ii-03 ANTITRUST LAW & ECONOMICS REVIEWVol. 26, No. 4 GLOSSARY OF ANTITRUST TERMS Charles E. MuellerANTITRUST LAWS--Laws designed to combat monopolies ("trusts")and other devices to suppress competition. In the U.S., the individualstates, as inheritors of the English common law (which condemneda number of these practices), were the pioneers in the anti-monopolyefforts of the late 1800s and many have their own antitrust statutestoday. Their lack of success in dealing with such powerful combinationsas Rockefeller's Standard Oil (90% of U.S. oil refining at theturn of the century) led to the passage of the first federal antitrustlaw, the Sherman Antitrust Act of 1890, 15 U.S.C. 1. This wasfollowed by the enactment of the Clayton Act, 15 U.S.C. 12, andthe Federal Trade Commission Act, 15 U.S.C. 41, both passed in1914.The Sherman Act contains two substantive provisions. Its Sec.1 declares illegal contracts and conspiracies in restraint oftrade and its Sec. 2 prohibits monopolization and attempts tomonopolize. The Clayton Act, as later amended by the Robinson-PatmanPrice Discrimination Act, 15 U.S.C. 13 (1936) and the Celler-KefauverAnti-Merger Act, 15 U.S.C. 18 (1950), deals with four businesspractices: price discrimination (Sec. 2); exclusive dealing andtying arrangements (Sec. 3); mergers (Sec. 7); and interlockingdirectorates (Sec. 8). The Federal Trade Commission Act, as amended,contains only one substantive provision (Sec. 5): "Unfairmethods of competition in [interstate] commerce, and unfair ordeceptive acts or practices in commerce, are hereby declared unlawful."BARRIERS TO ENTRY--The condition of entry into an industryor market refers to the presence or absence of "barriers"around it and, if any are present, to their "height."Entry barriers refer to the disadvantages of potential entrants,vis-a-vis already established firms, that impose on the formerhigher per-unit costs (e.g., royalty payments for the use of patents)or require them to accept lower per-unit prices for goods of thesame quality (e.g., buyer preferences for established "brands").These barriers are measured in terms of how much the establishedfirms can raise the price above a competitive level (see NormalProfit) without inducing new firms to enter. Thus, if existingtechnology would permit a firm of optimum efficiency to produceand sell product A for $1.00 per unit (including a normal or competitivereturn on its investment), and if the established firms in theindustry are in fact charging $1.15 without inducing the entryof new firms, then there is said to be a "15% entry barrier."The condition of entry into an industry or market is generallyclassified as either (a) "easy" (no barriers at all);(b) "ineffectively impeded" (barriers too low to makedeliberate entry-forestalling worth while); (c) "effectivelyimpeded" (barriers high enough to make entry-forestallingprofitable); or (d) "barricaded" (barriers high enoughthat the full "monopoly" price can be charged withoutinducing entry by new firms). Entry-forestalling refers to theselection of a price that, while above the competitive floor,is not quite high enough to make the market attractive to themost likely potential entrants.BEHAVIOR--A term sometimes used synonymously with Conduct,or with both Conduct and Performance. (See also Structure.) Theformer refers to the basis on which the firm makes its price andoutput decisions, the most significant being its use or non-useof (a) collusion, either express or tacit (as in tight-knit oligopolies),and (b) predatory and exclusionary practices. The term performancerefers to the results produced by the conduct patterns selected,as measured primarily in terms of efficiency, progressiveness(invention, innovation), and the like.BUSINESS COSTS--Total money expenses, as determined byordinary accounting methods. See Cost and Business Profit.BUSINESS PROFIT--Total revenue or gross receipts of thefirm, minus total money expenses or costs (see Business Costs).Revenue is simply the number of units sold, multiplied by theaverage unit price.COLLUSIVE OLIGOPOLY--A market situation in which the sellershave entered into express agreements on price and output, i.e.,a cartel. In general, the smaller the number of firms in a market(and the larger their respective market shares), the less theirneed to use actual collusion as a coordinating device; "oligopolisticinterdependence" is frequently sufficient in the tight-knitoligopolies. (See Oligopoly.) In the looser oligopolies, however,the larger number of firms and their smaller individual marketshares greatly weakens that sense of interdependence and henceincreases the difficulty of maintaining coordinated prices