Understand economics from scratch

Chapter 19 Why Oppose Monopoly and Encourage Competition—Market Structure Economics You Must Understand (1)
High profits are often seen as a symbol of monopoly.Traditional economics believes that enterprises in a "monopoly" position can earn monopoly profits, live a peaceful life, and have no motivation to innovate.Therefore, we should oppose monopoly and encourage competition.

Sir Edward Coke described the social dangers of monopoly in this way: "The monopolist seizes for himself what is the free enjoyment of all... The monopoly who takes another's business takes another's life.... The monopoly of transportation is anti-freedom and anti-autonomous."

Perfect Competition: Undisturbed Market Mechanism
In the Alaska Nature Reserve in the United States, people eliminated wolves in order to protect deer.With no natural enemies, the deer live a very leisurely life. They no longer run around and reproduce in large numbers, causing a series of ecological problems, causing the plague to spread among the deer herd, and a large number of deer herds to die.

Later, the conservation staff introduced the wolf in time, and the bloody life-and-death competition between the wolf and the deer started again.Under the chasing and predation of wolves, the deer had to run nervously to escape.In this way, except for those old, weak, sick and disabled who were preyed on by wolves, the physique of the other deer became stronger day by day, and the deer herd appeared full of vitality and restored their former beauty.

Perfect competition, also known as free competition, means that a market completely relies on an invisible hand, that is, price to regulate supply and demand.Perfect competition has two indispensable factors: the items offered for sale are identical, and there is no product differentiation; buyers and sellers are so many and equal in size that no one buyer or seller can affect the market price.

For example, the wheat market is a typical perfectly competitive market, with thousands of farmers selling wheat and millions of consumers using wheat and wheat products.Since no buyer or seller can affect the price of wheat, everyone is just a receiver of the price and has an equal competitive position.

Perfect competition has the following characteristics:

(1) There are countless buyers and sellers in the market.

(2) The same product is of the same quality and there is no difference.

(3) Market resources are completely free to circulate.

(4) Everyone has all the information about the market.

For ease of understanding, we make some supplementary explanations for these four features.Since there are a large number of demanders and suppliers in the market, whether any one of them buys or sells will not have an impact on the price of the entire commodity market; since the products are the same, the consumption For those who buy goods from any manufacturer, it is the same; since the information is very sufficient, it also excludes the situation that there may be several prices in the market at the same time due to poor information, and the price can only be one. Otherwise, customers will of course pick the cheapest product.

In such a perfectly competitive market, the price of commodities will be completely determined by market supply and demand, and each commodity will eventually form an equilibrium price, that is, the price when market supply and demand are equal.

If you visit the farmer's market more, you will soon find that almost every household has to carry a bag or basket to buy eggs as a necessary food for life, and there are really many stalls selling eggs.If we "picture" it, we can think of an infinite number of buyers and sellers in the market for eggs.The eggs at each stall are similar, as long as they are not broken or broken, generally no one will compare the differences between eggs from different stalls; otherwise, it will really be "picking bones".Therefore, it can be considered that all eggs are completely homogeneous.As for the other two characteristics of a perfectly competitive market, we can see that both buyers and sellers can freely choose to enter or exit (that is, eggs are completely free to buy and sell). People are all informed about it.In this egg market, the price of each stall is the same, and it is an equilibrium price determined by supply and demand.Through the egg market, we can understand the perfectly competitive market more vividly.In fact, most agricultural product markets are basically close to perfectly competitive markets.

So, there is still a problem here. In a perfectly competitive market or a similar market, how can the seller earn more profit because of the same quality and the same price?Is it only by the favor of luck?Indeed, in such a market, the seller is completely dominated by the market and the competition is fierce. In the case of identical products, the seller has to make a big fuss about reducing costs (such as reducing shipping costs, reducing business expenses, etc.).In addition, sellers also need to conduct marketing competition other than price, such as warm and thoughtful service, putting eggs in boxes for customers to carry, and labeling eggs with trademarks, etc., can attract more customers.

Under the market conditions of perfect competition, both consumers and producers will have no disadvantages, because the existence of perfect competition forces commodity producers to compete to make a fuss about reducing costs and lowering prices, so that consumers can actually achieve The lowest price to buy, and the producer can also get a normal profit by selling at this price.From a social point of view, perfect competition can effectively allocate social resources to each sector and the production of each commodity so that they can be fully utilized.Enterprises with low production efficiency are gradually defeated in the competition, and social resources such as capital, labor, and equipment are recombined into enterprises with high production efficiency. This is a kind of social progress.Because competition can promote a virtuous economic cycle and stimulate the enthusiasm of producers, it is important to encourage competition and create a fair competition environment, which is an important part of building a socialist market economic system.

We already know that in reality there is no perfect competitive market in the true sense.But just like Galileo's ideal laboratory, it is not important whether it can be realized in reality. What is important is that with this model of a perfectly competitive market and analyzing it, we have a ruler and a mirror, and we can Great for deepening your understanding of imperfectly competitive markets.

Monopoly: no possibility of choice

The word "monopoly" originated from Mencius's saying that "you must seek monopoly and get on it, and you must look left and right to see the profit of the market".It originally refers to standing on the high ground of the market to manipulate trade, and later generally refers to monopoly and monopoly.In a capitalist economy, a monopoly refers to a small number of large capitalist enterprises manipulating and controlling the production, sales and prices of commodities in one or several sectors through mutual agreements or alliances in order to obtain high profits.

