3:4:1 Market Structures Flashcards
What is the order of the Most to Least competitive market structures?
- Perfect Competition (most competitive)
- Monopolistic Competition
- Oligopoly
- Monopoly (Least Competitive)
What Market Structures have imperfect competition?
- Monopolistic Competition
- Oligopoly
- Monopoly
What determines the output and price of a firm?
COMPETITION in the market
What is the rule to tell if a market is an Oligopoly?
F-rule If FIVE or FEWER FIRMS have 50% market share, the market is highly concentrated and has characteristics of an Oligopoly
In highly concentrated markets [……] firms dominate
Few firms dominate
Define the Concentration Ratio?
Is the market share controlled by a certain amount (n) of the largest firms
Example - What is the Four-Firm concentration ratio?
Is the market share controlled by the four largest firms in the industry
What would the concentration ratio of an Oligopoly and Monopoly be?
- Oligopoly - Highly concentrated - Monopoly - Low concentration ratio
How many firms/its market concentration does a perfectly competitive market structure have?
Number of firms – many small firms Market concentration – low concentration
How many firms/its market concentration does a Monopolistic competitive Market have?
Number of firms – one large firm – high concentration - 1 firm has 100%
How many firms/its market concentration does an oligopoly market structure have?
Number of firms – a few large firms dominate Market concentration – high concentration
How many firms/its market concentration does a monopoly market have?
One firm has 100% concentration ratio
What type of product do perfectly competitive market sell?
Homogeneous (the same type of products)
What kind of product do monopolistic Competition markets have?
Similar products
What type of product to oligopolistic markets sell?
Similar
What type of products do monopolistic market sell?
Unique products
What kind of knowledge do firms have in perfectly competitive markets?
Perfect information
What kind of knowledge do firms have in monopolistic competition market structures?
Imperfect information
What kind of knowledge do firms have in oligopoly markets have?
Imperfect information
What kind of knowledge do consumers in monopoly market structures have?
Imperfect information
What are the barriers to entry/exit of a perfectly competitive market like?
No barriers to entry/Exit
What kind of barriers to entry/exit are there in monopolistic competition market structures?
Low barriers to entry/exit
What kind of barriers to entry/exit are there in oligopoly market structures?
Hi barriers to entry/exit
What kind of barriers to entry/exit are there in monopoly market structures?
Hi barriers to entry/exit
In perfectly competitive markets are produces price takers or price makers?
Price takers
In monopolistic competition markets are produces price takers or price makers?
Price makers
In oligopoly markets are produces price takers or price makers?
Price makers
In monopoly markets are producers price makers are price takers?
Price makers
What is productive efficiency?
Because at the lowest point on the average cost curve. Where average cost is at its lowest Where the marginal cost intersects the average cost
What is allocative efficiency?
Producing at a point where the price of a good is equal to the marginal cost of production P = MC
What is dynamic efficiency?
Looks at how changes in technology and productive techniques overtime will increase the productive potential of a firm.
What is the Difference between Dynamic Efficiency and Allocative and Productive Efficiency?
Looks at changes in technology and productive techniques change whereas productive and Allocative efficiencies which are assumed to be static
What is X-Inefficiency?
When Average Cost is higher than the lowest possible average cost. Firm operates above its Average Cost Curve (AC)
Where does X-Inefficiency occur?
Happens in highly concentrated markets, eg. Monopoly and Oligopoly Where Firms are able to make supernormal profits and have an Average Revenue (AR) that is greater than their Average Costs (AC)
Characteristics of a Perfectly Competitive Market - How many Firms are there in a Perfectly Competitive Market?
Many small firms
Characteristics of a Perfectly Competitive Market - Types of Product in a Perfectly Competitive Market.
Homogeneous (exactly the same)
What does Homogeneous mean?
Exactly the same
Characteristics of a Perfectly Competitive Market - Firms Information/Knowledge.
Perfect Knowledge - Firms has access to information about rival firms, including the latest technology and techniques on who makes SUPERNORMAL Profits
What is a Perfectly Competitive Market?
A market where a large number of small firms exist, selling homogeneous products. Normal profits are achieved in the long run because there are no barriers to entry to protect the firms that make supernormal profits in the short run.
Why can Perfectly Competitive NOT maintain Supernormal Profits in the long run?
