ANTITRUST LAWS--Laws designed to combat monopolies ("trusts") and
other devices to suppress competition. In the U.S., the individual states, as
inheritors of the English common law (which condemned a number of these
practices), were the pioneers in the anti-monopoly efforts of the late 1800s and
many have their own antitrust statutes today. Their lack of success in dealing
with such powerful combinations as Rockefeller's Standard Oil (90% of U.S. oil
refining at the turn of the century) led to the passage of the first federal
antitrust law, the Sherman Antitrust Act of 1890, 15 U.S.C. 1. This was followed
by the enactment of the Clayton Act, 15 U.S.C. 12, and the Federal Trade
Commission Act, 15 U.S.C. 41, both passed in 1914.
The Sherman Act contains two substantive provisions. Its Sec. 1 declares
illegal contracts and conspiracies in restraint of trade and its Sec. 2
prohibits monopolization and attempts to monopolize. The Clayton Act, as later
amended by the Robinson-Patman Price Discrimination Act, 15 U.S.C. 13 (1936) and
the Celler-Kefauver Anti-Merger Act, 15 U.S.C. 18 (1950), deals with four
business practices: price discrimination (Sec. 2); exclusive dealing and tying
arrangements (Sec. 3); mergers (Sec. 7); and interlocking directorates (Sec. 8).
The Federal Trade Commission Act, as amended, contains only one substantive
provision (Sec. 5): "Unfair methods of competition in [interstate] commerce, and
unfair or deceptive acts or practices in commerce, are hereby declared
unlawful."
BARRIERS TO ENTRY--The condition of entry into an industry or 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
former higher per-unit costs (e.g., royalty payments for the use of patents) or
require them to accept lower per-unit prices for goods of the same quality
(e.g., buyer preferences for established "brands"). These barriers are measured
in terms of how much the established firms can raise the price above a
competitive level (see Normal Profit) without inducing new firms to enter. Thus,
if existing technology would permit a firm of optimum efficiency to produce and
sell product A for $1.00 per unit (including a normal or competitive return on
its investment), and if the established firms in the industry are in fact
charging $1.15 without inducing the entry of new firms, then there is said to be
a "15% entry barrier." The condition of entry into an industry or market is
generally classified as either (a) "easy" (no barriers at all); (b)
"ineffectively impeded" (barriers too low to make deliberate entry-forestalling
worth while); (c) "effectively impeded" (barriers high enough to make
entry-forestalling profitable); or (d) "barricaded" (barriers high enough that
the full "monopoly" price can be charged without inducing entry by new firms).
Entry-forestalling refers to the selection of a price that, while above the
competitive floor, is not quite high enough to make the market attractive to the
most likely potential entrants.
BEHAVIOR--A term sometimes used synonymously with Conduct, or with
both Conduct and Performance. (See also Structure.) The former refers to the
basis on which the firm makes its price and output decisions, the most
significant being its use or non-use of (a) collusion, either express or tacit
(as in tight-knit oligopolies), and (b) predatory and exclusionary practices.
The term performance refers 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 by ordinary
accounting methods. See Cost and Business Profit.
BUSINESS PROFIT--Total revenue or gross receipts of the firm, minus
total money expenses or costs (see Business Costs). Revenue is simply the number
of units sold, multiplied by the average unit price.
COLLUSIVE OLIGOPOLY--A market situation in which the sellers have
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 their need to use actual collusion as a coordinating
device; "oligopolistic interdependence" is frequently sufficient in the
tight-knit oligopolies. (See Oligopoly.) In the looser oligopolies, however, the
larger number of firms and their smaller individual market shares greatly
weakens that sense of interdependence and hence increases the difficulty of
maintaining coordinated prices except through the cartel apparatus of
agreements, sanctions, and so forth.
