D2.Eco.5.9-12: The Consequences of Competition in Specific Markets
In plain English: D2.Eco.5.9-12 is the C3 Framework economics indicator for grades 9-12 that asks students to describe the consequences of competition in specific markets. Students trace how rivalry among sellers changes prices, output, costs, quality and the fortunes of firms, workers and places, and explain why the results differ from one market to another, using railroads in the 1880s, generic drugs and an airline route.
Describe the consequences of competition in specific markets.
C3 Framework for Social Studies (NCSS) · Dimension 2: Applying Disciplinary Concepts and Tools · Discipline: Economics · Exchange and Markets · Official standard
D2.Eco.5.9-12 asks students to describe the consequences of competition in specific markets. Competition is rivalry among sellers (or among buyers) for the same customers. Its usual consequences are lower prices, more output, pressure to cut costs and better quality or new products; but it can also bring losses and exits for weaker firms, unstable prices, and effects on workers, suppliers and other places. Which consequences appear, and how strongly, depends on the market: how many sellers there are, how easily new ones can enter, how much of the cost is fixed, and how similar the products are.
Students study three markets. An economist's 1889 account of railroad rate wars (Source 1) shows competition in an industry with huge fixed costs. A 2019 Food and Drug Administration analysis (Source 2 and Diagram 1) measures how generic drug prices fall as more makers enter. An invented airline route (Source 3) lets students calculate gains and losses for travelers, airlines and a nearby town. Activities include a jigsaw consequences matrix, a rate-war simulation and a structured academic controversy on a historical question.
Learning Objectives
By the end of this lesson, students will be able to:
Describe the consequences of competition for buyers, sellers, workers and communities in a specific market
Explain how fixed costs, ease of entry and the number of sellers shape the consequences of competition
Analyze government data on prices and the number of competitors, including its limits
Calculate price, quantity and revenue changes that follow the entry of a new competitor
Evaluate a historical source's account of competition, separating the author's evidence from his judgments
Prior Knowledge Required
Students should already be comfortable with:
Describing how competition helps determine prices and wages D2.Eco.4.6-8
Evaluating how much competition exists among sellers and buyers in a market D2.Eco.4.9-12
Integrating quantitative data with information in a text RH.9-10.7
"A second coffee shop opens across the street from the only coffee shop near your school. List everyone who could be affected, and say whether each one is likely to gain or lose."
Collect answers in two columns on the board. Push past customers and the two owners: baristas (more jobs, or fewer hours at the first shop), milk and bean suppliers, the landlord, the bakery next door, even the shop's other locations. Tell students that D2.Eco.5.9-12 asks them to describe these consequences in specific markets, and that the answer changes with the market.
Direct Instruction15-20 minutes
Consequences of competition: what usually happens, and what it depends on
Consequence
What happens
Depends on
Prices and output
Rivals undercut each other to win buyers, so prices fall and more is sold
How many sellers there are and how easily new ones can enter
Costs and efficiency
Firms that cannot cut costs lose customers; resources move to lower-cost producers
Whether firms can lower costs, and how fast
Quality, variety and innovation
Sellers also compete with better products, service and new ideas
Whether buyers can tell products apart
Profits, exit and consolidation
Profits shrink; weaker firms may close or merge with rivals
Fixed costs and how long firms can survive losses
Uneven rivalry
Buyers who have several sellers get better deals than buyers who have only one
Where the competing sellers are located and whom they serve
Effects beyond the market
Workers, suppliers, nearby businesses and other towns gain or lose
How resources shift between markets
Part 1: The usual consequences. Go through the table. Stress that competition is a process: a new rival changes prices first, then costs, products and which firms survive.
Part 2: Fixed and variable costs. A variable cost rises with each unit sold (fuel for one more trip, materials for one more product). A fixed cost stays the same whatever the amount sold (loan interest, rent, the track itself). When fixed costs are large, a firm in a price war will accept any price above its variable cost rather than lose the sale, because the fixed costs must be paid either way. That can push prices far below the full cost per unit, which is why some industries swing between price wars and agreements to stop competing. Work these examples.
Prices and output after entry (invented)
A town's only bike shop charges $60 for a tune-up and does about 80 tune-ups a month. A second shop opens and charges $45. The first shop lowers its price to $48. Together the shops now do about 130 tune-ups a month. By what percent did the first shop's price fall, and what happened to the number of tune-ups?
Result: Price: (60 - 48) / 60 = 0.20, a 20% fall. Quantity: 130 - 80 = 50 more tune-ups a month, a 62.5% rise (50 / 80). Riders who already used the first shop pay less, and 50 more tune-ups a month get done, some for riders who skipped tune-ups at $60.
The price floor in a price war (invented)
A ferry company's fuel and crew cost $300 per crossing (variable cost). Its boat loan and dock rent cost $500 per crossing on average (fixed cost), so its full cost is $800 per crossing. A rival ferry starts a price war. What is the lowest revenue per crossing the company should accept in the short run rather than stop sailing?
