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Abstract & Brief
This is a brief introduction to the private sector of the U.S. economy that deals with only privately owned firms and organizations as well as the competitive structure that bonds them up. Government, which makes the public sector, falls out of its discussion. In the this text, you will be familiarized with regular legal forms of business firms, including corporate and non-corporate; and the industrial(related to the market of a particular good or service) structure wherein firms of the same kind compete.
Table of Contents
A business firm is an organization under one management set up to make profits for its owners by producing goods or services that can be sold in the market. The terms business, firm, and enterprise are usually used interchangeably. A firm can operate on more than one plants, which are physical structures or locations capable of independent production with some degree of autonomy . If a firm uses its plants for production of several stages of a single product, it is a vertical integration; if it produces heterogenous products using different plants, it is called a conglomerate.
Non-corporate forms include the proprietorship and the partnership that are owned by persons. Legally speaking, a person here can either be a natural one like we are, or a juridical one that might be a corporation or an estate.
The proprietorship, or sole proprietorship, is the least complex, most basic and common form a business can take, because:
Proprietorships are not necessarily small, some are large firms with many employees and hired managers. And they are by far the most popular form of business organization in the United States. The Internal Revenue Service estimates that there are over 13.5 million proprietorships in the United States. Needless to say, most of these proprietorships are small; while they make up over 70% of all businesses, they account for only about 6% of total sales.
A partnership is a proprietorship with more than one proprietor. Basically, it is no different from a proprietorship, only the number of owners expands to include more. When two or more people agree to share the profits and the responsibility of a business, a partnership is formed. Similarly, no legal process is required to start this kind of business. The partners just get together to sign an agreement entailing that who pays what part of the costs or how profits shall be divided and so forth.
In both proprietorships and partnerships, the owners are personally liable for the firm's debts and there's no limit to the liability, that means, both their personal and business assets are exposed to it. Each partner is both jointly and separately liable for all the debts of the partnership. Suppose you own one third of a partnership that goes out of business with a debt of $30,000, you owe your creditors $10,000, and so does each of your partners. But if your partners skip town, you owe the entire $30,000.
Corporate firm, or corporation, is a powerful alternative to sole proprietorships and partnership. It is a business formally established under legal terms and granted an identity separate from its owners. A corporation is a juridical person, different from the natural persons of its owners. By incorporating, owners of the firm create an organization that can legally own property, incur debts, and is otherwise granted many of the legal rights of a citizen, including the right to engage in litigation. To establish a corporation, a corporate charter must be obtained from a state government by paying a certain fee and filing appropriate forms.
Upon the establishment of a corporation, shares of stock(certificates of partial ownership) are issued and either sold or assigned. A corporation is owned by its shareholders, who are in a sense partners in the success or failure of the firm. Shareholders differ from simple partners, however, in that the liability of shareholders is limited to the amount they paid for the stock and that the federal government and all but four states levy profit taxes on corporations. They do not levy profit taxes on proprietorships and partnerships.
After part of a corporation's profit is paid to government as profit taxes, part of the shareholders' dividends, that is, the share of profits they receive from the corporation, are also paid to government as personal income taxes. This is different from a proprietorship or a partnership wherein income is levied only once.
The term industry is used to refer to groups of competing firms that produce similar products in the market. As is rather loosely defined, an industry can either be in a broad sense or in a narrow sense, depending on the issue in question, and it is possible for a firm to be an intersection of several industries. For example, a company that provides tyres is part of the rubber industry and the car industry at the same time. A package company that provides packaging service to a milk company is part of the milk industry, the dairy industry, the food industry and in turn the agricultural industry.
Industrial structure, or market structure describes the important characteristics of a market. The features that jointly determine if a market is a perfectively competitive market, a monopolistic market, a monopolistically competitive market, or a oligopolic market include:
A perfectly competitive market is characterized by the following:
If these conditions are present in a market, individual participants will have no control over the price, which is solely determined by market supply and demand. Buyers and sellers are all price takers in that they have no ability at all to affect it but to "rake", or accept it as given. They are free to buy and sell, though, whatever amount that may maximize their interest. Nevertheless, no matter how much they buy or sell, their relative smallness to the market gives them no chance to have perceptible effect on the market price.
These characteristics limit the decisions open to competing firms and simplify the analysis of competitive behavior, but such a market as this can never be found in reality. In real world, firms do have some degree of control over price and the products vary; new firms cannot enter a market freely because of natural barrier or artificial barrier. Monopoly is one of them.
Monopoly is just the opposite of perfect competition, a market or industry in which only one firm produces a product for which no close substitutes exit. Monopolists are subject to market discipline, but they can set prices based on the quantity it will supply. For it to remain the sole provider of a good or service, a monopolist must find some way to prevent new entrants from entering the industry. Sometimes it is the government that erects the barriers to entry. They grant an exclusive license to one producer on a particular product. For example, in the United States, such public utilities as electric power and gas companies, most of which are privately owned, have traditionally been shielded by the government from competition. Sometimes, however, a producer is endowed with an exclusive access to a natural resource that can be found nowhere else. If a jewelry company in South Africa acquires a unique deposit of blue diamonds, it becomes a natural monopolist of the blue diamonds in the world.
A market in which many sellers compete to sell a basically the same but differentiated product, and in which new entry is possible is referred to as a monopolistically competitive market. A monopolistic competition has features as following:
The music industry is a good example of monopolistically competitive market where every band has a unique name and style, and entry is relatively inexpensive. Thinking of each band as a small firm, competing fiercely in an attempt to distinguish its products from the others. When a band grows prevalent and very successful, it is more like a monopoly, however, in that no "close" substitutes for U2, or the Beatles exist.
Another important market structure between perfect competition and monopoly is oligopoly, a market dominated by just a small number of firms(oligopolists) and entry of new competitors is difficult or impossible. More than half the market output is made by three or four major firms. Many industries, such as steel, automobile, and oil, are oligopolistic. Their products may be either differentiated or standardized. Since an oligopolistic market has only a few firms, each firm must consider the effect of its own policies and strategies.
Let's take a look at the characteristics of oligopolistic markets:
As for why some industries evolve into an oligopolistic market structure and some don't, reasons are not very clear. Anyway, an oligopolistic market structure can often be traced back to some form of barrier to entry, such as economies of scale, legal restrictions, brand names built up by years of heavy budget advertising, or control over an essential resource.
The four main kinds of market organization in the United States are summarized as below:
|Number of firms||Products||Firms have price-setting power||Free entry||Characteristics||Example|
|Perfect competition||Many||Homogeneous||No||Yes||Price competition only||Wheat farmer|
|Monopolistic competition||Many||Differentiated||Yes, but limited||Yes||Price and quality competition||Music industry|
|Monopoly||One||Unique||Yes||No||Constrained by market demand only||Electric power|