exceptthrough the cartel apparatus of agreements, sanctions, and soforth.COMPETITIVE PRICE--One that exceeds minimum accountingcosts (production and distribution) by an amount that permitsthe seller a normal return on the capital invested in the enterprise(e.g., 8% after taxes) but no more (see Normal Profit). Definedanother way, it is the price that would prevail in the absenceof any barriers to entry. (See Condition of Entry.) The principleinvolved is that, if entry is completely unrestricted, any pricethat permits more than a normal profit will immediately attractnew entrants; their entry will then continue until all monopolyprofits have been competed away and the price restored to itsformer (competitive) level.CONCENTRATION--The number and size distribution of thefirms in an industry or market, most commonly expressed in termsof a "concentration ratio," i.e., the percentage ofproduction or sales accounted for by some relatively small numberof firms, generally the "four largest" and the "eightlargest." The competitive significance of these ratios issaid to lie in the proposition that they are correlated with pricelevels--the higher the concentration ratio, the further the priceis expected to rise above the competitive floor and toward themonopoly ceiling. The mechanism through which this is thoughtto be accomplished is what is called "oligopolistic interdependence"(see Oligopoly). In substance, as the number of firms declineand the size of their respective shares increases, the incentiveto engage in price competition is lessened and their incentive(and capacity) to collude, either expressly or tacitly, is increased.CONDUCT--The behavior patterns that are expected to followfrom the various types of industry Structure, particularly thebasis on which an industry's members make their basic price andoutput decisions, e.g., whether they set their respective pricesand volumes independently or collusively. In general, there issaid to be a causal connection between an industry's structure(competitive, monopolistic, oligopolistic) and the "conduct"patterns selected by its members. See also Structure and Performance.COST--As used by the economist, the term cost includesnot only the usual business costs as presented by the accountant,i.e., the recorded costs of production and distribution, but a"normal" or competitive profit as well (see Normal Profit).The reasoning is that the services of the entrepreneur, beingessential to production and distribution, are no different inthis respect than the services of the various other input factorsthat go into the final product; just as the "wages"of the production worker and the "interest" of the moneylenderare costs that society must incur if it is to continue receivingits accustomed goods and services, so it must also pay the entrepreneurfor his services in organizing production if it is to continuereceiving them. The minimum level, of course, is the one thatis sufficient but just sufficient to induce him to continue hisefforts.CROSS-ELASTICITY OF DEMAND--The effect of a change in theprice of one product on the sales volume of someother product. Thus, if an increase in the price of butter causesa significant increase in the volume of oleomargarine sold, thenthere is significant cross-elasticity of demand between thosetwo products.DEMAND--The number of units of a product that can be soldat each price the entrepreneur might elect to charge. Demand isgenerally thought of in terms of a "schedule," a matchingof prices and volumes in parallel columns. The "law of demand"postulates generally that volume is an inverse function of price--thatthe higher the price, the lower the volume consumers will buy.Thus, the entrepreneur might learn by experimentation that hecan sell 10,000 units at $10 each but that, if he raises his priceto $12, he can only sell 9,000 units.DISECONOMIES OF SIZE--A situation in which larger firmsize produces not lower but higher per-unit costs. Typically,a firm's per-unit costs fall fairly sharply at first as outputincreases, then level off and remain fairly "flat-bottomed"over a mid-size range, and finally climb upward as market poweris achieved. See also Economies of Scale.DOMINANT FIRM--A market situation in which all sellersexcept one have an insignificant individual share of the market'stotal sales and hence behave as perfect competitors, while thatone large firm, being aware of its ability to influence the marketwideprice by varying its individual output, selects its price andoutput accordingly. In principle, this large firm selects a price,lets its atomistic competitors sell all they can at that price,and then takes the "rest" for itself. The price it