Monopoly in economics generally refers to the sole seller in one or more markets, through one or more stages, facing competitive consumers - just the opposite of monopoly by buyers.A monopoly can adjust price and output at will in the market (not at the same time).Since the monopolist is the only seller of the product it produces, it directly faces the entire market, in other words, it will face a downward-sloping market demand.The number of buyers is large, so it is competitive, that is, buyers are price takers.Therefore, sellers can maximize their profits by controlling product prices or output.

The claim that monopoly preceded free markets can be clearly seen by reading Adam Smith's The Wealth of Nations.Before the free market was established as a system and gained theoretical support, governments of various countries habitually created all kinds of monopoly enterprises. In the early 19th century, free enterprise rose along with the industrial revolution.By the end of the 19th century, however, the tide of public opinion had turned again.After the emergence of the free market, in order to control the impact of corporate monopoly on small businesses, the government established an anti-monopoly system.However, for more than 100 years, economists have not been conclusive about what role the system has played in protecting and promoting competition.

Monopoly can be understood as the excessive concentration of economic power and a small number of enterprises with too high market share; it can also be understood as the abuse of market dominance.It is not illegal to have a high market share. It is only when a company uses its dominant position in a certain market to set up barriers to prevent other competitors from entering, or to engage in unequal competition in other markets by means of "bundling sales", it constitutes an objection that needs to be opposed. "Monopoly" behavior.The former is the idea of ​​structural regulation, focusing on the balance of the market structure; the latter can be called behavioral regulation, which is specific to enterprises.

It is not easy to break the monopoly.Usually, there are three protective "blockhouses" in a complete monopoly market: one is that monopoly enterprises have economies of scale advantages, that is, under the condition of constant production technology level, the reason why monopoly enterprises can defeat other enterprises depends on their large production scale, The advantage of high output and thus low total average cost.The second is that monopolies control certain resources.The Coca-Cola Company of the United States has long dominated the world by controlling the ingredients for making the drink. South Africa's Derby Company has also formed a monopoly because it controls about 85% of the world's diamond supply.The third is that monopoly enterprises have legal protection.For example, the governments of many countries implement a complete monopoly on public utilities such as railways, postal services, power supply, and water supply, and provide legal protection for certain product trademarks and patents within a certain period of time, thus forming a complete monopoly.

Market Type: Between Perfect Competition and Monopoly

If the number of monopoly factors is used as the standard, the market can be divided into four types: monopoly, oligopoly, monopolistic competition and perfect competition.

Classical economists believe that perfect competition is the most idealized market. In other words, such an idyllic market does not actually exist.In real life, our common market is neither perfect competition nor extreme monopoly (only one company produces products in the market), but is often in between.So, how many faces does the market have?For example, because there are many areas with high fluoride in the country, the teeth of people in these areas are allergic to fluoride toothpaste.When they want to go to the store to buy fluoride-free traditional Chinese medicine toothpaste, they will find many good brands: Tianqi, Heimei, Liangmianzhen, Lengsuanling, etc.The traditional Chinese medicine toothpaste produced by these enterprises covers almost most of the national market, and also has a decisive impact on the sales price of fluorine-free traditional Chinese medicine toothpaste.So, what type of market does this fluorine-free traditional Chinese medicine toothpaste market belong to?

Although both the perfect competition model and the monopoly model are ideal models of the market: many companies providing the same product constitute a perfectly competitive market; a company occupying the entire market is a monopoly market.Starting from them is helpful in building theory.But in fact, like the toothpaste market, the market for most items in life lies between perfect competition and extreme monopoly.In these industries, several powerful firms compete with each other, but the competition is not as intense as in a perfectly competitive market.Economists call this market an imperfectly competitive market.

Imperfect competition can be divided into oligopoly and monopolistic competition.Oligopoly refers to a market organization in which a few manufacturers control the production and sales of products in the entire market.The world oil market is a prime example.It is reported that China's economy is advancing towards an oligarchic structure, especially in industries such as communications, electric power, and finance with natural monopoly nature.Monopolistic competition refers to a market organization in which many firms produce and sell differentiated products of the same kind in a market.In real life, most items are in monopolistic competition, such as video discs, game consoles, beverages, etc. The toothpaste discussed above also belongs to this category.

Economists who study industrial organization therefore divide markets into four categories according to the number of firms and types of products: a market with only one firm is a monopoly; a market with a few powerful firms is an oligopoly; a market with many firms and differentiated sales The product is monopolistic competition; there are many firms selling undifferentiated products is perfect competition.

Oligarchs: From OPEC's Control of the World Oil Market

OPEC is an oligarchic organization in the world oil market, and each member country will obtain high profits by means of uniform output and price.However, the existence of antitrust laws and the prisoner's dilemma in the world will destroy the agreement they formed.

The Middle East is a large natural oil depot, and its underground oil reserves account for more than half of the world's total.The lucky ones who occupy this area are Iran, Iraq, Kuwait, Saudi Arabia, etc., which are one of the few oil oligarchs.Lured by high profits, these countries formed an alliance - the Organization of Petroleum Exporting Countries, or OPEC for short.They want to increase the price of oil by uniformly reducing production. From 1973 to 1985, they successfully raised the price of crude oil per barrel by more than 10 times, thus allowing all countries to jointly obtain astonishing profits.However, due to competitive factors, this means of unifying output and prices is not always effective.

So why does OPEC work sometimes and sometimes not?
(End of this chapter)