Because rival firms will see that these supernormal profits are being made (because of perfect knowledge) and will enter the industry (no barriers to entry)
What is Long-Run Equilibrium?
A Perfectly Competitive Firm will always make normal profits only, any supernormal profits having been competed away and the losses removed by firms leaving the industry
Where is the shut-down point for a Firm?
Occurs when the firm is not covering its average variable costs
When will a Firm only make a loss in the short run?
As long as it covers the variable cost of making the good.
What is Monopolistic Competition?
Market with many small firms, which supply goods that are slightly differentiated, allowing them to be price makers
What are the characteristics of a Monopolistically Competitive Firm?
Have similar characteristics of perfect competition. Except they are price makers because the products they produce are not exactly the same.
Why are some Monopolistically Competitive Firms able to be Price Makers?
Because the products they produce are not exactly the same
Characteristics of Monopolistically Competitive Firms - Number of Firms.
Many small firms
Characteristics of Monopolistically Competitive Firms - Type of Products.
Similar goods, slightly differentiated because of quality, branding and advertising
Characteristics of Monopolistically Competitive Firms - Knowledge/Information.
Imperfect Information about rival firms’ price and output decisions but firms will be able to identify when supernormal profits are made
Characteristics of Monopolistically Competitive Firms - Barriers to Entry/Exit.
Low
Characteristics of Monopolistically Competitive Firms - Price Taker or Price Makers?
Price makers to an extent because they are producing goods that are slightly different from those of rival firms
The average variable cost is the same as what?
Average variable cost is the same as average total costs (no fixed costs)
Can a monopolistically Competitive Firm make supernormal profits?
Yes in the short term
Does a firm need to operate at the productively efficient (Lowest point in the average cost curve) or Allocatively efficient (Where Price = Marginal Cost) levels of output?
It does not need to because it is a price maker to an extent and firms ha e imperfect knowledge
Can monopolistically Competitive Firm maintain supernormal profits in the long run? Why/Why not?
No Because firms have near perfect knowledge that allows firms to identify the supernormal profits a firm is making, and low barriers to entry that allows firms to enter the market and compete profits away.
Why do Monopolistically Competitive Firms not make losses in the long run?
There are very low barriers to exit, which means that should Firms be making losses they will leave the industry rather than try to persevere in the long run.
How are some firms able to survive longer making losses profits than others?
Because some firms have greater cash reserves than other firms, who have to leave the market.
What is an Oligopoly?
A market dominated by a few large firms - often associated with interdependence and collusion
What does Interdependence mean?
Means that actions of one firm in the industry will impact on the other firms in the industry
Characteristics of an Oligopoly market - Number of Firms.
A few large firms dominate
Characteristics of an Oligopoly market - Type of Product
Goods with some similarity but brand loyalty tends to be strong
Characteristics of an Oligopoly market - Barriers to Entry/Exit
High
Characteristics of an Oligopoly market - Price makers or Price takers.
Oligopolies are price makers but agree to price-fixing deals with rivals to avoid price competition
What is the concentration ratio in an Oligopoly market?
High concentration ratio - few firms dominating in an industry
How do Firms deal with price competition in an Oligopoly market?
Firms tend to avoid price competition with collusion
What is a Price War? And what are the Costs of a Price War?
When one firm lowers their prices, others follow, the firm loses revenue although they gain additional sales, the lost revenue is the cost of the price war.
What is a Collusion?
Is an agreement between two or more firms to limit competition and therefore divide the market, set prices and output.
Is Collusion Legal?
Collusion is NOT legal and is illegal
What are the two types of Collusion?
- Overt Collusion - Tacit Collusion
What is Overt Collusion?
Where Firms openly fix output, prices, marketing or the sharing out of customers
What is an extreme form of Overt Collusion?
Cartel
What is Tacit Collusion?
Is quiet or behind the scenes. The result is that firms do not compete with other or prices are higher than they would be otherwise be. There is Price Fixing
What is Price Fixing?
Firms coming together to ensure that prices remain stable and therefore price competition is avoided
Is Tacit Collusion Legal?
It is illegal
How is Tacit Collusion performed?
Is the collection of firms avoiding competition and following the actions of a market leader, known as a price leader.
