Monopolies Vs. Competition in a Term Paper

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Instead, IBM began to falter after a series of product failures. As a result, many companies gained market share against IBM with some even over taking it; an efficient market took care of the issue.

Yet, another example of why government should not interfere with market structures is the airline industry. After 1978, the airline industry was quickly transformed into an oligopoly market structure where only a half dozen or so companies controlled 90% of U.S. travel. Airlines such as American mostly enjoyed high profits until 2000, taking advantage of limited competition and their ability to price discriminate to increase profit margins for those customers who were willing and able to pay higher prices. Beginning in 2000, everything came crashing down for the airlines (pardon the pun). American airlines lost money from 2000 until it finally reaped a small net profit in 2005. The oligopoly market structure that once fueled profits has been the undoing of legacy carriers such as American. Not fearing significant competition due to what it perceived as significant barriers to entry such as government regulations and licensing agreements with airports, it had become complacent about costs, with inefficient operations and expensive union labor. But, new competitors were able to enter the market as barriers to entry decreased over time. Most notably, Southwest and JetBlue entered the industry with more efficient business models and dramatically lower costs. Then, along came a recession that reduced demand and higher fuel costs. Ironically, the oligopoly has high barriers to exist because the government closely scrutinizes mergers and acquisitions.

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The lesson learned is that even oligopolies have to focus on being as operationally efficient as possible and must keep up with changing market dynamics. Barriers to entry may be high, but this can always change.

True, competition is good for economic growth and benefits the consumer.

Market forces create environments that limit competition, but they also take them away when they become too inefficient as the cases discussed have shown. For this reason, the government should not interfere with market structures.

Figure 1: Market Structures

Perfect Competition Monopoly Monopolistic Competition Oligopoly An example of an industry Consumer Goods Coal Forest Products Chemicals Goods or services produced by the firm Identical; buyers are indifferent to which seller's products they buy Not relevant, but there might be substitutes in related markets that should be considered Differentiated Identical or Differentiated Barriers to entry Few barriers to entry Significant barriers to entry Number of firms Large number of small firms One Several Very few Price elasticity of demand Perfectly elastic - a horizontal line at the market equilibrium price. Firm is a price taker The demand is downward sloping. Firm is a price maker

The demand is downward sloping. Firm is a price maker

Economic profits (Is there a presence of economic profits? No, there are no long-run profits Yes No, there are no long-run profits Yes

Data source: Micro. http://library.thinkquest.org/C004323/low/micro2.html.....

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