selectsautomatically determines both how much its small competitors willbe able to sell and thus how much it gets for itself. (Given theinability of the small competitive firms to influence the marketwideprice, they can only expand their volume up to the point wheretheir rising per-unit costs collide with that price ceiling.)By lowering the price, it can force them to restrict their production;by raising the price, it can let them expand. Its own large sharegenerally rests on a price advantage of some sort (see e.g., ProductDifferentiation) vis-a-vis these numerous smaller firms.ECONOMIES OF SCALE--The savings that can be realized throughthe use of producing and selling facilities of optimum size. Theoptimum size is defined as that which, given the existing stateof technology, permits the lowest possible per-unit costs. Thecompetitive significance of this factor is said to lie in thefact that, if a firm must have a relatively large share of itsmarket in order to achieve this optimum or minimum-cost volume,then that market cannot be both efficient and competitive at thesame time. Thus, if the volume required for minimum per-unit costsamounts to a market share of 25%, then that market can only supportfour optimum-size firms; to break them up and produce eight (orsixteen) firms would presumably produce more competition but itwould also produce higher per-unit costs, i.e., more of society'sscarce resources would be required in order to produce the sameoutput. Empirical studies are said to indicate that this is arelatively rare phenomenon in American industry--that, in allbut a few industries, firms reach the optimum size at a pointwell below that at which significant oligopolistic interdependencesets in.EFFICIENCY--Efficient allocation of resources means generallythat the total or aggregate output of a nation's economy couldnot be increased merely by transferring some of its resources(dollars of capital and man-hours of labor) from one industry(or firm) to another, a condition that, in turn, requires a certainrelationship between the "cost" and the "price"of all products sold. Thus, if a certain number of dollars andman-hours of labor produce a product that sells for $100 in acompetitive industry, but could produce a monopolized productthat consumers are willing to pay $125 for, then the country'stotal output is $25 less than it could be. This is the increasein consumer satisfaction (utility) that could be obtained at noadditional real cost (dollars of capital and man-hours of labor)by simply transferring those particular resource units from thecompetitive to the monopolized industry. The economist thereforeconcludes that the country is inefficiently using its resourceswhen it allows monopolists to block that transfer, i.e., whenit allows them to maintain barriers around their industries that,by preventing newcomers from bringing in those additional resources,permit the maintenance of the artificial "scarcity"that underlies the monopoly price.ELASTICITY OF DEMAND--The percentage change in the quantitydemanded of a product, divided by the percentage change inthe price charged. Thus, if a 1% price raise resulted ina sales drop of more than 1%, it would be said that thedemand for a product was "elastic"; if sales fell byless than 1%, its demand would be termed "inelastic."See also Demand.ENTRY--The entry into an industry or market of a new andindependent decision-maker, a firm that had not previously operatedthere, plus the construction of new productive capacity. See Conditionof Entry.ENTRY-INDUCING RETURN--A profit rate that is sufficientto induce one or more potential entrants to actually enter anindustry or market and construct new productive capacity. SeeCondition of Entry and Normal Profit.EQUILIBRIUM_A theoretical position of "rest"in a market, as the price mechanism momentarily brings supplyand demand into balance at some specific price-volume combination.See Static-Equilibrium and Dynamic Economy.FIXED COSTS--Costs that are incurred by the firm whetherit produces or not, and that remain constant in amount whetherits production volume is large or small. Rent, insurance, andsalaries of supervisory personnel are common examples.HERFINDAHL-HIRSCHMAN INDEX (HHI)--A measure of market concentrationthat's used primarily in merger cases. See the Justice/FTC HorizontalMerger Guidelines of 1992, §1.5 (Antitrust Law & EconomicsReview, Vol. 23:2, at 68, 73, n. 17.) This concentration measureis calculated by summing the squares of the individualmarket shares of all competing firms there. Thus a market consistingof only 4 firms with shares of 30%, 30%, 20%, and 20% has an HHIof 2600 (30 x 30 + 30 x 30 + 20 x 20 + 