What is the difference between Overt and Tacit Collusion?
- Overt Collusion is open - it is an agreement between firms to collaborate in some way to restrict competition - Tacit Collusion is quiet, unspoken or unwritten.
Why may some firms be able to break a collusion agreement?
To maximise a Firms Sales by lowering prices and catching a rival unaware or to gain immunity by acting as a whistle-blower and informing the competition authorities about any collusion agreement.
What is Price Discrimination?
happens when a firm charges a different price to different groups of consumers for an identical good or service
What are the main condition necessary for price discrimination to work?
- Differences in Elasticity in demand (different elasticities of demand for different consumer groups ) - Barriers to prevent consumers switching from one supplier to another - Firm is a price maker - Separate markets
Why do firms do peak and off peak pricing?
- Off peak times - there is plenty of Spare Capacity and Marginal costs are low - At Peak times - when Demand is high, short run supply becomes inelastic as the supplier reaches full capacity.
What is 3rd Degree Price Discrimination?
involves charging different prices to different groups of people.
Advantages of Price Discrimination.
- Firms will be able to increase revenue (enable some firms to stay in business and continue providing off-peak services) - Increased Investment (Increased revenues lead to greater research and development) - Lower Prices for some (Some consumers benefit from lower prices) - Manages Demand (Can use it to encourage people to travel at unpopular times)
Disadvantages of Price Discrimination.
- Higher Prices for some (Some consumers will pay more for the same product) - Decline in consumer surplus (More Money is transferred from consumers to firms, greater inequality) - Potentially unfair (Those who pay higher prices may be poor) - Administration Costs ( there will be Costs in separating the markets) - Predatory Pricing (Profits from this could be used to finance Predatory Pricing)
Marginal Cost and Price Discrimination?
In markets where the marginal cost of a product is very low, the firm is incentivised to sell all its tickets and uses price discrimination to do this.
What market share do Monopolies have?
25% in the UK
What are the Problems with Monopolies?
- Higher Prices (can set higher prices than if they were in a competitive market) - Allocative inefficiency (Price is greater than Marginal Cost, in a competitive market the price would be lower) - Productive Inefficiency (Output does not occur at the lowest point of the AC curve) - X-Inefficiency (Monopolies have less incentives to cut costs because it doesn’t face competition from other firms) - Supernormal Profit (Unequal distribution of income in society) - Lack of Choice - Diseconomies of Scale
Advantages of Monopolies.
- Economies of Scale (If there are significant economies of scale, a monopoly can benefit from lower average costs. This can lead to lower prices for consumers.) - Research & Development (Monopolies make supernormal profit which can be invested in Research & Development.) - May gain monopoly power because it is the most efficient - Global Competition (A domestic monopoly may face competition from abroad, and therefore what may appear as a monopoly may still face competitive pressures.)
Evaluation of Monopolies.
- Depends on the industry (Eg, Monopoly is needed in the tap water industry but not in the restaurant sector, where there is less economies of scale) - Some industries need a lot of research and development (Monopolies may be needed to do this) - Government could regulate Monopolies (to gain better economies of scale, without disadvantages of higher prices)
How do Monopolies develop
- Horizontal Integration - Vertical Integration - Legal Monopoly - Internal expansion of firm - Being the first Firm
Development of Monopolies - Horizontal Integration
Where two firms join at the same stage of production
Development of Monopolies - Vertical Integration
Where a firm gains market power by controlling different stages of the production process.
Development of Monopolies - Legal Monopolies
Patents Eg. Royal Mail
Development of Monopolies - Internal Expansion of a Firm
Firms can increase market share by increasing their sales and possibly benefiting from economies of scale.
Development of Monopolies - being the first Firm
Microsoft created monopoly power by being the first Firm
Why do Monopolies need to create barriers to entry?
to protect them from new firms entering the market.
Features of a monopolistically Competitive Market?
- Many Firms - Freedom of entry and exit. - Firms produce differentiated products. - Firms have price inelastic demand; they are price makers because the good is highly differentiated - Firms make normal profits in the long run but could make supernormal profits in the short term - Firms are allocatively and productively inefficient.
What is a Monopolistically Competitive Market?