COMPETITIVE PRICE--One that exceeds minimum accounting costs
(production and distribution) by an amount that permits the seller a normal
return on the capital invested in the enterprise (e.g., 8% after taxes) but no
more (see Normal Profit). Defined another way, it is the price that would
prevail in the absence of any barriers to entry. The
principle involved is that, if entry is completely unrestricted, any price that
permits more than a normal profit will immediately attract new entrants; their
entry will then continue until all monopoly profits have been competed away and
the price restored to its former (competitive) level.
CONCENTRATION--The number and size distribution of the firms in an
industry or market, most commonly expressed in terms of a "concentration ratio,"
i.e., the percentage of production or sales accounted for by some relatively
small number of firms, generally the "four largest" and the "eight largest." The
competitive significance of these ratios is said to lie in the proposition that
they are correlated with price levels--the higher the concentration ratio, the
further the price is expected to rise above the competitive floor and toward the
monopoly ceiling. The mechanism through which this is thought to be accomplished
is what is called "oligopolistic interdependence" (see Oligopoly). In substance,
as the number of firms decline and the size of their respective shares
increases, the incentive to 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 follow from the
various types of industry Structure, particularly the basis on which an
industry's members make their basic price and output decisions, e.g., whether
they set their respective prices and volumes independently or collusively. In
general, there is said 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 includes not 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, being
essential to production and distribution, are no different in this respect than
the services of the various other input factors that go into the final product;
just as the "wages" of the production worker and the "interest" of the
moneylender are costs that society must incur if it is to continue receiving its
accustomed goods and services, so it must also pay the entrepreneur for his
services in organizing production if it is to continue receiving them. The
minimum level, of course, is the one that is sufficient but just sufficient to
induce him to continue his efforts.
CROSS-ELASTICITY OF DEMAND--The effect of a change in the price
of one product on the sales volume of some other product. Thus, if an
increase in the price of butter causes a significant increase in the volume of
oleomargarine sold, then there is significant cross-elasticity of demand between
those two products.
DEMAND--The number of units of a product that can be sold at each
price the entrepreneur might elect to charge. Demand is generally thought of in
terms of a "schedule," a matching of prices and volumes in parallel columns. The
"law of demand" postulates generally that volume is an inverse function of
price--that the higher the price, the lower the volume consumers will buy. Thus,
the entrepreneur might learn by experimentation that he can sell 10,000 units at
$10 each but that, if he raises his price to $12, he can only sell 9,000 units.
DISECONOMIES OF SIZE--A situation in which larger firm size produces
not lower but higher per-unit costs. Typically, a firm's per-unit costs
fall fairly sharply at first as output increases, then level off and remain
fairly "flat-bottomed" over a mid-size range, and finally climb upward as market
power is achieved. See also Economies of Scale.
DOMINANT FIRM--A market situation in which all sellers except one have
an insignificant individual share of the market's total sales and hence behave
as perfect competitors, while that one large firm, being aware of its ability to
influence the marketwide price by varying its individual output, selects its
price and output 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 selects automatically determines both how
much its small competitors will be able to sell and thus how much it gets for
itself. (Given the inability of the small competitive firms to influence the
marketwide price, they can only expand their volume up to the point where their
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 share generally rests on a price advantage of some
sort (see e.g., Product Differentiation) vis-a-vis these numerous smaller firms.
ECONOMIES OF SCALE--The savings that can be realized through the use
of producing and selling facilities of optimum size. The optimum size is defined
as that which, given the existing state of technology, permits the lowest
possible per-unit costs. The competitive significance of this factor is said to
lie in the fact that, if a firm must have a relatively large share of its market
in order to achieve this optimum or minimum-cost volume, then that market cannot
be both efficient and competitive at the same time. Thus, if the volume required
for minimum per-unit costs amounts to a market share of 25%, then that market
can only support four optimum-size firms; to break them up and produce eight (or
sixteen) firms would presumably produce more competition but it would also
produce higher per-unit costs, i.e., more of society's scarce resources would be
required in order to produce the same output. Empirical studies are said to
indicate that this is a relatively rare phenomenon in American industry--that,
in all but a few industries, firms reach the optimum size at a point well below
that at which significant oligopolistic interdependence sets in.