Result: Anything above $300. At $450 per crossing the company loses $800 - $450 = $350 per crossing compared with full cost, but if it stops sailing it still owes the $500 of fixed cost and loses $500. Sailing loses $150 less. In the long run, it must cover all $800 or leave the market.
Costs and exit (invented)
Three bakeries sell sandwich bread. Their full costs per loaf are $2.40, $2.90 and $3.30. A new bakery's arrival pushes the market price from $3.60 to $3.00. What happens to each?
Result: At $3.00: the first earns $3.00 - $2.40 = $0.60 a loaf, the second $3.00 - $2.90 = $0.10, and the third loses $3.30 - $3.00 = $0.30 a loaf. The third must cut costs or close. Buyers pay $0.60 less per loaf, but the third bakery's owner and workers may lose income.
Quality instead of price (invented)
In a town where one company offered home internet, its basic plan gave 100 megabits per second for $55 a month to 9,000 households. A second provider arrived offering 300 megabits for $55. A year later, the first company raised its basic plan to 300 megabits at the same price and kept 6,000 households; the new provider had 4,500. What were the consequences?
Result: Price stayed at $55, but speed tripled (300 / 100 = 3). The first company lost 9,000 - 6,000 = 3,000 households, a third of its customers. Total households served rose from 9,000 to 10,500, a gain of 1,500. Competition worked through quality, not price.
Teacher tip. Students often list only the good consequences for buyers. Ask for at least one consequence for sellers, one for workers and one for people outside the market. Also ask what is special about the market: a bike shop and a railroad face very different cost structures, so competition plays out differently.
Guided Practice15-20 minutes
Railroads in the 1870s and 1880s. Context note: by the late 1880s the United States had about 150,000 miles of railroad, the figure given in the same 1889 book. Rival lines often connected the same big cities, such as Chicago and New York, while most small towns were served by only one line. In 1887 Congress passed the Interstate Commerce Act, which banned rate agreements called pools and created the Interstate Commerce Commission. Arthur T. Hadley, an economist at Yale who later became its president, wrote Source 1 two years later. He criticizes some railroad practices and also doubts that government ownership would fix them. Read Source 1 aloud. Glossary: "conveyance" (a way of carrying goods), "freight-agent" (the railroad employee who set shipping rates), "rolling-stock" (locomotives and cars), "chargeable to" (caused by), "fixed charges" (costs that do not change with the amount of traffic, such as interest on loans), "trade centres" (big commercial cities), "water competition" (rivalry from boats on rivers, lakes and canals), "trunk-line" (a main line between major cities), "accede" (agree), "speculator" (a person who buys and sells to profit from price changes), "pretence" (a false show).
1[...] If A was charged 30 cents while his competitor B was paying only 20 cents for the same service, he was worse off than when they were both paying a dollar; and the fact that no other means of conveyance could be found to do the work for less than a dollar simply put A all the more completely at the mercy of the railroad freight-agent. [...]
2[...] The expenses of a railroad are of two kinds. Some, like train and station service, locomotive fuel, or repairs of rolling-stock, are pretty directly chargeable to the different parts of the traffic. [...] But there is another class of items, known as fixed charges, that do not vary with the amount of business done. Interest on bonds must be paid, whether the volume of traffic be large or small. [...] In order that the railroad as a whole may be profitable, the fixed charges must be paid somehow. [...] But if, for any reason, a particular piece of business cannot or will not pay its share of the fixed charges, it is better to secure it at any price above the bare expense of loading and hauling, without regard to the fixed charges. For if the business is lost, these charges will run on just the same, without any added means of meeting them.
[...]
3The points which got the benefit of the lowest rates were the large trade centres, which had the benefit of competing lines of railroad, and often of water competition also. The threat to ship goods by a rival route was the surest way of making a freight-agent give low rates. The result was that the growth of such places was specially stimulated. [...] There was a time when cattle were carried from Chicago to New York at a dollar a car-load; and many other instances, scarcely less marked, could be cited from the history of trunk-line competition. The fact was, that in an active railroad war freight-agents would generally accede to a demand for reduced rates at a competing point, whether well founded or not, and would almost always turn a deaf ear to similar demands from local shippers, however strongly supported by considerations of far-sighted business policy.
4But this was not the worst. Inequalities between different places might after some hardship correct themselves; differences of treatment between individuals could not be thus adjusted. [...] The fluctuation of rates was first taken advantage of by the unscrupulous speculator. Often, if he controlled large sources of shipment, he might receive the benefit of a secret agreement by which he could obtain lower rates than his rivals under all circumstances. [...] Sometimes, where one competitor was overwhelmingly strong, the pretence of secrecy was thrown aside, and the railroad companies so far forgot their public duties as almost openly to assist one concern in crushing its rivals. [...]