Market structure which combines elements of Monopolies and competitive markets. Essentially a monopolistic competitive market is one with freedom of entry and exit, but firms can differentiate their products. Therefore, they have an inelastic demand curve and so they can set prices. However, because there is freedom of entry, supernormal profits will encourage more firms to enter the market leading to normal profits in the long term.
Limitations of Monopolistic Competition.
- Some Firms are better at brand differentiating and therefore will make supernormal profit - More assumes there are no barriers to entry when in real life there will be a few - Difficult for firms to achieve brand loyalty
What are the differences between a Monopoly market and a Monopolistically Competitive Market?
In monopolistic competition there are no barriers to entry. Therefore in long run, the market will be competitive, with firms making normal profit
Difference between Monopolistically Competitive Market and Perfect Competition.
In Monopolistic competition, firms do produce differentiated products, therefore, they are not price takers (perfectly elastic demand). They have inelastic demand.
Define an Oligopoly.
Is an industry dominated by a few firms
Main features of an Oligopoly market.
- An industry that is dominated by a few firms - Interdependence of firms – companies will be affected by how other firms set price and output. - Barriers to entry. In an oligopoly, there must be some barriers to entry to enable firms to gain a significant market share. - Differentiated products. In an oligopoly, firms often compete on non-price competition. - Oligopoly is the most common market structure
How do firms compete in an Oligopoly market?
- The objectives of the firms; e.g. profit maximisation or sales maximisation? - The degree of contestability; i.e. barriers to entry. - Government regulation.
What are the outcomes of an Oligopoly market?
- Stable prices (e.g. through kinked demand curve) – firms concentrate on non-price competition. - Price wars (competitive oligopoly) - Collusion- leading to higher prices.
Price wars in an Oligopoly.
Firms in oligopoly may still be very competitive on price, especially if they are seeking to increase market share. In some circumstances, we can see oligopolies where firms are seeking to cut prices and increase competitiveness. A feature of many oligopolies is selective price wars.
What is Perfect Competition?
Perfect competition is a market structure where many firms offer a homogeneous product. Because there is freedom of entry and exit and perfect information, firms will make normal profits and prices will be kept low by competitive pressures.
Feature of a Perfectly Competitive Market?
- Many firms. - Freedom of entry and exit; this will require low sunk costs. - All firms produce an identical or homogeneous product. - All firms are price takers, therefore the firm’s demand curve is perfectly elastic. - There is perfect information and knowledge.
What happens if Supernormal Profits are made in a Perfectly Competitive Market?
If supernormal profits are made new firms will be attracted into the industry causing prices to fall. If firms are making a loss then firms will leave the industry causing price to rise
Efficiency of Perfect Competition.
- Firms will be allocatively efficient P=MC - Firms will be productively efficient. Lowest point on AC curve - Firms have to remain efficient otherwise they will go out of business. - Firms are unlikely to be dynamically efficient because they have no profits to invest in research and development. - If there are high fixed costs, firms will not benefit from efficiencies of scale
Definition of Competition Policy?
Government policies to prevent and reduce the abuse of monopoly power
What can the abuse of monopoly power lead to?
Lead to market failure and be against the public interest. Therefore governments intervene the protect the interests of the consumer.
What is Collusive Behaviour?
Occurs when firms enter into agreements to fix prices and or output. This enables firms to make higher profits at the expense of consumers
Abuse of market power may include:
- Charging Higher Prices - Predatory Pricing - Selling below Cost with intention of forcing a rival Firm out of business - Vertical Restraints
What does the CMA regulate?
- Regulation of cartels / collusion - Education is Business so that they comply with the competition act - Mergers - The CMA must be notified of Mergers and they can investigate if they think they might be against the public interest - Investigate particular industries and see wether they are run in the public interest
What does CMA stand for?
Competition and Markets Authority
Examples of the CMA investigations.
- Investigation into grocery market - Investigation into care home sector by CMA found they need • More Public Sector finding • Consumers need greater help in choosing which care home.
What is the key role of the CMA?
To protect the public interest particularly against firms abusing their dominant positions
What happens in the long run if I’m the short run business are making abnormal profit? PERFECT COMPETITION
- If Firms are making abnormal profits in the short-run, this encourages the ENTRY OF NEW FIRMS into the industry - Causes an outward shift in market supply forcing down price - Increase in Supply will eventually reduce the price until PRICE = LONG-RUN AVERAGE COSTS. At this point the industry is making normal profit
What is Monopoly?