20 x 20 = 900 + 900 + 400+ 400 = 2600). The HHI ranges from a high of 10,000 (a single-firmmonopolist) to a number approaching zero (an atomistic marketwith, say, hundreds of very small firms). "Moderate"concentration is said to begin with an HHI of 1000 and "high"concentration at 1800. Id., pp. 69-70. The latter is roughly approximatedby a top-4-firm share of around 50%.HOMOGENEOUS PRODUCT--A market situation in which the outputof one seller is indistinguishable from that of the market's othersellers, i.e., no seller is able to convince the buyers that hisproduct is sufficiently different (superior) that they shouldbe willing to pay even a penny more for it. This is to be contrastedwith the successfully "differentiated" product (seeProduct Differentiation), one that can command a price premium.HORIZONTAL MERGERS--Mergers in which the two firms beingjoined formerly stood in a competitive relationship, i.e., theysold the same or a close substitute product in the same geographicalmarket. See Conglomerate Mergers and Vertical Mergers.INTERDEPENDENCE--See Oligopoly.JOINT PROFIT MAXIMIZATION--A situation in which a smallnumber of large firms in an industry or market, recognizing their"oligopolistic interdependence," succeed in raisingthe price to the level that a profit-maximizing monopolist (singlefirm) would have selected. At that point, the total industry profitis at an absolute maximum, in the sense that any other price,either higher or lower, would mean less profit to divide amongthemselves.LONG RUN--Generally a period of time sufficient to permitthe construction of new productive capacity in the industry inquestion. It is to be contrasted with the "short run,"a period of sufficient duration to permit a variation in the quantityoffered by established sellers, but too short to permit the constructionof new capacity by either established firms or new entrants. Incalendar time, the long run thus varies from a period of severalyears in some very heavy manufacturing industries to perhaps onlya few weeks in certain service or distributive trades that requireno specialized factors, that can be entered with, say, hired facilitiesand personnel diverted from other trades.MARGINAL COST--The cost of producing one additional unit.If the total cost of producing 10 units is $50, and if the totalcost of producing 11 units is $54, then marginal cost at thatlevel of output is $4. This is to be distinguished from "average"cost, the total dollar cost incurred during some relevant periodof time, divided by the total number of units produced in thatperiod. Here, for example, the average cost is approximately $4.91($54 total cost, divided by 11 units), or 91¢ more than themarginal cost. The one includes Fixed Cost (overhead), the otherdoes not. "Constant" marginal costs, the absence ofvariation at different output levels, indicates the absence ofboth economies and diseconomies of scale in that output range.MARGINAL EFFICIENCY OF CAPITAL--The return or yield fromincremental investment dollars. In general, business enterprisesare expected to continue investing in new plant and equipmentas long as the returns they anticipate from each additional projectexceed the going interest rate. Thus, the businessman who hasthree new projects under consideration, these promising a yieldof 10%, 7%, and 4%, respectively, is expected to go ahead withthe first two if the going rate of interest is 6%, but to putthe third one on the shelf until the interest rate falls (to,say, 3.9%).MARGINAL FIRMS--Firms that, because of higher per-unitcosts (relative inefficiency) or other disadvantages, are ableto continue in business only because, and so long as, the generalmarket price of the product is above the competitive level. Thus,if intensified rivalry among the more efficient firms forced themarketwide price to the competitive floor, the marginal firmswould by definition be forced out of production. Such firms arethought to have considerable competitive significance in somemarkets, however, in that their presence, and their propensityto increase their output continuously as price rises, puts a ceilingon the price that the larger, more efficient firms would otherwisebe free to charge. See Competitive Fringe.MARGINAL REVENUE--The addition or gain to a firm's revenue(sales receipts) from producing one additional unit, i.e., thedifference between the total receipts from the sale of "x"units and from the sale of "x + 1" units. In the caseof firms in a perfectly competitive industry, marginal revenueis the same as price; in imperfectly competitive markets, it isalways less than price. Thus, if an oligopolist can sell 5 unitsat $10 each, but can sell 6 