[...]
5[...] Where the government has obtained control of all the railroads of the country, and made such arrangements with the water-routes as to render competition impossible, the abuses have vanished, because there was no longer any conceivable motive to continue them. But this was the result of the monopoly, not of the State ownership; and the advantage was purchased by a sacrifice of all the stimulus of competition toward the development of new facilities.
Arthur T. Hadley, The Railway in Its Business Relations (Source 1: railroad competition in the 1870s and 1880s) (1889). Public domain (published 1889). Source text.
Sourcing. Prompt: who wrote Source 1, when, and for what kind of reader? What might shape his view? Teacher note: an academic economist writing in 1889, in a book for general readers about railways. He had studied railroad economics closely, so his view rests on expertise, but he was also writing during a heated national debate about regulating railroads.
Two kinds of cost. Prompt: paragraph 2 names two kinds of railroad expenses. List one example of each from the paragraph, then give a modern example of each for an airline. Teacher note: costs tied to particular traffic (train service, fuel, repairs to rolling-stock) and fixed charges (interest on bonds). For an airline: jet fuel and crew pay for one flight; airplane loan payments and headquarters rent.
At the mercy of the freight-agent. Prompt: in paragraph 1, why does Hadley say shipper A was "all the more completely at the mercy of the railroad freight-agent"? Teacher note: no other way of shipping cost less than a dollar, so A had no alternative to the railroad. When a seller has no rival, the buyer must take whatever terms it sets.
Fact or judgment. Pairs mark two sentences in paragraphs 3-5 that report events and two that express Hadley's judgment. Keep the lists for Activity 3.
Independent Practice15 minutes
Generic drugs today. Context note: when a brand-name drug's patent runs out, other companies may sell generic copies with the same active ingredient after the Food and Drug Administration (FDA) approves them. Source 2 is a 2019 report by two FDA economists, a US government work. It compares generic prices with the brand price from before any generic entered, for drug products whose first generic arrived in 2015-2017. Students read Source 2 and Diagram 1 on their own. Terms: "AMP" (average manufacturer price, what drug makers report receiving), "invoice price" (what pharmacies paid wholesalers), "median" (the middle value), "wholesale markup" (the amount a distributor adds to the price it paid).
1Greater competition among generic drug makers is associated with lower generic drug prices, according to a new analysis using two different sources for wholesale prices. [...]
[...]
2We find that for products with a single generic producer, the generic AMP is 39% lower than the brand AMP before generic competition, compared to a 31% reduction using invoice prices. With two competitors, AMP data show that generic prices are 54% lower than the brand drug price before generic competition, compared to 44% when calculated using invoice-based drug prices. With four competitors, AMP data show that the generic prices are 79% less than the brand drug price before generic entry, compared to 73% when calculated using invoice-based drug prices. With six or more competitors, generic prices using both AMP and invoice prices show price reductions of more than 95% compared to brand prices. Combining all competition groups, we find median price of generics relative to brands using AMP is 40% for the drugs in our sample, while the median price ratio using invoice prices is 49%. Most of this difference appears driven by wholesale markups, which we discuss below.
[...]
3Some limitations apply to this work. [...] Analysis of samples over more years and with generic products that have been on the market for longer periods may lead to different results because they would include more observations of small markets where total revenue is insufficient to attract many competitors. Fourth, the prices that we analyze reflect sales by manufacturers (AMP) and purchases by pharmacies (IQVIA NSP) and not prices paid by consumers, either insured or uninsured. Differences in consumer prices may vary according to whether and how they are insured and other factors. Finally, very low generic prices may in some instances be related to drug shortages, a topic that FDA has analyzed separately.
Ryan Conrad and Randall Lutter, U.S. Food and Drug Administration, Generic Competition and Drug Prices: New Evidence Linking Greater Generic Competition and Lower Generic Drug Prices (Source 2) (2019). US government work (17 U.S.C. 105). Source text.
Students answer on their own: (1) Describe the pattern in Diagram 1 in one sentence. (2) Using AMP data, by how many percentage points does the discount grow from two generic makers to four? (3) Give one reason why each added maker would push the price down further. Teacher answers: (1) The more generic makers sell a drug, the further its price falls below the brand price, on both measures. (2) 79 - 54 = 25 percentage points. (3) A new maker can win pharmacy orders only by offering a lower price than the makers already selling, and they must answer with cuts of their own. Collect the answers; the quiz returns to Source 2.
Closure10-15 minutes
A new airline on the route. Introduce Source 3, an invented scenario about a low-cost airline entering a route. Students read it on their own; it is used in the quiz and the homework.
1Invented scenario, written for this page. Lakeport is a fictional city of about 400,000 people. For years only one airline, Northline Airways, flew nonstop between Lakeport and Denver. Northline ran 3 round trips a day, charged an average round-trip fare of $420, and carried about 150,000 round-trip passengers a year on the route.