EFFICIENCY--Efficient allocation of resources means generally that the
total or aggregate output of a nation's economy could not 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
certain relationship between the "cost" and the "price" of all products sold.
Thus, if a certain number of dollars and man-hours of labor produce a product
that sells for $100 in a competitive industry, but could produce a monopolized
product that consumers are willing to pay $125 for, then the country's total
output is $25 less than it could be. This is the increase in consumer
satisfaction (utility) that could be obtained at no additional real cost
(dollars of capital and man-hours of labor) by simply transferring those
particular resource units from the competitive to the monopolized industry. The
economist therefore concludes that the country is inefficiently using its
resources when it allows monopolists to block that transfer, i.e., when it
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 quantity
demanded of a product, divided by the percentage change in the price
charged. Thus, if a 1% price raise resulted in a sales drop of more than
1%, it would be said that the demand for a product was "elastic"; if sales fell
by less than 1%, its demand would be termed "inelastic." See also Demand.
ENTRY--The entry into an industry or market of a new and independent
decision-maker, a firm that had not previously operated there, plus the
construction of new productive capacity.
ENTRY-INDUCING RETURN--A profit rate that is sufficient to induce one
or more potential entrants to actually enter an industry or market and construct
new productive capacity. See Normal Profit.
EQUILIBRIUM--A theoretical position of "rest" in a market, as the price
mechanism momentarily brings supply and demand into balance at some specific
price-volume combination. See Static-Equilibrium.
FIXED COSTS--Costs that are incurred by the firm whether it produces
or not, and that remain constant in amount whether its production volume is
large or small. Rent, insurance, and salaries of supervisory personnel are
common examples.
HERFINDAHL-HIRSCHMAN INDEX (HHI)--A measure of market concentration
that's used primarily in merger cases. See the Justice/FTC Horizontal Merger
Guidelines of 1992, §1.5 (Antitrust Law & Economics Review, Vol.
23:2, at 68, 73, n. 17.) This concentration measure is calculated by summing the
squares of the individual market shares of all competing firms there.
Thus a market consisting of only 4 firms with shares of 30%, 30%, 20%, and 20%
has an HHI of 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-firm monopolist) to
a number approaching zero (an atomistic market with, 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 approximated by a
top-4-firm share of around 50%.
HOMOGENEOUS PRODUCT--A market situation in which the output of one
seller is indistinguishable from that of the market's other sellers, i.e., no
seller is able to convince the buyers that his product is sufficiently different
(superior) that they should be willing to pay even a penny more for it. This is
to be contrasted with the successfully "differentiated" product (see Product
Differentiation), one that can command a price premium.
HORIZONTAL MERGERS--Mergers in which the two firms being joined
formerly stood in a competitive relationship, i.e., they sold the same or a
close substitute product in the same geographical market.
INTERDEPENDENCE--See Oligopoly.
JOINT PROFIT MAXIMIZATION--A situation in which a small number of
large firms in an industry or market, recognizing their "oligopolistic
interdependence," succeed in raising the price to the level that a
profit-maximizing monopolist (single firm) would have selected. At that point,
the total industry profit is at an absolute maximum, in the sense that any other
price, either higher or lower, would mean less profit to divide among
themselves.