units at only $9 each, his marginalrevenue from the sales of the 6th unit (the difference betweenthe $50 he got from the 5 and the $54 he got from the 6) is only$4, or $5 less than the price he got for each of the 6,including the 6th one itself. The significance of this phenomenais that such a firm, aware of the revenue loss it has to incuron the earlier units in order to sell such additional units,is thus also aware that its profits can be increased by restrictingoutput and thereby maintaining the price at a higher level thanthat a group of competitive firms would have been induced to reach.MARKET--An area in which a group of sellers of some commodity,product, or service and its close substitutes compete for thepatronage of a common group of buyers. A market thus has two dimensions,one geographical, the other "product." In general, itis said that two geographical areas, or two "products,"do in fact constitute separate "markets" if the one'sprice changes have no substantial effects on the other'ssales volume. See Cross-Elasticity of Demand.MONOPOLY PRICE--The price that maximizes the monopolist'stotal profit, considering both price and volume. In general, amonopolist taking over a previously competitive industry wouldfind that profits could be increased by reducing his output below,and raising his price above, the level selected by those competingfirms. Ultimately, however, a point is reached where the gainin profit from raising the price by one more penny wouldbe more than offset by the loss of volume it would cause.Hence the monopoly price is not the "highest" pricethat can be got, but simply the most profitable one; higher pricescan almost always be charged, but it is irrational to do so ifthe profit drain from the loss in volume more than offsets theprofit gain from the higher per-unit price.MONOPOLY PROFITS--Returns over and above a normal or competitiverate (see Normal Profit). Roughly synonymous terms are "excessprofit" and "economic profit." In economics, theterm "costs" (see Costs) includes a normal or competitivereturn on the entrepreneur's investment (and compensation forhis services), with any additional profits above that level beingby definition excess or supracompetitive returns.MONOPSONY--A market with only a single buyer, the buying-sidecounterpart of Monopoly (a single firm on the selling side). Justas the monopolist finds it profitable to restrict output belowthe competitive level in order to raise the price it can chargeto supracompetitive heights, so the monopsonist finds it profitableto restrict its purchases--to buy fewer units than would havebeen purchased by a group of competing buyers under similar conditions--andthereby depress the price it has to pay below the competitivelevel, i.e., below that which a group of competing buyers wouldhave offered.NONCOMPETITIVE PRICE--A price that exceeds that which thenatural forces of competition would have established in a fullycompetitive market. See Competitive Price and Monopoly Price.NORMAL PROFIT--In general, a rate of profit that is sufficient,but just sufficient, to induce the firms in an industry to continueproducing and offering the product in question. A lower rate wouldcause some of the established firms to leave, a higher one wouldcause new firms to enter. See Condition of Entry. A normal profitis also one that, in the absence of entry barriers, would be ultimatelyestablished in an industry by the normal forces of competition,e.g., 8% after taxes on invested capital. If there are no barriers,new firms are expected to continue entering and expanding outputuntil prices and profits fall to the competitive norm. Shouldtoo many enter and their "excess" output force pricesand profits below that competitive level, exists would start andcontinue until those norms were restored.OLIGOPOLY--A market structure characterized by "fewness"of sellers, as distinguished from Atomism ("many" sellers)and Monopoly (a single seller). Given a situation in which thereare only a few sellers, a phenomenon called "oligopolisticinterdependence" is expected. Whereas the individual firmin an atomistic industry has such a small share of aggregate industrysales that nothing it can do will perceptibly influence the overallmarketwide price (e.g., the withdrawal of its entire supply fromthe market would not affect that market price), the individualfirm in an oligopolistic industry is, by definition, sufficientlylarge that any substantial change in its output volumewill have a perceptible effect on the overall market-wideprice--and hence on the volume of sales, and price received, byeach of its rivals. The latter are thus expected to notice thesechanges, recognize