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Discussion 1 Instruction:
Read the article, The Ethics of Big Data. Based on the content presented in the article, describe
the microeconomic principles being used, in other words what is the impact for demand? List the
different types of market structures that big data benefits the least and benefits the most. While
data collection may benefit the business community, discuss the potential concerns for
consumers that arise with the proliferation of big data.
Link to article:
Martin, E. R. (2014, March 27). The ethics of big data. Forbes. Retrieved from
http://www.forbes.com/sites/emc/2014/03/27/the-ethics-of-big-data/#762ab32030c7
Response Instructions:
Respond to your peers in a minimum of 125 words. Review the discussion board posts of your
classmates. Analyze the difference between market structures. Compare your response to those
of your classmates. Respond to at least two of your classmates. Discuss the way profits vary
based on market structure.
Student 1:
The Ethics of Big Data” was a wonderful read. It reminded me of when I first got on Facebook
long ago, and I had selected that I liked a certain type of shoe and all the advertisements I was
seeing in my feed were related to shoes such as those. It was not until I asked a friend of mine
why were there so many advertisements about this type of shoe, or shoe stores coming up and
they told me that if you click on anything or set up anything that you like in your settings or
while you are looking at something within your feed it tracks it and starts to target you.
Microeconomics displayed in the article targeting the shopping habits of customers. Data mining
is a way to provide the products that matches the shopping interests/habits of the customers. It is
a good idea in theory, but a lot of other factors come into play. If I am shopping for a friend or
family member who is having a baby within a few months, and I get new born clothing, I am
done. I do not want to get advertisements about these clothes or information about where to get it
again, I am finished doing what I wanted to do. We can look at the example of the teenager who
shopped for baby items, for herself, and her father found out or saw that coupons were being
sent., and I believe the store that did this was Target, 2012. They started to receive baby
advertisements and father was like this is a problem cause he had no idea his daughter was
actually pregnant. That is wrong. An invasion of privacy to me. (Martin, 2014). We found in the
reading four market structures: Monopoly, Perfect Competition, Monopolistic competition, and
Oligopoly. In defining Monopoly, it is a market structure where there is only one producer/seller
for a product. (Amacher, 2013) This is considered the single business is the industry. In certain
areas, like where I live in the country far out, the only provider of cable service that has a
contract with the developer is Direct TV and Verizon. We do not have a choice if we want
cable/internet. Even though there are other companies/providers they do not service my area,
therefore they have a monopoly for my neighborhood. It is either accept or go without. Perfect
competition in contrast is a market structure where each firm has no market control.
Monopolistic competition is type of imperfect competition in that there are many producers sell
products that are differentiated from one another with branding or quality and are not perfect
substitutes. Then there is oligopoly which is similar to monopoly in which one company exerts
control over most of a market. That market is controlled by a small group of firms., we can say
that there are at least two firms that control the market. (Amacher, 2013). I found that the article
did mention that big companies are using data, but not correctly. In other words, they should be
homing in on the specific data, they tend to gather all the information (being greedy) and many
times the personal information is invasive. Yet we find that some of the information can help the
sale of the products, other information that is collected is a turn off for the customer that
ultimately will make them terminate doing business with said company.
Student 2:
Data mining has been an ongoing process as companies try to capture consumer habits, customer
behavior and buying preferences. “Data collection is not going away. Every business sector now
collects data of one form or another, and the future marketplace will have even more computing
power at their fingertips to mine customer behavior” (Martin, 2014, para 3). Even though this is
the case, there are ways that companies can use specific data to meet customer needs without
alienating their business or compromising their identities and privacy. Data can be aggregated to
follow certain shopping patterns. Companies know that collecting data about consumer needs is
a big money maker. By following this information, companies can meet demand faster, and
possibly at a lower market price.
Market structure is a collection of factors that determine how sellers and buyers interact in a
market, how prices change, and how different levels of the production and selling processes
interact. There are four market structures that are used in economics: In a perfect competition
market structure, several companies produce identical products and they are all sold at market
price. The entry barriers for this market are free and the only factor determining sales is price.
Since one producer cannot affect prices, this market is elastic. Big data would not benefit this
market structure because real data doesn’t exist as it is used more as a theoretical model.
A monopolistic competition is a large number of sellers that offer a “differentiated product”
(Amacher & Pate, 2013, p 11.3, para 1). This means that they offer goods with different prices,
features, and branding. A good example of this would be sneakers. There are various brands,
Nike, Converse, Adidas, Sketchers, etc., but each producer has different features and different
ways of marketing their product. Entry into this form of industry is easy, and new firms can start
selling products that are similar.
In an oligopoly market “a few firms compete imperfectly” (Amacher & Pate, 2013, p 11.4, para
1). A good example of this would be seat belt manufacturers. The economies of scale are very
high making entry barriers high also. Companies realize that their small numbers dominate the
market and that competitors create a certain response to price and output. Last is a monopoly
which is usually one seller and the entry is very high in this kind of market. Examples of a
monopoly would be a copyright, investment, or a hold over resources. The railroad is a good
example of this or utility companies. This type of market has the ability to exercise power over
output and the market price.