LONG RUN--Generally a period of time sufficient to permit the
construction of new productive capacity in the industry in question. It is to be
contrasted with the "short run," a period of sufficient duration to permit a
variation in the quantity offered by established sellers, but too short to
permit the construction of new capacity by either established firms or new
entrants. In calendar time, the long run thus varies from a period of several
years in some very heavy manufacturing industries to perhaps only a few weeks in
certain service or distributive trades that require no specialized factors, that
can be entered with, say, hired facilities and 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 total cost of producing 11 units
is $54, then marginal cost at that level of output is $4. This is to be
distinguished from "average" cost, the total dollar cost incurred during some
relevant period of time, divided by the total number of units produced in that
period. Here, for example, the average cost is approximately $4.91 ($54 total
cost, divided by 11 units), or 91¢ more than the marginal cost. The one includes
Fixed Cost (overhead), the other does not. "Constant" marginal costs, the
absence of variation at different output levels, indicates the absence of both
economies and diseconomies of scale in that output range.
MARGINAL EFFICIENCY OF CAPITAL--The return or yield from incremental
investment dollars. In general, business enterprises are expected to continue
investing in new plant and equipment as long as the returns they anticipate from
each additional project exceed the going interest rate. Thus, the businessman
who has three new projects under consideration, these promising a yield of 10%,
7%, and 4%, respectively, is expected to go ahead with the first two if the
going rate of interest is 6%, but to put the third one on the shelf until the
interest rate falls (to, say, 3.9%).
MARGINAL FIRMS--Firms that, because of higher per-unit costs (relative
inefficiency) or other disadvantages, are able to continue in business only
because, and so long as, the general market price of the product is above the
competitive level. Thus, if intensified rivalry among the more efficient firms
forced the marketwide price to the competitive floor, the marginal firms would
by definition be forced out of production. Such firms are thought to have
considerable competitive significance in some markets, however, in that their
presence, and their propensity to increase their output continuously as price
rises, puts a ceiling on the price that the larger, more efficient firms would
otherwise be free to charge.
MARGINAL REVENUE--The addition or gain to a firm's revenue (sales
receipts) from producing one additional unit, i.e., the difference between the
total receipts from the sale of "x" units and from the sale of "x + 1" units. In
the case of firms in a perfectly competitive industry, marginal revenue is the
same as price; in imperfectly competitive markets, it is always less than price.
Thus, if an oligopolist can sell 5 units at $10 each, but can sell 6 units at
only $9 each, his marginal revenue from the sales of the 6th unit (the
difference between the $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 phenomena is that such a firm,
aware of the revenue loss it has to incur on the earlier units in order
to sell such additional units, is thus also aware that its profits can be
increased by restricting output and thereby maintaining the price at a higher
level than that 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 the patronage of a
common group of buyers. A market thus has two dimensions, one geographical, the
other "product." In general, it is said that two geographical areas, or two
"products," do in fact constitute separate "markets" if the one's price
changes have no substantial effects on the other's sales volume. See
Cross-Elasticity of Demand.
MONOPOLY PRICE--The price that maximizes the monopolist's total
profit, considering both price and volume. In general, a monopolist taking over
a previously competitive industry would find that profits could be increased by
reducing his output below, and raising his price above, the level selected by
those competing firms. Ultimately, however, a point is reached where the gain in
profit from raising the price by one more penny would be more than offset
by the loss of volume it would cause. Hence the monopoly price is not the
"highest" price that can be got, but simply the most profitable one; higher
prices can almost always be charged, but it is irrational to do so if the profit
drain from the loss in volume more than offsets the profit gain from the higher
per-unit price.
MONOPOLY PROFITS--Returns over and above a normal or competitive rate
(see Normal Profit). Roughly synonymous terms are "excess profit" and "economic
profit." In economics, the term "costs" (see Costs) includes a normal or
competitive return on the entrepreneur's investment (and compensation for his
services), with any additional profits above that level being by definition
excess or supracompetitive returns.
MONOPSONY--A market with only a single buyer, the buying-side
counterpart of Monopoly (a single firm on the selling side). Just as the
monopolist finds it profitable to restrict output below the competitive level in
order to raise the price it can charge to supracompetitive heights, so the
monopsonist finds it profitable to restrict its purchases--to buy fewer units
than would have been purchased by a group of competing buyers under similar
conditions--and thereby depress the price it has to pay below the competitive
level, i.e., below that which a group of competing buyers would have offered.
