Page 41 - Introduction to Business

CHAPTER 1 What Is Business? 15

is large, it will not make sense nor will it be profitable to build mini auto plants.
That’s a major reason why you don’t see automobile plants in countries with a
small car market. It would make more sense to import cars than to build them in
these countries.
Barriers to competition, also sometimes called barriers to entry, arise when barriers to competition Barriers that
certain legal restrictions are imposed on an industry or when suppliers themselves arise when certain legal restrictions
(patent protection, licensing, and tariffs)
try to differentiate their products or services. Examples of legal restrictions to com-
that reduce the level of competition are
petition include patent protection, licensing, and tariffs. Patents are awarded to imposed on an industry
companies or individuals by governments to protect their inventions (intellectual patents Awards to companies or
property). Patents provide exclusive rights to the owner to produce goods (e.g., individuals by governments to protect
pharmaceuticals) or services (e.g., software) for a set period of time, thereby pre- their inventions (intellectual property)
by providing exclusive rights to the
venting others from doing so during that period. A patent awards exclusivity, or owner to produce the goods (e.g.,
monopoly rights, to the owner for a given period of time so that the inventor can pharmaceutical products) or services
recoup the research and development cost of the invention and also earn a certain (e.g., software or operating systems) for
a set period of time, thereby preventing
profit for the effort. Licensing operates in a similar manner and is more prevalent
others from doing so during that time
in developing countries where governments select certain investors to operate a period
particular type of businesses (cement manufacturing, steel production, etc.). licensing The practice by governments
Licensing restricts entry into an industry, thereby reducing competition. Finally, of selecting investors to operate certain
tariffs, which are taxes on imports, raise the price of imports and boost prices to types of businesses, thereby restricting
entry into those businesses and
domestic consumers. Domestic producers of import-competing products are reducing competition
therefore provided relief from overseas competition (from lower-cost imports). tariffs Taxes on imports that raise the
price of imports and consequently
enable domestic competitors to raise
OLIGOPOLY. How imperfect can imperfect competition get? At one extreme is the
prices as well
monopolist, or single seller. Oligopoly implies “few sellers,” that is, an industry in
oligopoly The industry market structure
which a few sellers cater to the needs of the whole market. An oligopolist is one of where a few producers of almost
these few sellers who produces and sells identical (or almost identical) products identical products cater to the needs of
the whole market
like cement, steel, copper, and so on, or services like airlines. On the basis of the
four conditions of market structure that were discussed earlier, you will find that
oligopolists are generally large producers, so only a few of them are needed to sup-
ply the whole market. Since the products or services sold by oligopolists are quite
similar, when an oligopolist lowers prices, consumers will at once switch to the
lower-price seller. In order not to lose market share, the other oligopolists will be
forced to match the lower prices or go out of business. If you use commercial
airlines, you will understand what we mean. For example, if American Airlines low-
ers its fare between any two cities, at once other carriers that cater to that pair of
cities will lower their prices as well and will match American’s fare; otherwise, cus-
tomers will flock to American Airlines. Unlike a monopolist, the oligopolist does
not control prices, but each can have a great effect on market price, especially
downward.

MONOPOLISTIC COMPETITION. The key characteristic of monopolistic competition
is product differentiation. Although there are quite a few sellers in this type of product differentiation A strategy that
market structure, each firm will try to make its product sound or appear different firms employ to make their product
seem different from those of their
from the rest. Although the number of producers remains large (not as large as in competitors
pure competition), each firm will try to advertise and promote its products as if
they are unique. Take, for example, jeans, which are a common product. However,
through the creation of brand awareness, brands like Polo, Calvin Klein, Levi’s,
Wrangler, Lee’s, Rustler, and so on, the companies try to give the consumer the
impression that their jeans are something out of the ordinary—in a class by them-
selves. Each company tries to convey to the consumer that its jeans are unique—
one of a kind—in the market, and it wants to behave like a monopolist in the mar-
ket for its jeans. This way it can try to charge a monopoly price. While some
consumers may say that jeans are jeans and go for the ones that cost the least, there
Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.