2Two years ago SkyValue, a low-cost airline, began 2 round trips a day on the route at $189. SkyValue charges extra for checked bags and seat choice, and its planes have less legroom. Northline cut its average fare to $260 and added a fourth daily round trip. In the first full year of competition, the route carried 260,000 round-trip passengers: 100,000 on SkyValue and 160,000 on Northline.
3The changes reached beyond the two airlines. Lakeport's hotels reported more weekend visitors from Denver, and the airport hired 30 more workers. To free a plane for the extra Denver flight, Northline ended its one daily flight between Lakeport and Cedar Bluff, a town of 18,000 people 150 miles away. Cedar Bluff travelers now drive to Lakeport to fly.
4This year SkyValue reported that the route was losing money and said it may cut back to one round trip a day. Northline has not announced any fare changes. Some Lakeport business leaders worry that fares will rise again if SkyValue leaves.
SVHS (invented scenario written for this page), Competition Comes to the Lakeport-Denver Route (Source 3: invented scenario). Original passage written for this page.
Exit ticket: Pick one of the three markets. Name one consequence of competition that helped some group and one that hurt another group, and name one feature of that market that explains why.
Teacher note on the sources: Source 1 is quoted exactly as published in 1889 and gives one economist's view during a national debate about railroads; it does not name the shippers or companies it describes. Source 2 is real federal data, and its FDA authors list the limits of their price measures. Source 3 is invented, and its airlines and towns are fictional. The lesson takes no position on current drug-pricing, airline or antitrust policy; students describe consequences, and the rubric scores evidence and reasoning.
Differentiation Strategies
For Struggling Students
Give a consequences matrix with rows for buyers, sellers, workers and other places and columns for each source, with the first cell filled in as a model
Read Source 1 one paragraph at a time and give a one-sentence summary of each before any questions
Provide a formula card for percent change and for revenue (price x quantity)
For Advanced Students
Find the passage in Source 1 where Hadley explains why railroad rates have "no natural standard" (in the full chapter) and connect it to fixed costs
Read the FDA's limitation about small markets and explain why a drug with few patients might attract only one or two generic makers
Write a short comparison of how competition worked in a market with high fixed costs (railroads, airlines) and one with low fixed costs (generic tablets)
Assessment Guidance
What to Look For
Strong answers name the market, the competing sellers and a specific consequence for an identified group, support it with a quotation, a number or a calculation, and explain which feature of the market (fixed costs, number of sellers, ease of entry, location) shaped it. Watch for three weaknesses: listing only lower prices; treating every consequence as good or every consequence as bad; and ignoring the limits of the evidence, such as a small or short sample, or an author's judgment presented as fact.
02
Classroom Activities
3 Activities
1
Consequences Matrix Jigsaw
20 minGroups of 3 (jigsaw)
Each member of a home group becomes the expert on one source. Experts meet with the other experts on the same source, then return home and teach it, so the group can fill in one consequences matrix for all three markets.
The Matrix
Rows: buyers; the competing sellers; workers; suppliers, nearby businesses or other places; quality, variety and new products. Columns: Source 1 (railroads), Source 2 (generic drugs), Source 3 (the airline route). Each filled cell names a group, a consequence and the evidence (a quotation or a number).
What a Complete Matrix Includes
At least one gain and one loss in every column.
At least one consequence for a group outside the market itself.
A one-sentence note under each column naming the feature of that market (fixed costs, number of sellers, location, ease of entry) that best explains its consequences.
Cells left empty where a source gives no evidence, marked "no evidence" instead of guessed.
Discussion Questions
Which consequence appears in more than one market? Why might that be?
Which column has the most empty cells, and what evidence would fill them?
Modification for a Shorter Class
Assign each group only two sources and fill in two columns; the class completes the third column together.
2
Rate War Simulation
20 minGroups of 3: two railroads and one shipper
Two railroads compete for one shipper's 30 cars of freight a week. Each railroad has a cost of $20 per car for loading and hauling and fixed charges of $300 a week that it owes whether it carries any cars or not. The game shows why rates can fall far below full cost when fixed costs are large.
Rules
The starting rate is $50 a car. Each round, both railroads secretly write a rate in whole dollars on a price card.
The shipper sends all 30 cars to the lower rate. If the rates are equal, each railroad gets 15 cars.
Each railroad's profit for the round is cars x (rate - $20) - $300. Record it on the tally sheet.
Play 6 rounds. Railroads may not talk to each other until the teacher announces "pool talks" before round 5.
Numbers for the Teacher
Both at $50: each gets 15 cars and earns 15 x $30 - $300 = $150.
One cuts to $45 while the other stays at $50: the cutter earns 30 x $25 - $300 = $450, and the other earns -$300.