NONCOMPETITIVE PRICE--A price that exceeds that which the natural
forces of competition would have established in a fully competitive 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 continue producing and
offering the product in question. A lower rate would cause some of the
established firms to leave, a higher one would cause new firms to enter.
A normal profit is also one that, in the absence of entry
barriers, would be ultimately established 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 output until prices
and profits fall to the competitive norm. Should too many enter and their
"excess" output force prices and profits below that competitive level, exists
would start and continue 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 there are only a few sellers, a phenomenon called
"oligopolistic interdependence" is expected. Whereas the individual firm in an
atomistic industry has such a small share of aggregate industry sales that
nothing it can do will perceptibly influence the overall marketwide price (e.g.,
the withdrawal of its entire supply from the market would not affect that market
price), the individual firm in an oligopolistic industry is, by definition,
sufficiently large that any substantial change in its output volume will
have a perceptible effect on the overall market-wide price--and hence on
the volume of sales, and price received, by each of its rivals. The latter are
thus expected to notice these changes, recognize their source, and take
appropriate measures to protect their respective interests.
A price decrease, for example, will normally prove unprofitable for the
price-cutter. The others will promptly match his lower price, 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
prove unprofitable, since the others will quickly drop back to protect their
market share if there's a holdout still selling at the lower price, the result
being that the holdout gets no increase in his market share and foregoes a
higher per-unit price that all could have had if he had gone along with the
change. By a series of such adjustments, rational oligopolists are expected to
eventually arrive at the price level that will maximize their joint profits,
i.e., the industry's profit-maximizing price level, the same price as
that a single-firm monopolist would charge.
The possibility of this result actually being reached is dependent on other
factors, however, particularly on (1) whether the industry in question belongs
to the Tight Knit or Loose subcategory of oligopoly, that is, whether its
concentration ratio is very high or only moderate, and on (2) whether its entry
barriers are high enough to permit the exercise of that pricing power without
inducing new 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 deposited funds, then, in calculating the total
"cost" of using those funds for any purpose, the owner must include that 5% in
foregone interest. As an amount that he would have received had he not elected
to use the money for this other purpose, it is one of the true "costs" of that
project.
OPTIMUM SIZE--That particular size of plant or firm that permits
production and sale at the lowest possible real cost (in dollars of capital and
man-hours of labor), given the existing state of technology. See Economies of
Scale.
PERFORMANCE--The ultimate economic results that are said to 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-cost scale, 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 capacity without 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 expected to enter the
market in question under certain circumstances, e.g., those that would be
expected to appear if established firms in an oligopolistic market raised their
prices above the competitive and entry-forestalling levels, thus making actual
entry profitable for those outsiders. A large part of the competitive
significance of potential competition is that the presence of firms known to be
considering entry causes the established firms to keep their prices lower
than they would have otherwise been kept in order to forestall actual entry by
those firms and thus prevent the enlarged capacity (and still lower prices)
their entry would be expected to bring. A lessening of this potential
competition (as by certain kinds of mergers) thus implies higher prices.
PRODUCT DIFFERENTIATION--The distinguishing of substitute products
from one another by advertising and the like. Whereas buyers of a homogeneous
product regard the output of any particular seller as identical in all respects
to that of all other producers of that product, the seller of a "differentiated"
product enjoys a favored position over its rivals, in that the buyers consider
it a superior product and are willing to pay a "premium" price for it rather
than accept the substitutes offered by those rivals. Since new entrants must
frequently accept a lower price than established firms are able to get for a
product of equal quality and cost, this disadvantage is said to constitute a
"barrier to entry," one that permits established firms to charge a
supracompetitive price without attracting new entry.