A single seller, with high barriers to entry.
What is a price maker?
Is when a firm is able to set prices and output to maximise profits
Characteristics of a monopoly – number of firms
One
Characteristics of a monopoly – type of product
Unique
Characteristics of a monopoly – knowledge/information
Imperfect Information
Characteristics of monopoly – barriers to entry/exit
High
Characteristics of monopoly – price setting powers
Price maker
What can monopolies do as a result of high barriers to entry?
Can set high prices to maximise profits without fear that another firm will enter the industry
Why do governments intervene to prevent the development of monopolies and ensure that competition is maintained in some form?
Because of high Barriers to entry, monopolies can set high prices to maximise profits without fear that another firm could enter the industry
What kind of efficiency do monopolies have?
X – inefficiency
What is meant by monopoly is being X – inefficient?
– The tendency to allow costs arise when there is no threat of more efficient firms undercutting prices – there being less inclined to innovate and develop new products because they have no need to maintain an edge over competitors
What kind of profit do monopolies make?
Abnormal profits
Comparing monopolies with perfect competition – Which ones are profit maximisers?
Monopoly – Yes Perfect competition – Yes
Comparing monopolies with perfect competition – which ones are allocated for the efficient?
Monopoly – no Perfect competition – yes
Comparing monopolies with perfect competition – which ones are productively efficient?
Monopoly – no Perfect competition - yes
Comparing monopolies with perfect competition – what are prices like?
- Monopoly – prices are higher on the monopoly compared with perfect competition – Perfect competition – prices are lower on the perfect competition competitive monopoly
Comparing monopolies with perfect competition – compare quantity produced?
– Monopoly – quantity is lower than the monopoly compared with perfect competition – perfect competition – quantity is higher and a perfect competition compared with monopoly
What are the disadvantages of monopoly power?
– Supernormal profits means: • Less incentive to be efficient and develop new products • monopolists can exploit its position by exerting pressure on suppliers that may rely on it – monopoly power means higher prices and lower output for domestic consumers – monopolists do not produce at the most productively efficient point of output – monopolists may undertake price discrimination to raise producer surplus and reduced consumer surplus
Advantages of monopoly power.
– Supernormal profits means: • Finance for investment to maintain competitive edge • firms can create reserves to overcome short-term difficulties, giving stability to employment • Funds for research and development – Firms will have financial power to match large overseas competitors – monopolists may be able to take advantage of economies of scale – The incentive of supernormal profit/abnormal profit forces firms to bypass any barriers to entry by product development and innovation
Define price discrimination.
Occurs when a firm sells the same product in different markets with different elasticities of different prices.
What kind of firm can use price discrimination?
A found with monopoly power
Why does a firm with monopoly power use price discrimination?
To increase profits and reduce consumer surplus
What three conditions price discrimination be successful under?
– High barriers to entry and a degree of monopoly power – two separate markets with differing price elasticities of demand – markets can be kept separate at a cost that is lower than the gain in profits
What is 3rd Degree price discrimination?
Firms can use different prices based on regional, consumer page or time of use differences
What are the aims of price discrimination?
– Extra revenue – higher profit – Improve cash flow – use up spare capacity
What are Sunk Costs?
Costs that a firm cannot recover on Exit such as advertising
When does a natural monopoly exist?
When an industry can support only one firm
Why is it difficult to removed a Natural Monopoly?
- Because neither of the competing firms will be able to obtain sufficient market share to ensure that it can benefit from economies of scale. - Significant start up costs - Establishing necessary infrastructure - Long-Run losses as it tried to compete with existing suppliers
In what markets do natural monopolies exist?
Supply of: - Water - Gas - Rail Industry - Electricity Where start up Cost are high
What is a Monopsony?
Power exists when sellers face powerful buyers
How could a Monopsony be formed?
Number of firms could act together (collude) to increase buying power
What effects do Monopsony have on the Suppliers and Consumers?
Cheaper prices are passed on to the consumer, but only at the expense or the supplier of goods
What are the advantages of a Monopsony?
- Lower Prices Are passes on to consumers - Quality might be better than if there was perfect competition in buying resources - Monopsony Power night Balance Out Monopoly Power
What is a Contestable Market?