Both at $21: each earns 15 x $1 - $300 = -$285, which is still better than carrying nothing (-$300). This is Hadley's point in paragraph 2 of Source 1.
A pool at $50 with 15 cars each gives each railroad $150 a round. Remind students that the Interstate Commerce Act of 1887 made such pools illegal.
Discussion Questions
What happened to rates over the first four rounds, and why did neither railroad want to stop cutting?
Who gained from the rate war, and what would happen to the railroads if it lasted for years?
Why might the law ban pools even though they help the railroads?
Pairs argue each side of a historical question, using only Source 1, then switch sides and finally try to reach a group statement. The question: "According to the evidence in Source 1, did competition among railroads in the 1870s and 1880s do more good than harm?"
Steps
Pair 1 prepares the case for "more good"; pair 2 prepares "more harm." Each pair finds at least three pieces of evidence (4 minutes).
Each pair presents for 2 minutes while the other pair takes notes and then restates the case to the presenters' satisfaction.
Pairs switch sides and add one new piece of evidence each (4 minutes).
The group drops its assigned roles and writes a two-sentence statement that it can agree on, or a statement of where it still disagrees.
Scoring
Score the reasoning, not the side: 2 points for accurate evidence, 2 for explaining how the evidence supports the claim, 1 for fairly restating the other pair's case. Either position can earn full credit.
Modification for English Learners
Give each pair a sentence-frame card: "Source 1 shows that competition ___, because Hadley writes '___'."
03
Diagrams & Visual Aids
1 diagrams
Diagram 1: Generic Prices Compared with the Brand Price, by Number of Generic Makers (FDA Data, 2015-2017 Entries)
Drawn to scale from the percentages in Source 2: how far below the brand price (before generic entry) the generic price was, by the number of generic makers. Dark bars use average manufacturer prices (AMP); lighter bars use pharmacy invoice prices. FDA reports only "more than 95%" for six or more makers, so those bars are drawn at 95%. Source: U.S. Food and Drug Administration, Generic Competition and Drug Prices (December 2019).
04
Homework Assignment
~30 min
D2.Eco.5.9-12 Homework: Consequences of Competition in Three Markets
Directions: Part 1 uses invented examples and markets you know. Part 2 uses Sources 2 and 3 in the lesson plan. Answer in complete sentences and show your calculations.
Part 1: Competition in Other Markets (Problems 1-3)
Invented example: a bus company runs one daily bus between two cities. Fuel, driver pay and tolls cost $900 per trip; the bus loan and garage cost $600 per trip on average. A rival cuts fares, and the company's ticket revenue falls to $1,100 per trip. (a) Should the company keep running the bus in the short run? Compare its loss if it runs with its loss if it stops. (b) What must happen in the long run for the company to stay in this market?
Invented example: a large discount store opens in a town that has two family-owned hardware stores. Describe one likely consequence of the new competition for each of these groups: shoppers, the two family stores, their employees, and the town's other businesses. Mark each consequence as a gain or a loss.
Choose a market you know well (for example, streaming music, fast food or video games). Describe two consequences of competition in that market: one about price and one about quality, variety or new products. Name one feature of the market that helps explain each.
Part 2: Using the Sources (Problems 4-6)
Use Source 2's AMP results. Invented example: a brand-name drug cost $80 a month before generic entry. (a) Find the generic price with one, two and four generic makers. (b) Using the invoice figure, what would pharmacies have paid with one generic maker? (c) Explain why the two answers for one maker differ.
Use Source 3. (a) What was SkyValue's ticket revenue on the route in its first full year? (b) How much less did Northline's 160,000 passengers pay in total than they would have paid at the old $420 fare? (c) Give one reason SkyValue might lose money on the route even with 100,000 passengers.
Write a paragraph of 6-8 sentences describing the consequences of competition in one of the three markets in the lesson (railroads, generic drugs or the airline route). Describe consequences for at least three different groups, support each with evidence, and name one feature of the market that shaped the consequences.
Rubric
Criterion
Full Credit (2 pts)
Partial Credit (1 pt)
No Credit (0 pts)
Consequences
Specific gains and losses for several named groups
Consequences for one group only, or only gains
No consequences described
Market Features
Explains how fixed costs, number of sellers, entry or location shaped the result
Names a feature without explaining it
No feature named
Evidence and Math
Accurate quotations and data; Problems 1, 4 and 5 correct with work
Loose evidence or an arithmetic slip
No evidence; work missing
Judgment
Problem 6 weighs gains against losses and notes limits of the evidence
One-sided judgment
No judgment
05
Quiz: 20 Questions
Interactive, with answers
Instructions
Questions 1-6 and 16 use Source 1 (Hadley, 1889) in Guided Practice. Questions 7-11 and 18 use Source 2 (FDA, 2019) and Diagram 1 in Independent Practice. Questions 12-15 and 17 use Source 3, the invented airline scenario in Closure. Questions 19 and 20 use more than one source. Your score updates as you answer, and Reset quiz clears everything.
