the competition between them and clean up the market.\u2019 Nevertheless, by the early 1990s, a price war had broken out among them.\u201d During the soap executives\u2019 meetings, which sometimes lasted more than four hours, complex pricing structures were established. \u201cOne [soap] executive recalled \u2018chaotic\u2019 meetings as each side tried to work out how the other had bent the rules.\u201d Like many cartels, the soap cartel disintegrated due to the very strong temptation for each member to maximize its own individual profits.<\/p>\n

How did this soap opera end? After an investigation, French antitrust authorities fined Colgate-Palmolive, Henkel, and Proctor & Gamble a total of \u20ac361 million ($484 million). A similar fate befell the icemakers. Bagged ice is a commodity, a perfect substitute, generally sold in 7- or 22-pound bags. No one cares what label is on the bag. By agreeing to carve up the ice market, control broad geographic swaths of territory, and set prices, the icemakers moved from perfect competition to a monopoly model. After the agreements, each firm was the sole supplier of bagged ice to a region; there were profits in both the long run and the short run. According to the courts: \u201cThese companies illegally conspired to manipulate the marketplace.\u201d Fines totaled about $600,000\u2014a steep fine considering a bag of ice sells for under $3 in most parts of the United States.<\/p>\n

Even though it is illegal in many parts of the world for firms to set prices and carve up a market, the temptation to earn higher profits makes it extremely tempting to defy the law.<\/p>\n<\/section>\n

Self Check: Inefficiency in Oligopolies<\/h2>\n

Answer the question(s) below to see how well you understand the topics covered in the previous section. This short quiz does not<\/strong> count toward your grade in the class, and you can retake it an unlimited number of times.<\/p>\n

You\u2019ll have more success on the Self Check if you\u2019ve completed the Reading in this section.<\/span><\/p>\n

Use this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.<\/p>\n

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