their source, and take appropriate measuresto protect their respective interests.A price decrease, for example, will normally prove unprofitablefor the price-cutter. The others will promptly match his lowerprice, thus removing any incentive for buyers to switch suppliers.With his market share unchanged, but price now at a lower level,the price-cutter's profits are presumably lower than before. Similarly,a failure to go along with a price increase will generally proveunprofitable, since the others will quickly drop back to protecttheir market share if there's a holdout still selling at the lowerprice, the result being that the holdout gets no increase in hismarket share and foregoes a higher per-unit price that all couldhave had if he had gone along with the change. By a series ofsuch adjustments, rational oligopolists are expected to eventuallyarrive at the price level that will maximize their joint profits,i.e., the industry's profit-maximizing price level, thesame price as that a single-firm monopolist would charge.The possibility of this result actually being reached is dependenton other factors, however, particularly on (1) whether the industryin question belongs to the Tight Knit or Loose subcategory ofoligopoly, that is, whether its concentration ratio is very highor only moderate, and on (2) whether its entry barriers are highenough to permit the exercise of that pricing power without inducingnew entry. See Barriers to Entry.OPPORTUNITY COSTS--The amount that a given resource (e.g.,dollar of capital) could have earned in its next best employment.For example, if savings banks are paying 5% interest on depositedfunds, then, in calculating the total "cost" of usingthose funds for any purpose, the owner must include that 5% inforegone interest. As an amount that he would have received hadhe not elected to use the money for this other purpose, it isone of the true "costs" of that project.OPTIMUM SIZE--That particular size of plant or firm thatpermits production and sale at the lowest possible real cost (indollars of capital and man-hours of labor), given the existingstate of technology. See Economies of Scale.PERFORMANCE--The ultimate economic results that are saidto be produced by the conduct patterns prevailing in an industry.Those end results are of four general types: (1) "Efficiency"in production and selling (firms and plants of optimum or minimum-costscale, no excess capacity, no excess selling or promotional costs,no monopoly profits); (2) technological "progressiveness"(no suppression of new inventions and innovations); (3) economic"stability" (maximum employment of labor and plant capacitywithout inflation); and (4) economic justice or "equity"in the distribution of income (competitive returns to labor, capital,etc.). See also Structure and Conduct.POTENTIAL COMPETITION--Additional firms that are expectedto enter the market in question under certain circumstances, e.g.,those that would be expected to appear if established firms inan oligopolistic market raised their prices above the competitiveand entry-forestalling levels, thus making actual entry profitablefor those outsiders. A large part of the competitive significanceof potential competition is that the presence of firms known tobe considering entry causes the established firms to keep theirprices lower than they would have otherwise been kept inorder to forestall actual entry by those firms and thus preventthe enlarged capacity (and still lower prices) their entry wouldbe expected to bring. A lessening of this potential competition(as by certain kinds of mergers) thus implies higher prices. SeeCondition of Entry.PRODUCT DIFFERENTIATION--The distinguishing of substituteproducts from one another by advertising and the like. Whereasbuyers of a homogeneous product regard the output of any particularseller as identical in all respects to that of all other producersof that product, the seller of a "differentiated" productenjoys a favored position over its rivals, in that the buyersconsider it a superior product and are willing to pay a "premium"price for it rather than accept the substitutes offered by thoserivals. Since new entrants must frequently accept a lower pricethan established firms are able to get for a product of equalquality and cost, this disadvantage is said to constitute a "barrierto entry," one that permits established firms to charge asupracompetitive price without attracting new entry. See Conditionof Entry.PRODUCT HOMOGENEITY--A market situation in which the buyersof a product consider the output of producer X identical in allrespects to that of producer Y, and hence will not consent topay even a penny more in order to