Page 175 - Business Principles and Management

Unit 2

7.1 Regulations Maintaining Competition

Goals Terms
• Explain how federal laws help • monopoly • false advertising
regulate monopolies. • natural monopoly • bankruptcy
• Explain how federal laws help • price discrimination
promote fair competition.

n the following pages, you will learn how government encourages free enter-
prise by controlling monopolies and promoting competition. You will also
Ilearn how the government protects the general public as well as business.
Like Deion, you will learn about taxes and how taxes influence business
decisions.

Regulating Monopolies

Competition is the rivalry among companies for customers’ dollars. Competition,
however, does not always operate smoothly by itself. To provide for fair competi-
tion, government has passed laws and created regulations to enforce the laws.
These laws and regulations grow out of a need to preserve competition, which
is done, in part, by controlling monopolies and unfair business practices. Firms
that cannot survive in a competitive atmosphere either go out of business or face
bankruptcy.

CONTROLLING MONOPOLIES
A monopoly exists when only one company provides a product or service with-
out competition from other companies. Without competitors, the one producer
can control the supply and price of the product or service. By controlling the
supply of an item, a single producer can set a price that will generate the great-
PHOTO: © GETTY IMAGES/PHOTODISC. prices are generally very high. Without competitors to lure customers away with
est profit. In a monopoly situation, such as Deion Banks’s taxi company, the
lower prices, the monopolistic company can raise its price as high as it wants.
If customers want the product or service, they have no choice but to pay the
monopolist’s price.
In actual practice, however, few monopolies exist, because of the effec-
tiveness of competition. To illustrate, assume a business offers a new product
that no other business does. The product suddenly becomes quite popular.
The prospect of profits to be made entices other companies to enter the mar-
Deregulation of the telecommu- ket to help meet the demand. A temporary monopoly will exist until those
nications industry has helped competitors can produce and sell similar products. Usually, through competi-
benefit consumers through tive pricing, the more efficient companies will attract the greatest number of
lower prices and improved purchasers, whereas the less efficient may struggle for survival or go out of
phone services. Are cellular business. Even if some competitors fail, however, a monopoly will not exist
telephone prices deregulated? as long as there are at least two or more producers.

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