PRODUCT HOMOGENEITY--A market situation in which the buyers of a
product consider the output of producer X identical in all respects to that of
producer Y, and hence will not consent to pay even a penny more in order to get
the one rather than the other. In general, this situation is relatively common
in the markets for industrial products, those that are virtually "fungible"
(e.g., steel, cement, etc.) and are purchased by expert commercial buyers
capable of evaluating with considerable accuracy any claimed differences. The
opposite situation, Product Differentiation, is more common in consumer markets;
there, the buyer (consumer), being relatively uninformed and generally unable to
inform himself as to the relative merits of complex products, can often be
persuaded that the identical products of firms X and Y are in fact "different,"
or that a featured difference is "worth" more than it actually cost, a situation
that permits the exercise of monopoly power.
PROFIT-MAXIMIZING PRICE--The price that yields the seller the largest
net profit (revenue minus costs), i.e., the most profitable combination of
price, cost, and volume. See generally Monopoly Price.
PROFIT MAXIMIZATION--The principle of adjusting price and/or output
volume in such a way as to earn the largest possible profits. This is said to be
accomplished by continuing to increase production up to the point where the cost
of the last unit of output (see Marginal Cost) just equals the additional
revenue received by the firm from selling that additional unit of output
(Marginal Revenue). This is the profit maximizing output since (a) profits would
be reduced by producing still another unit (the extra cost would exceed
the extra revenue) and (b) profits would similarly be reduced by failing
to produce that last unit (the extra cost is slightly less than the extra
revenue).
RELEVANT MARKET--The area in which the sellers of a product and its
close substitutes compete for the patronage of a common group of buyers. See
Market.
SECULAR CHANGE--A movement over time.
SHORT RUN--A period of time that permits an increase or decrease in
current production volume with existing capacity, but one that is too short to
permit enlargement of that capacity itself (e.g., the building of new plants,
training of additional workers, etc.). See Long Run.
STATIC-EQUILIBRIUM--A theoretical position of "rest" in a market, as
the price mechanism momentarily brings supply and demand into balance at some
specific price-volume combination. It is an equilibrium position in the sense
that any other combination would unbalance supply and demand (create either a
shortage or a scarcity) and hence set in motion self-correcting forces. It is a
static position in that it refers to a "frozen" instant in time, the theoretical
moment in which supply and demand are supposedly in exact equality; in the real
world, of course, supply and demand are in a constant state of flux, with only a
general "tendency" or movement toward, not actual realization, of an equilibrium
position.
STRUCTURE--The environmental or institutional features of a market
that condition or influence the kind of behavior or conduct that the individual
firms in it must follow in order to maximize their profits. The most significant
of these structural features are said to be a market's Concentration (number and
size distribution of firms) and its Condition of Entry.
SUBSTITUTE PRODUCTS--Products that are "reasonably interchangeable"
with each other in buyers' eyes. If two products are sufficiently "close"
substitutes that changes in the price of one cause substantial changes in the
volume of sales of the other, they are said to belong in the same Relevant
Market. If, however, they are only "remote" substitutes, i.e., if a change in
the price of one has little or no effect on the other's sales volume, then they
are in different markets. See Cross Elasticity of Demand.
TIGHT-KNIT OLIGOPOLY--A market structure so highly concentrated that
prices are expected to be significantly above, and output significantly below,
the competitive norm. In general, empirical studies suggest that this result is
to be expected when the four largest sellers have 50% or more of the sales in a
market or when the eight largest have 70% or more. See Oligopoly.
VARIABLE COSTS--Total costs, less all "fixed" or overhead costs (see
Fixed Costs). Variable costs are those that "vary" with the volume of output
(e.g., labor hours and raw material), increasing as production rises, decreasing
as production volume contracts. Because of their relationship to output volume,
they are subject to the day-to-day control of the firm, whereas fixed or
overhead costs remain constant in the short-run. (In the long-run, however,
all costs are "variable"_the firm can "vary" even its major production
facilities, either expanding by building new plants or, at the other extreme,
going out of business entirely.)