The biggest concern among shoppers is that private information could be used against them and
unsanctioned organizations using private preferences such as religion, political, and other
preferences (Martin, 2014). Customers do not want companies knowing their personal
information such as illness, pregnancy or financial problems they are having. Companies need to
be responsible with personal data and maintain the consumers trust.
Discussion 2 Instructions:
Analyze the major barriers for entry and exit into the airline industry. Explain how each barrier
can foster either monopoly or oligopoly. What barriers, if any, do you feel give rise to monopoly
that will allow the government to become involved to protect consumers?
Response Instructions:
Review the discussion board posts of your classmates. Do you agree or disagree with their
reasons on whether or not government should get involved when it comes to monopolies?
Respond to at least two classmates. Compare and contrast your posts and comment on barriers to
enter a market and analysis of government’s relationship with monopolies.
Student 1:
Competition in the airline industry is intense as barriers to entry are low due
to liberalization of market access, a result ofglobalization. The airline industry is
highly competitive and capital-intensive. Because of its capital-intensive nature, fixed costs and
barriers to exit are high.
“Monopoly is themarket structure in which there is a single seller of a product that has no close s
ubstitutes.” (Amacher; 2013; chapter 10 introduction). “Oligopoly is the market structure in
which a few firms compete imperfectly. “Amacher; 2013; section 11.4).Some of the things that
are needed to take into consideration when it comes to entry of airlines, would be the fuel, fleet
cost, and government regulations. After reading and acknowledging both defintions of monopoly
and oligopoly, the barriers of entry of airlines fuel and fleet cost would fall oligopoly. The reason
for this is because the airlines are wanting the best prices when fueling their planes. Airlines will
also want the best prices for a fleet of planes, depending on the type of plane, and what the plane
has to offer (first class). Government regulations would fall under monopoly because they are
across the board with every airplane. Each airline has to pass those inspections before flying.
Barriers of exit to airline industry are the flip side of the entry. These barriers include specific
assets, regulations, long term liabilities, or by owners with non-financial objectives. It is a key
strategic concept in industries where companies frequently earn under their capital cost (value
destruction). Out of the four barriers three of them would fall under oligopoly. Assets, liabilities
and finanical objectives can vary. The owner may in the future want to change the amount of
liabilty that they offer. The financial objective could change depending on the economy and what
the supply and demand is. The regulations of the plane would fall under monopoly; they should
not change. The regulations are guidlines that the staff and customers have to follow in order to
travel and or work. At one point regulations were considered to be oligopoly. Security wasn’t as
stricted, as they are now.
The barrriers that i feel have been on the rise to monopoly would be the government regulations
and the regulation. There is one event that has happened in the United States that have changed
both these barriers; which was 9/11. The airlines now have a security system where you have tyo
have your bags checked, and the people have to be checked. You have to have a passport to
travel. The airline staff also has to undergo the security check. When the plane is in the air, the
pilot has to communicate with the airlines throughout the flight. The fleet cost could also change
to monopoly, because the government would be able to keep check on the planes. If something
were to happen the government would be able to investigate quickly with a small amount of fllet,
rather than a large amount.
Student 2:
According to our text, barriers to entry are natural or artificial obstacles that keep new firms from
entering an industry. Without such barriers, monopoly cannot continue. (Amacher, R., & Pate, J.
(10.2 2013). The cost of flying continues to trend lower. The Internet has also created greater
price transparency, reducing margin. Another natural or artificial obstacles that keep new firms
from entering an industry, is the post-deregulation U.S. airline industry has been the hub
premium-The premium over average fares that large carriers command in markets from airports
where they provide a large share of service.
The airline industry is known as an oligopoly market structure and there are many barriers in
entering into the airline industry. The monopolist is able to charge different consumers different
prices or charge a given consumer different prices depending on the quantity purchased, the
monopolist is practicing price discrimination. Price discrimination is a way to expand
monopoly profits by extracting consumer surplus from consumers. Airlines often offer loweredticket prices to workers and people how fly frequently thru frequent flyer miles. This is an
example of price discrimination.
The premium over average fares that large carriers command in markets from airports where
they provide a large share of service, and they have their security and security back grounds
already in place. The barriers for entry and exit into airline industry would be high startup costs,
high risk nature of the airline industry, slots available for takeoffs and landing, and leases.
According to our text it is very difficult to be a monopolist because it is very hard to keep new
entrants out of an industry—unless you can get the government to help you.(Amacher, R.,
& Pate, J. (10.2 2013) The monopolist is often willing to pay for this with campaign
contributions, favors, or outright bribes, such as direct cash payments, free vacations, or jobs for
relatives.
Image Source/SuperStock
9
Perfect Competition
Learning Objectives
By the end of this chapter, you will be able to:
• List the assumptions of perfect competition.
• Diagram the relationship between a firm and the total market. Calculate profits, given quantity, marginal revenue, marginal cost, average cost, and price. Identify the profit-maximizing level of output.
