Reference no: EM132893337

Perfect Competition and Monopoly

Part One:

Debit and Credit Card Industry

When people think of the credit card and debit cardindustry, they think of four main companies: Visa, MasterCard, American Express, and Discover.These companies represent thecredit card network side of the industry.Another side of the industry, the credit card issuers, are far greater in number and exhibit some characteristics of a perfectly competitive market.Credit card issuers are the financial institutions that back consumers' payments.Issuers approve applications and establish credit limits and interest rates.They provide any perks related to the card and collect payments. You can choose cards from over six thousand credit issuers.Think of all the banks and credit unions that offer cards.(Retailer cards are generally backed by a bank.) As of 2019, 70% of the U.S. population had at least one credit card.In fact, many people have multiple cards. Approximately 1.89 billion credit cards are in use in the United States and $3.8 trillion in purchases were charged on credit cards in 2018.Credit cardsall serve a similar function, they provide payment in lieu of cash, and have a similar appearance.Retailers do not look at who issues your card; generally, they are concerned only with the payment going through.As evidenced by the number of credit issuers, it is easy to enter the credit origination market.Further, with so many issuers, companies can sell their accounts and exit the market with ease.The large number ofissuersensure interest rates remain competitive.Further, interest rate incentives and other purchasing incentives are known, can easily be evaluated by consumers, and often are similar if not identical between cards.

Use the information above to analyze how the credit card industry fits the perfectly competitive model.

1. Think about the following categories: number of firms, type of product, pricing, market knowledge, entry and exit in the market, and the elasticity of the product.For each category, state the ways the credit card issuing industry is consistent with the characteristics of perfect competition and what ways it is not.

2. Do some research and use your own experience to cite some ways the credit card industry has changed over the past ten years.

3. In light of your answer to number two, has the credit card industry become more or less competitive?Does it still fit the characteristics of perfect competition or is it moving away from being perfectly competitive?

4. Does the fact that the credit card issuing industry meets some criteria of perfect competition benefit society? Why or Why not?

Part Two:

De Beers and the Diamond Industry

Unlike water, diamonds have no practical useand, while diamonds are not as abundant as water, the earth does have a vast quantity of diamonds within it. However, diamonds are significantly more expensive than water.Why is this?The high price of diamonds is due primarily to the genius of the De Beers Company.The founders of the De Beers Company understood the principle of scarcity.Scarcity increases value, and, in the case of the diamond industry, it ensures better pricing control in the market.By maintaining a virtual monopoly on the diamond market for much of the 20th century De Beers was able to control supply and thus create a sense of scarcity and value that made the diamond business extremely profitable.

The De Beers Consolidated Mines formed when two of the largest diamond-mining operations joined in 1888.For much of its history, the De Beers Company controlled 85 percent of the market.The strength of De Beers came through their expansion from mining to distribution in the diamond market.This included the creation of the Diamond Clearinghouse, where De Beers evaluated diamonds before distributing them to retail markets.Therefore, because of jewelers' trust of the De Beers valuation process, other mining operations used the De Beers Clearinghouse to distribute their diamonds as well.This allowed the De Beers Company to maintain its control of the diamond market throughout the first part of the 20th century.

In the latter part of the 20th century, things began to change in the diamond market, which led to De Beers losing some of its stronghold on the marketand its market share falling to 65 percent.The expansion of the mining industry and the choice by some mines to break from the cartel played a significant role.De Beers did adapt and continues to be an important player in the diamond market.

1. Think about the following categories: number of firms, type of product, pricing, market knowledge, entry and exit in the market, and the elasticity of the product.For each category, state the ways the diamond industry was consistent with the characteristics of a monopoly market at the beginning of 20th century.

2. Do some research and describe how the diamond market changed in the latter half of the 20th century.

3. Think about your answers in number one and the changes in the diamond industry your research uncovered in number two. Describe any changes to the categories outlined in question one.Be sure to include how these changes shifted the diamond industry away from a monopolistic market.

4. Does the fact that the diamond industry is monopolistic benefit society? Why or Why not?