1.5 perfect competition, imperfectly competitive markets and monopoly Flashcards
monopoly
only one firm in the market
legal monopoly
over 25% market share
e.g. Tesco 29%
3 simplifying assumptions used to model monopolies
only one firm
high barriers to entry
firm is profit maximiser
profit maximiser
where MC+MR
only one firm
100% market share
higher barriers to entry
otherwise new firms join the market
e.g. Microsoft using patents to prevent other firms using similar technology
monopoly barriers to entry
legal barriers
sink costs
internal economies of scale
brand loyalty
how to legal barriers stop new firms entering the marker?
includes patents, copyrights, trademarks
they stop new firms using ideas of incumbent firms
(already in market)
how do sunk costs prevent new firms from entering the market?
money can’t be recovered if firms leaves the market
e.g. specialist machinery and advertising as you can’t resell specialist machinery
high sunk costs increase the cost of failure
if firm enters market and leaves, can’t recover sunk costs
deters new firms from entering
how do internal economies of scale prevent new firms from entering the market?
big firms use internal economies of scale to reduce LRAC
competitive advantage over smaller firms, able to produce much cheaper
how can technical economies of scale prevent new firms from entering the market?
can be used to produce things at a very low cost
small firms can’t afford the machinery
get to keep costs and prices very low creating a high barrier to entry
can’t compete with low prices
how can brand loyalty prevent new firms from entering the market?
strong branding from incumbent firms makes it impossible for new firms to enter the market
e.g. Coca Cola spends lots of money on advertising and when Virgin Cola entered the market it struggled
discontinued completely in 2014
example of brand loyalty causing new firms to fail
e.g. Coca Cola spends lots of money on advertising and when Virgin Cola entered the market it struggled
discontinued completely in 2014
productive efficiency
MC=AC
average total cost is at its lowest
allocative efficiency
welfare is maxmised
MC=AR=price=D
cost to producers of producing good matches price consumers are willing to pay
X-inefficiency
when a firm is producing above its average cost curve for a given level of output
monopolies can get lazy
costs could be higher due to poor management and excessive bonuses
costs of raw materials too high, accidents
dynamic efficiency
AR>ATC, money left over to invest
need supernormal profit to invest in research and development
how changing technology improves a firm’s output potential over time
e.g. how phones went from brick to small
which efficiencies are monopolies?
productively efficient
allocatively inefficient
possibly dynamically inefficient
X-inefficient
natural monopoly
when it’s naturally most efficient if only one firm is in the market
example of natural monopoly
london transport network
would be very inefficient if London had multiple transport network, it’s most efficient to just have one (like TFL)
why do the government support and own monopolies if they are inefficient?
natural monopoly argument
natural monopoly argument
there are high sunk costs
huge internal economies
estimated sunk costs of London’s transport system
estimated at £129bn
another firm to enter market would have to pay high costs
how could TFL use internal economies of scale?
could use technical economies of scale like oyster card and self service ticket machines to reduce amount of workers needed
purchasing economies to buy fuel in bulk and transport trains and buses at lower costs
minimum efficient scale
where LRAC is at its lowest
constant marginal cost simplification
MC initially decreases because as output increases and more workers are hired, they can specialise, increasing productivity and decreasing marginal cost
but MC will then increase because diminshing marginal returns will decrease productivity, increasing MC
when MC is constant, MC will be a straight line and MC=AC
economists can assume MC is constant
price discrimination
when a firm charges different prices for different consumers for the same good