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
example of price discrimination
e.g. student discounts
in education, poorer elastic students can get scholarships
which consumers are likely to be charged higher prices and why?
consumers with higher income as they are less responsive to a change in price
which consumers are likely to be charged a lower price and why?
lower income consumers as they are more responsive to a change in price (elastic)
3 conditions of price discrimination (monopolies)
market power
information
limit reselling
why do monopolies need market power?
so that the firm has enough market share to change prices without losing all consumers
why do monopolies need information?
they need to know which consumers are elastic and inelastic
why do monopolies need to limit reselling?
it can ruin price discrimination
the firm will lose out on profit as the consumer doesn’t pay the higher price like they are supposed to
real life example of why monopolies need to limit reselling
students can buy student priced tickets and resell them to an adult for a price cheaper than the adult ticket
can be countered with making carrying student IDs compulsory
what does price discriminating increase?
firm’s profits
characteristics of a market
number of firms
concentration ratio
barriers to entry
info available
product differentiation
pricing
what is a firm’s most rational decision?
profit maximisation
MC>MR
perfect competition
opposite of a monopoly
market structure with many buyers and sellers
no barriers to entry or exit
homogenous goods
perfect information
market
where consumers and producers buy and sell, market is huge
Q=millions
firm
represents 1 of just many producers
Q=10s
what does the demand curve of s perfectly competitive market look like and why?
perfectly straight horizontal line
putting price up by just a bit means firm will lose all consumersha
what are perfectly competitive firms?
price takers
perfectly competitive firms in the short run
losses
firms will leave as there are no barriers to exit
prices go back up
profit covers opportunity cost
perfectly competitive firms in the long run
can only make normal profit
supernormal profits incentivise other firms to join the market
supply continues to increase
long run equilibrium reached as firms can no longer make supernormal profit
key features of oligopolies
a few large sellers
high barriers
differentiated goods
interdependence
price war
when firms repeatedly reduce their prices below that of their competitors with the aim of offering the lowest price in the market
benefits consumer as leads to a lower price
bad for profits
collusion
when 2 or more firms agree to limit competition
overt collusion
a formal agreement between firms
tacit collusion
an unspoken agreement between firms
non collusive oligopoly
where firms in an oligopoly industry compete on prices in order to undercut the other firm and gain market share
collusive oligopoly
where firms in an oligopoly industry set the same prices either through tacit or overt collusion
whistleblowing
can lead to immunity and protection from fines
price agreement
occurs as a result of overt collusion
price leadership
when one firm changes their prices and other firms follow
tacit collusion is the result of price leadership
cooperation
when firms work together for mutual benefit
legal
3 methods of price competition in oligopolies
price wars
predatory pricing
limit pricing
price competition
when firms compete by changing prices
non price competition
firms compete without changing prices
price wars
when firms try to undercut each other with lower prices to steal the other firms’ consumers
can be dangerous and lead to very low prices
predatory pricing
price dropped before short run shutdown point (AVC=AR)
competitors can’t compete
firms go bust and have to leave market
leads to losses in short run but in long run helps to get rid of competition so can increase price and take over market
limit pricing
incumbent firm sets price low enough to limit new firms from entering market
uses its economies of scale
barrier to entry
non price competition
firms compete without changing price
advertising
can criticise other firms with adverts
loyalty cards
can get money off
encourages customers to spend more and come back
branding
lures customers towards their brand
quality
can invest into r&d and increase dynamic efficiency and develop higher quality products
to increase quality firms need supernormal profits AR>AC
uncertainty
when oligopolistic firms make decisions they have to deal with uncertainty
this is because decisions by one firm in the industry impact all the other firms
hard to predict decisions