Multiple choice: pick an option to check it. Short answer: write your answer, then reveal the model answer.
0 of 20 answered · 0 correct
Question 1 of 20 · Multiple Choice
Use Hadley's reasoning in Source 1, paragraph 2. Loading and hauling one shipment costs a railroad $60, and the railroad would like the shipment to add another $40 toward fixed charges. A rival line offers to carry it for $70. What is the lowest price at which the railroad should still take the shipment rather than lose it?
Answer: D
Hadley says it is "better to secure it at any price above the bare expense of loading and hauling," because "if the business is lost, these charges will run on just the same." Above $60, each dollar helps pay fixed charges. Choice A would lose the shipment to the $70 rival. Choice B treats the rival's price as a floor, but the railroad can go lower and still gain. Choice C confuses the fixed-charge share with the cost of the trip itself.
Question 2 of 20 · Multiple Choice
According to Source 1, paragraph 3, which places got the lowest railroad rates?
Answer: A
Hadley writes that the lowest rates went to "the large trade centres, which had the benefit of competing lines of railroad, and often of water competition also." Choice B is the opposite: local shippers met "a deaf ear." Choice C has no competing water route, which was a source of low rates. Choice D ignores the whole point of the paragraph, that rates were unequal.
Question 3 of 20 · Multiple Choice
In Source 1, paragraph 1, shipper A paid 30 cents while competitor B paid 20 cents for the same service. A's rate was what percent higher than B's?
Answer: B
The gap is 30 - 20 = 10 cents, and 10 / 20 = 0.5, so A paid 50% more than B. Choice A treats the 10-cent gap as a percent. Choice C divides by A's rate instead of B's (10 / 30). Choice D gives A's rate as a percent of B's (30 / 20 = 150%), not the percent higher.
Question 4 of 20 · Multiple Choice
Why does Hadley mention, in paragraph 3, that cattle were once carried from Chicago to New York "at a dollar a car-load"?
Answer: A
The sentence is one of the "instances ... from the history of trunk-line competition" showing how far rates fell where lines competed. Choice B is not in the source; a dollar a car-load suggests a loss, not a profit. Choice C contradicts the next sentence about "a deaf ear" to local shippers. Choice D reverses Hadley: he says freight-agents ignored "far-sighted business policy."
Question 5 of 20 · Multiple Choice
According to Source 1, paragraph 4, how did the special-rate system affect individual shippers?
Answer: B
Hadley writes that a shipper who "controlled large sources of shipment" might get "a secret agreement by which he could obtain lower rates than his rivals under all circumstances," and that railroads sometimes helped "one concern in crushing its rivals." Choice A is what Hadley wishes for, not what happened. Choice C reverses who benefited. Choice D is not in the source.
Question 6 of 20 · Multiple Choice
In paragraph 5, Hadley describes countries where the government controlled all the railroads and made competition impossible. What does he say was given up?
Answer: C
Hadley says the abuses vanished, but "the advantage was purchased by a sacrifice of all the stimulus of competition toward the development of new facilities." Choice A is what was gained, since the abuses vanished. Choice B is backward: the government held full control. Choice D misreads the arrangements made "with the water-routes."
Question 7 of 20 · Multiple Choice
Invented example using Source 2's AMP results: a brand-name drug cost $200 a month before any generic entered. About what would the generic cost with four generic makers?
Answer: D
With four competitors the AMP is 79% below the brand price, so the generic costs 21% of $200: 0.21 x 200 = $42. Choice A, $158, is 79% of $200, the discount rather than the price. Choice B, $54, uses the invoice figure for four makers (27% of $200). Choice C, $92, uses the two-maker AMP figure (46% of $200).
Question 8 of 20 · Multiple Choice
Using AMP data in Source 2, by how many percentage points did the discount from the brand price grow when a drug went from one generic maker to two?
Answer: A
The discount went from 39% to 54%, and 54 - 39 = 15 percentage points. Choice B is the one-maker discount itself, not the growth from one maker to two. Choice C is the two-maker generic price as a share of the brand price (100 - 54). Choice D adds the two discounts.
Question 9 of 20 · Multiple Choice
Source 2 reports smaller discounts with invoice prices than with AMP. According to the authors, what mostly explains the difference?
Answer: B
The report says, "Most of this difference appears driven by wholesale markups": invoice prices include what distributors add, while AMP does not. Choice A is not in the excerpt. Choice C is wrong because both measures cover the same competition groups. Choice D is wrong because both measures compare with the brand price from before generic entry.
Question 10 of 20 · Multiple Choice
Which statement about Source 2's prices is supported by its list of limitations?
Answer: A
The authors write that the prices "reflect sales by manufacturers (AMP) and purchases by pharmacies (IQVIA NSP) and not prices paid by consumers, either insured or uninsured." Choice B claims more than the data can show. Choice C ignores that the sample covers first generic entries in 2015-2017. Choice D contradicts the report's use of pharmacy purchases.