A market with low sunk costs and therefore low barriers to entry.
How is a Contestable Market firmed?
This may be because an industry does not have a dominant Firms with a high brand recognition, requiring large amounts to be spent on advertising in order to gain market share.
Does a Monopsony refer to buying or selling power?
Buying power
What are the signs of high levels of contestability (Low Barriers to Entry and Exit)?
- Low Fixed Costs - Low dunk costs - Weak Brand names\few patents - Low Potential profitability in the long run.
What are the signs of an Uncontestable market? (Reverse of the signs of Contestable Market)
- Strong Oligopoly or market power (Predatory Pricing) - High Levels of non price competition - Investigations by the CMA
Why you shouldn’t get Contestable and concentrated markets mixed up?
- Highly Contestable Market has low Barriers to Entry or Exit - Highly concentrated market has high barriers to entry
Why do we use Game Theory?
Is used to explain much of the behaviour of interdependent firms in an Oligopoly
What is Price Discrimination?
Occurs when the same Good is sold at different prices in different markets.
At what point On a graph does a Monopoly maximise profits?
Where MR=MC
What are some of the Problems of Monopolies - Higher Prices
- Higher Prices : Firms with Monopoly power can set higher prices than if in a competitive market.
What are some of the Problems of Monopolies - Allocative Inefficiency
- Allocative Inefficiency : A monopoly is allocatively inefficient because in monopoly the price is greater than MC.
What are some of the Problems of Monopolies - Productive Inefficiency
- Productive Inefficiency : A monopoly is productively inefficient because the output does not occur at the lowest point on the AC curve.
What are some of the Problems of Monopolies - X Inefficiency
- X Inefficiency : It is argued that a monopoly has less incentive to cut costs because it doesn’t face competition from other firms.Therefore the AC curve is higher than it should be.
What are some of the Problems of Monopolies - Supernormal Profit
- Supernormal Profit : A monopolist makes Supernormal Profit leading to an unequal distribution of income in society.
What are some of the Problems of Monopolies - Higher Prices to Suppliers
- Higher Prices to Suppliers : A monopoly may use its market power (monopsony power) and pay lower prices to its suppliers.
What is Perfect Competition?
Perfect competition is a market structure where many firms offer a homogeneous product. Because there is freedom of entry and exit and perfect information, firms will make normal profits and prices will be kept low by competitive pressures.
Why do Firms make Normal Profit in Perfect Competition?
Because there is freedom of entry and exit and perfect information, firms will make normal profits and prices will be kept low by competitive pressures.
What are the features of a Perfectly Competitive Market?
- Many firms. - Freedom of entry and exit; this will require low sunk costs. - All firms produce an identical or homogeneous product. - All firms are price takers, therefore the firm’s demand curve is perfectly elastic. - There is perfect information and knowledge.
Diagram of Perfectly Competitive Markets.
What happens if Supernromal Profits are made in a Perfectly Competitive market?
Changes in long - run equilibrium - The effect of an increase in demand for the industry.
Changes in long - run equilibrium - An increase in firm costs
In Perfect Competition are firms Allocatively Efficient?
In Perfect Competition are firms Productively Efficient?
Firms will be productively efficient. Lowest point on AC curve
In Perfectly Competitive Markets why do firms need to be Efficient?
Why are firms likely not to be dynamically efficient in perfect competition?
Define a Monopoly.
A pure monopoly is defined as a single seller of a product, i.e. 100% of market share.
In the UK a firm is said to be a monopoly if it has a market share greater than 25%
Graphically, where does a Monopoly maximise profits?
MC=MR
Problems of a Monopoly - Higher Prices
Firms with monopoly power can set higher prices than in a competitive market.
Problems of a Monopoly - Allocative Efficiency
A monopoly is allocatively inefficient because in monopoly the price is greater than MC.
Problems of a Monopoly - Productive inefficiency
A monopoly is productively inefficient because the output does not occur at the lowest point on the AC curve.
Problems of a Monopoly - X - Inefficiency
It is argued that a monopoly has less incentive to cut costs because it doesn’t face competition from other firms. Therefore the AC curve is higher than it should be.