• Define the shutdown point in terms of price and average variable costs or total fixed costs and losses.
• Describe the long-run supply curve for a constant cost industry, an increasing cost industry, an
increasing cost industry, and a decreasing cost industry.
• Identify the long-run equilibrium for the firm and the industry under perfect competition.
• Explain how economic rent might exist in perfect competition, even in long-run equilibrium.
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Section 9.1
Characteristics of Perfect Competition
CHAPTER 9
Introduction
C
onsider this. . . Some firms, like convenience stores and grocery chains, are open
24 hours a day. Others close at 6:00 or 7:00 P.M. Some bars and restaurants open
at 11:00 A.M. to cater to a lunch crowd, while others don’t open until 4:00 P.M. for
the happy hour crowd. Some resorts are open year-round, while others close for business
during the off-peak season.
How can you explain this distinctly different behavior across firms that are in the same
industry? Any firm that makes production decisions will relate potential, or forecasted,
revenues to costs in order to determine output levels. However, the forecasted revenues
will depend on the market conditions faced by the firm. After studying the material in this
chapter you will be able to explain why firms in the same industry make different choices,
whether they choose to close at 7:00 P.M., close for the winter, or close permanently.
This chapter and the next two look at four different models, referred to as market structures. The model discussed in this chapter is perfect competition. Perfect competition is
the market structure in which there are many sellers and buyers, firms produce a homogeneous product, and there is free entry into and exit out of the industry. It is important to
keep in mind that this is a theoretical model. Real data does not exist, and the model does
not precisely describe reality. The model is useful, however, because it provides a point
of reference. It allows the development of tools of analysis that indicate what determines
price and quantity when conditions are close to those of perfect competition. The perfectly
competitive market is the abstract ideal to which we will compare other market structures.
9.1
Characteristics of Perfect Competition
T
here are six basic assumptions for the model of perfect competition. In developing
the theory, we assume that all firms in the market in which the product is sold possess these six characteristics.
The first assumption is that there is a large number of sellers (producers) in the
market. A large number means there are so many sellers of the product that no
single seller’s decisions can affect price. For example, no single wheat farmer
can influence the price of wheat. A farmer could sell the entire crop or none of
the crop. The farmer’s decision wouldn’t affect the price of wheat in any perceptible manner because the market for wheat is so large relative to any single
producer.
The second assumption is that there is a large number of buyers (consumers) in
the market. A large number means that no one buyer can affect the price in any
perceptible way. That is, no single purchaser has any market power.
The third assumption is that perfectly competitive firms produce a homogeneous product. Homogeneous means that the product of one firm is no different
from that of other firms in the industry. Since this is the case, purchasers have
no preference for one producer over another. If you are a miller and want to
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1/28/13 9:49 AM
Section 9.1
Characteristics of Perfect Competition
CHAPTER 9
purchase wheat, you don’t care if it was produced by Farmer Jones or Farmer
Smith—a bushel of No. 1 winter wheat is a bushel of No. 1 winter wheat!
The fourth assumption, a very important assumption, is that there is free entry
into and free exit out of the market. This means that if one firm wishes to go into
business or if another firm wishes to cease production, either can do so without any kind of constraint. This assumption is crucial in distinguishing perfect
competition from monopoly, which we will examine in the next chapter.
The fifth assumption is that there is perfect knowledge. The sixth assumption is
that workers and other resources can easily move in and out of the industry. These
last two assumptions are even more unrealistic than the others because information is costly to acquire and resources are usually costly to move. The effect
of these two assumptions is that when economic profits exist, firms will find
out about these profits and enter the industry. Even though these assumptions
are unrealistic, the resulting model is valuable because it shows what adjustments would take place in an ideal setting.
If these six assumptions are met, a market will be perfectly competitive. These assumptions create a model market in which no firm or individual has the power to exert control
over the market. This means that neither buyer nor seller has any influence over price.
The six assumptions were first stated more than two centuries ago by Adam Smith in a
general outline of the perfectly competitive model in his book, An Inquiry Into the Nature
and Causes of the Wealth of Nations (1776). In the nineteenth century, the model of perfect
competition was the main way of looking at how firms and markets determined price and
output levels. The study of other market structures arose later.
Economics in Action: What Criteria Is Necessary for Perfect Competition?
Looking at the airline industry, the Khan Academy lists the criteria for perfection competition. Follow
the link to the Khan Academy (http://www.khanacademy.org), and then do a search for the video
“Perfect Competition” to learn more about how this criteria applies to any market.
Large Numbers on the Buyers’ Side
This chapter concentrates on developing a theory of firms in perfect competition, or competition on the sellers’ side of the market. Keep in mind, however, that we also assume
large numbers of buyers—so many that no single firm possesses market power.
Concentrating on the firm should not obscure the importance of competition on the buyers’ side of the market. In order for markets to be competitive, there must be enough buyers that none can affect the market price by withholding purchases. Note also that perfect
competition and free markets are not necessarily the same. A free market means a market
that is free of government regulation—thus a perfectly competitive market could also be
a free market, but the reverse is typically not the case.
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