Question 11 of 20 · Multiple Choice
Source 2 says that "very low generic prices may in some instances be related to drug shortages." Which possible consequence of competition does this point to?
Answer: C
If competition drives a price so low that making a drug no longer pays, some makers may stop, and supply can fall short. Choice A is about brand prices, which the sentence does not discuss. Choice B is not in the source. Choice D runs the opposite way: very low prices mean thin profits, which discourage entry.
Question 12 of 20 · Multiple Choice
In Source 3, by about what percent did Northline's average round-trip fare fall after SkyValue entered?
Answer: C
The fare fell from $420 to $260, a drop of $160, and 160 / 420 is about 0.38, or 38%. Choice A is SkyValue's fare compared with the old fare ((420 - 189) / 420 is about 55%). Choice B is the new fare as a share of the old one (260 / 420). Choice D treats the $160 drop as a percent.
Question 13 of 20 · Multiple Choice
In Source 3, by about what percent did the total number of round-trip passengers on the route rise in the first full year of competition?
Answer: B
Passengers rose from 150,000 to 260,000, a gain of 110,000, and 110,000 / 150,000 is about 0.73, or 73%. Choice A divides by the new total (110,000 / 260,000). Choice C treats the gain in thousands as a percent. Choice D is the old total as a share of the new one (150,000 / 260,000).
Question 14 of 20 · Multiple Choice
Use Source 3. How did Northline's yearly ticket revenue on the route change from before SkyValue entered to the first full year of competition?
Answer: D
Before: 150,000 x $420 = $63.0 million. After: 160,000 x $260 = $41.6 million. The change is $63.0 - $41.6 = $21.4 million less. Choice A forgets that Northline carried 10,000 more passengers (150,000 x $260 = $39.0 million). Choice B counts all 260,000 route passengers as Northline's. Choice C uses SkyValue's $189 fare for Northline's passengers (160,000 x $189 = $30.24 million).
Question 15 of 20 · Multiple Choice
In Source 3, what happened to Cedar Bluff as a result of competition on the Lakeport-Denver route?
Answer: C
Northline "ended its one daily flight between Lakeport and Cedar Bluff" to free a plane for the extra Denver flight, so Cedar Bluff travelers now drive to Lakeport. Competition in one market pulled resources out of another. Choice A is not in the scenario. Choice B describes Lakeport's airport. Choice D confuses SkyValue's Lakeport-Denver fare with service from Cedar Bluff.
Question 16 of 20 · Short Answer
Using paragraphs 2 and 3 of Source 1, explain why competition between two railroads could push rates at a competing point far below the full cost of the service, and why local shippers did not get the same low rates.
Model answer: Most railroad costs were fixed charges, such as interest on bonds, that had to be paid whether a train ran or not. Hadley says it was "better to secure it at any price above the bare expense of loading and hauling," so when two lines fought for traffic at a big trade centre, each kept cutting until rates were barely above the cost of the trip, as when cattle went from Chicago to New York "at a dollar a car-load." Local shippers on a single line had no rival route, so freight-agents "would almost always turn a deaf ear" to them and charged them more to cover the fixed charges. Rubric: 1 point for the fixed-charge reasoning with evidence; 1 point for explaining why rates differed between competing and local points.
Question 17 of 20 · Short Answer
Use Source 3. Calculate the average round-trip fare paid by all passengers on the route in the first full year of competition, and compare it with the $420 fare before SkyValue arrived. Show your work.
Model answer: Weight each fare by its share of the 260,000 passengers: (100,000 / 260,000) x $189 + (160,000 / 260,000) x $260 is about $72.69 + $160.00 = $232.69, or about $233. That is $420 - $233 = $187 less, about 45% lower, so the typical traveler paid much less, though SkyValue passengers also paid extra for bags and seats. Rubric: 1 point for the weighted average (accept $232-$233); 1 point for a correct comparison.
Question 18 of 20 · Short Answer
Source 2 says longer studies would include "more observations of small markets where total revenue is insufficient to attract many competitors." Explain how the consequences of competition could differ for a drug that millions of people take and for a drug that only a few thousand people take.
Model answer: A drug with millions of patients brings in enough revenue to attract many generic makers, so, as Diagram 1 shows, its price can fall to a small fraction of the brand price. A drug with only a few thousand patients may attract one or two makers, because the market is too small to cover the cost of entering, so its price stays much closer to the brand price and supply depends on very few firms. The size of the market shapes how much competition, and therefore how much price cutting, happens. Rubric: 1 point for linking market size to the number of competitors; 1 point for the consequence for prices or supply.
Question 19 of 20 · Short Answer
Describe one consequence of competition that appears in both Source 1 and Source 3. Use evidence from each source.