Problems of a Monopoly - Supernormal Profit
A monopolist makes Supernormal Profit leading to an unequal distribution of income in society.
Problems of a Monopoly - Higher Prices to Suppliers
A monopoly may use its market power (monopsony power) and pay lower prices to its suppliers.
Problems of a Monopoly - Diseconomies of Scale
It is possible that if a monopoly gets too big it may experience Diseconomies of Scale – higher average costs because it gets too big and difficult to coordinate.
Problems of a Monopoly - Lack of Incentives
A monopoly faces a lack of competition, and therefore, it may have less incentive to work at product innovation and develop better products.
Problems of a Monopoly - Lack of Choice
Consumers in a monopoly market face a lack of choice.
Advantages of a Monopoly - Economies of Scale
If there are significant economies of scale, a monopoly can benefit from lower average costs. This can lead to lower prices for consumers.
Advantages of Monopolies - Research and Development
Monopolies make supernormal profit which can be invested in Research & Development.
Advantages of Monopolies - Firm May Gain Monopoly Power because it is the Most Efficient
Google gained monopoly power through offering innovative new products. It is hard to argue Google has x-inefficiency because of its monopoly power.
Advantages of Monopolies - Global Markets
A domestic monopoly may face competition from abroad, and therefore what may appear as a monopoly may still face competitive pressures.
Evaluation of Monopolies
- Depends on the industry in question, eg in restaurants there is little economies of scale so there will be no Monopolies
- Some industries need a lot of Research and Development therefore Monopolies may be needed In these industries
- Government May be able to regulate monopolies to gain benefits of economies of scale, without the disadvantages of higher prices
How can Monopolies Develop - Horizontal Integration
Where two firms join at the same stage of production.
How Can Monopolies Develop - Vertical Integration
Where a firm gains market power by controlling different stages of the production process.
How can Monopolies Develop - Legal Monopoly
Through Patents
How can Monopolies Develop - Internal Expansion of a Firm
Firms can increase market share by increasing their sales and possibly benefiting from economies of scale.
How can Monopolies Develop?
- Horizontal Integration
- Vertical Integration
- Legal Monopoly
- Internal Expansion of a Firm
- Being the first Firm to the market
How can governments regulate Monopolies?
- Price capping RPI-X to limit price increases
- Prevent mergers
- Windfall tax on monopoly profit.
- Investigating abuse of monopoly power,
Why do Governments regulate Monopolies?
Economies of scale and lower prices
Show the Monopoly Diagram.
Define a Monopolictically Competitive Market.
Monopolistic competition is a market structure which combines elements of monopoly and competitive markets.
Essentially a monopolistic competitive market is one with freedom of entry and exit, but firms can differentiate their products.
Therefore, they have an inelastic demand curve and so they can set prices.
Why does Supernormal Profits in the short run of Monopolistically Competitive Markets lead to normal profits in the long run?
This is because of the low barriers to entry and exit so if supernormal profits are being achieved then firms will freely enter the market
In a Monopolistically Competitive Market, what does Supernormal profits in the short run lead to…
Leads to normal profit in the long run.
What are the features of a Monopolistic Competitive Industry?
- Many firms.
- Freedom of entry and exit.
- Firms produce differentiated products.
- Firms have price inelastic demand; they are price makers because the good is highly differentiated
- Firms make normal profits in the long run but could make supernormal profits in the short term
- Firms are allocatively and productively inefficient.
Diagram of Monopolistic Competition in the short run.
In the short run, the diagram for monopolistic competition is the same as for a monopoly.
Diagram showing Monopolistic Competition in the long run.
Demand curve shifts to the left due to new firms entering the market.
In the long-run, supernormal profit encourages new firms to enter. This reduces demand for existing firms and leads to normal profit.
Efficiency of firms in Monopolistic Competition - Allocative Inefficient
The price is set above the marginal cost
Efficiency of firms in Monopolistic Competition - Productive Inefficiency
Firm not producing on the lowest point of the Average Cost curve (AC)
Efficiency of firmsin Monopolistic Competition - Dynamic Efficiency
This is possible as firms have profit to invest in research and development
Efficiency of firmsin Monopolistic Competition - X-efficiency
This is possible as the firm does face competitive pressures to cut costs and provide better products
Limitations of Monopolistic Competition.