get the one rather than theother. In general, this situation is relatively common in themarkets for industrial products, those that are virtually "fungible"(e.g., steel, cement, etc.) and are purchased by expert commercialbuyers capable of evaluating with considerable accuracy any claimeddifferences. The opposite situation, Product Differentiation,is more common in consumer markets; there, the buyer (consumer),being relatively uninformed and generally unable to inform himselfas to the relative merits of complex products, can often be persuadedthat the identical products of firms X and Y are in fact "different,"or that a featured difference is "worth" more than itactually cost, a situation that permits the exercise of monopolypower.PROFIT-MAXIMIZING PRICE--The price that yields the sellerthe largest net profit (revenue minus costs), i.e., the most profitablecombination of price, cost, and volume. See generally MonopolyPrice.PROFIT MAXIMIZATION--The principle of adjusting price and/oroutput volume in such a way as to earn the largest possible profits.This is said to be accomplished by continuing to increase productionup to the point where the cost of the last unit of output (seeMarginal Cost) just equals the additional revenue received bythe firm from selling that additional unit of output (MarginalRevenue). This is the profit maximizing output since (a) profitswould be reduced by producing still another unit (the extracost would exceed the extra revenue) and (b) profits would similarlybe reduced by failing to produce that last unit (the extracost is slightly less than the extra revenue).RELEVANT MARKET--The area in which the sellers of a productand its close substitutes compete for the patronage of a commongroup of buyers. See Market.SECULAR CHANGE--A movement over time.SHORT RUN--A period of time that permits an increase ordecrease in current production volume with existing capacity,but one that is too short to permit enlargement of that capacityitself (e.g., the building of new plants, training of additionalworkers, etc.). See Long Run.STATIC-EQUILIBRIUM--A theoretical position of "rest"in a market, as the price mechanism momentarily brings supplyand demand into balance at some specific price-volume combination.It is an equilibrium position in the sense that any other combinationwould unbalance supply and demand (create either a shortage ora scarcity) and hence set in motion self-correcting forces. Itis a static position in that it refers to a "frozen"instant in time, the theoretical moment in which supply and demandare supposedly in exact equality; in the real world, of course,supply and demand are in a constant state of flux, with only ageneral "tendency" or movement toward, not actual realization,of an equilibrium position.STRUCTURE--The environmental or institutional featuresof a market that condition or influence the kind of behavior orconduct that the individual firms in it must follow in order tomaximize their profits. The most significant of these structuralfeatures are said to be a market's Concentration (number and sizedistribution of firms) and its Condition of Entry.SUBSTITUTE PRODUCTS--Products that are "reasonablyinterchangeable" with each other in buyers' eyes. If twoproducts are sufficiently "close" substitutes that changesin the price of one cause substantial changes in the volume ofsales of the other, they are said to belong in the same RelevantMarket. If, however, they are only "remote" substitutes,i.e., if a change in the price of one has little or no effecton the other's sales volume, then they are in different markets.See Cross Elasticity of Demand.TIGHT-KNIT OLIGOPOLY--A market structure so highly concentratedthat prices are expected to be significantly above, and outputsignificantly below, the competitive norm. In general, empiricalstudies suggest that this result is to be expected when the fourlargest sellers have 50% or more of the sales in a market or whenthe eight largest have 70% or more. See Oligopoly.VARIABLE COSTS--Total costs, less all "fixed"or overhead costs (see Fixed Costs). Variable costs are thosethat "vary" with the volume of output (e.g., labor hoursand raw material), increasing as production rises, decreasingas production volume contracts. Because of their relationshipto output volume, they are subject to the day-to-day control ofthe firm, whereas fixed or overhead costs remain constant in theshort-run. (In the long-run, however, all costs are "variable"_thefirm can "vary" even its major production facilities,either expanding by building new plants or, at the other extreme,going out of business entirely.) |
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