Model answer: In both markets the benefits of competition were uneven between places. In Source 1 the large trade centres with competing lines got the lowest rates, while local shippers met "a deaf ear." In Source 3 Lakeport travelers got lower fares and more flights, but Cedar Bluff lost its only daily flight when Northline moved a plane to the Denver route. Another acceptable answer is unstable prices: rate wars in Source 1 and a money-losing SkyValue route that may shrink in Source 3. Rubric: 1 point for naming a shared consequence; 1 point for accurate evidence from each source.
Question 20 of 20 · Short Answer
Evaluate this claim: "Competition in a market makes everyone better off." Use evidence from at least two sources and reach a judgment of your own.
Model answer: The claim is too broad. Competition did make many buyers better off: generic prices with four makers were 79% below the brand price in Source 2, and Northline's fare fell from $420 to $260 in Source 3. But some groups lost: Northline's ticket revenue fell, Cedar Bluff lost its flight, local railroad shippers paid more than shippers at competing points in Source 1, and the FDA notes that very low prices may sometimes be linked to shortages. A fair judgment is that competition usually helps buyers in the market but can hurt rival firms, some workers and places outside the market, and its effects depend on the market's features. Rubric: 1 point for evidence from each of two sources (2 points); 1 point for a reasoned judgment that weighs gains and losses. Students may support or reject the claim; the reasoning earns the credit.
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06
Frequently Asked Questions
10 Questions
What does D2.Eco.5.9-12 mean?
D2.Eco.5.9-12 asks high school students to describe what competition does in particular markets. The full text is "Describe the consequences of competition in specific markets." The key word is specific: students study real markets and explain who gains, who loses and why, instead of reciting that competition is good.
What are the main consequences of competition?
Usually lower prices and more output, pressure on firms to cut costs, and better quality, more variety and new products. Competition can also shrink profits, push weaker firms to close or merge, cause unstable prices in some industries, and shift jobs and resources between places and markets.
Is competition always good for consumers?
Usually, but not always in the same way. Buyers who can choose among several sellers tend to pay less. Buyers in places with only one seller may not share the gains, and rival firms, their workers and nearby towns can lose even when buyers gain. The lesson asks students to look for these differences in evidence.
Why does competition play out differently when fixed costs are high?
A firm with large fixed costs, such as a railroad or an airline, owes those costs whether it sells a lot or a little, so in a price war it is tempted to cut far below its full cost to keep business. That can lead to long price wars, losses, mergers and attempts to agree on prices, which in the United States are generally illegal for competitors.
What is a generic drug, and why does the FDA study generic competition?
A generic drug has the same active ingredient as a brand-name drug and is approved by the Food and Drug Administration after the brand's patent protection ends. The FDA studies generic prices because the number of generic makers is a clear, measurable form of competition, and its reports track how prices change as more makers enter.
Is the data on this page real?
Source 2 and Diagram 1 are real: they come from a December 2019 FDA report, a US government work, on drugs whose first generic entered from 2015 through 2017. Source 1 is a real 1889 text. Source 3 and the worked examples are invented and labeled that way.
How is D2.Eco.5.9-12 different from D2.Eco.4.9-12?
D2.Eco.4.9-12 asks students to evaluate how much competition exists among sellers and buyers in a market. D2.Eco.5.9-12 asks what happens because of that competition. A good sequence measures competition first and then describes its consequences in the same markets.
Which course teaches D2.Eco.5.9-12?
It is usually taught in a high school economics course, often in a unit on market structures. It also fits U.S. history units on the railroads and the Gilded Age, which is why this lesson pairs a historical market with two modern ones.
How do I keep a lesson on competition neutral?
Use evidence from more than one market and more than one point of view, and score reasoning rather than conclusions. Source 1 criticizes both railroad practices and government ownership, and Source 2 lists its own limits. The structured academic controversy in Activity 3 asks students to argue both sides of a historical question, and the lesson takes no position on current policy.
What is a good quick check for D2.Eco.5.9-12?
Give students a short new case, such as a new grocery store opening in a town with one supermarket, and ask for three consequences for three different groups plus one feature of the market that explains them. If they go beyond "prices fall" and support each consequence, they are meeting the indicator.
07
Related Standards
5 standards
These standards connect to D2.Eco.5.9-12: prerequisites to review first, parallel standards at the same level, and next steps that build on it.
Before this lesson
D2.Eco.4.6-8Prerequisite
Describe the role of competition in determining prices and wages in a market economy
Describe intended and unintended consequences of policies to improve market outcomes
Lesson coming soon
Standard text: National Council for the Social Studies (NCSS), The College, Career, and Civic Life (C3) Framework for Social Studies State Standards: Guidance for Enhancing the Rigor of K-12 Civics, Economics, Geography, and History (Silver Spring, MD: NCSS, 2013). NCSS was not involved in the production of this lesson and does not endorse it.