- Some firms will be better at brand differentiation and therefore, in the real world, they will be able to make supernormal profit.
- New firms will not be seen as a close substitute.
- There is considerable overlap with oligopoly – except the model of monopolistic competition assumes no barriers to entry. In the real world, there are likely to be at least some barriers to entry
Key difference between Monopoly on Monopolistic Competition?
In monopolistic competition there are no barriers to entry. Therefore in long run, the market will be competitive, with firms making normal profit.
Key difference between Perfect Competition and Monopolistic Competition.
In Monopolistic competition, firms do produce differentiated products, therefore, they are not price takers (perfectly elastic demand). They have inelastic demand.
Define an Oligopoly.
Features of an Oligopoly
- An industry which is dominated by a few firms, has a five-Firm concentration ratio of over 50%
- Interdependence of Firms - companies will be affected by how other firms set price and output.
- Barriers to Entry - In an oligopoly, there must be some barriers to entry to enable firms to gain a significant market share. These barriers to entry may include brand loyalty or economies of scale. However, barriers to entry are less than monopoly.
- Differentiated products - In an oligopoly, firms often compete on non-price competition. This makes advertising and the quality of the product are often important.
Oligopoly is the [……][…….] market structure
Most common
What does Competition within an Oligopoly depend upon?
What are the possible Outcomes of an Oligopoly market?
What is the Kinked Demand Curve?
What does the Kinked Demand Curve assume?
Kinked Demand Curve - What happens to a firm if they increase the price?
Kinked Demand Curve - Is Demand Elastic or Inelastic for price increases?
Kinked Demand Curve - Is Demand Elastic or Inelastic for Price Decreases?
Inelastic
Kinked Demand Curve - Why is Demand Inelastic?
Why are Prices Rigid in a Monopoly?
Price Increases are elastic because firms will lose market share.
Therefore prices are rigid.
Evaluation of the Kinked Demand Curve?
Why are there Price Wars in Oligopoly Markets?
Why is there Collusion in Oligopoly Markets?
What is Game Theory?
Why are Firms encouraged to confess Collusion?
What is the definition of Competition Policy?
What can abuse of Monopoly power lead to? And what happens because of this?
What is meant by Collusive Behaviour?
This occurs when firms enter into agreements to fix prices and or output. This enables firms to make higher profits at the expense of consumers.
Is Collusive behaviour Legal?
Abuse of Market Power May include….
Why is Charging Higher Prices - An example of the abuse of market power?
What is a Contestable Market?
Benefits of Contestable Markets.
- Lower prices (allocative efficiency)
- Increased incentives for firms to cut costs (x-efficiency)
- Increased incentives for firms to respond to consumer preferences (allocative efficiency)
- Economies of Scale
What are the Factors which determine the Contestability of a Market?
Why are SUNK COSTS a factor which determines the Contestability of a Market?
Why are LEVELS OF ADVERTISING AND BRAND LOYALTY a factor which determines the Contestability of a Market?
Why is VERTICAL INTEGRATION a factor which determines the Contestability of a Market?
Why is ACCESS TO TECHNOLOGY AND SKILLED LABOUR a factor which determines the Contestability of a Market?
What other factors which are not Barriers to Entry determine if an Industry is Contestable?
- Level of Profit - if firms in a market are making lots of profit the market is less likely to be Contestable
- Number of Firms - a Contestable Market could have low number of firms, as long as possible new entrants to the market is possible. However if few firms have tried to enter for a long time the market is less likely to be Contestable.
Methods to increase the Contestability of a Market.
What is Price Discrimination?
Give an example of Price Discrimination.
What is Third Degree Price Discrimination?
Why is Product Versioning Price Discrimination?
Why is Product Versioning a form of Indirect Segmentation?
What are the Conditions needed for Price Discrimination?
Profit Maximisation under Price Discrimination.
For Price Discrimination in an Inelastic Sub Market what is the Price like?
For Price Discrimination in an Elastic Sub Market what is the Price like?
State some Advantages of Price Discrimination.
Disadvantages of Price Discrimination.
Why is Marginal Cost important for Price Discrimination?
If marginal cost for an extra product / passenger is low, the firm has an incentive to use price discrimination to sell all the tickets.
What is the Diagram for Price Discrimination?
