4.1.1/4.1.2 Spectrum of competition/Barriers to entry Flashcards
What is a monopoly
characteristics
Monopolies is when one firm dominates the market and has more than 25% market share. A pure monopoly is where there is only one supplier providing the good/service.
Characteristics include very high barriers to entry, supernormal profits are made and are price setters. Also monopoly firms tend to benefit from economies of scale. Assymetric information
Why are barriers to entry high in a monopoly market?
Due to sunk costs being so high in monopoly markets, these are costs which are spent and cannot be recovered such as advertising creating a barrier to exit.
Also start up costs are likely to be very high as monopoly firms are so big they high quality machinery and technology so for a business to even try and compete lots of capital required when starting up. Monopooly marketsbenefit from economies of scale such as managerial, technial and purchasing. High quality branding also and intellectual property rights too.
What is an oligopoly?
charactersitics
Oligopoly markets are where a few firms dominate in the market with relatively high market shares. Heterogeneous products are sold which vary through differntiation and branding and oligopoly firms tend to be price makers. Though usually dont comepte on price hence price rigidity. Barriers to entry fairly high and assymetric info between business and consumer.
No firms benefit from changing their price in oligopoly market hence price rigidity and non-price competition
Why are barriers to entry fairly high in oligopolies?
Economies of scale
Sunk costs
start up costs
Investments in R and D
Branding
product differentiation.
IP’s
What is a monopolostic market
chracteristics
Monopolistic markets is where homogenous goods are sold and low barriers to enter and exit with lots of firms competing. Somtimes hit and run firms will try benefit from low barriers to enter and exit to try make supernormal profits in the short run.
Very litle assymetric information. High number of sellers in the market. Due to very high levels of competition firms will try to reduce costs in order to push onto consumers, the lower price, to gain competitive advantage
This can be done through aiming to increase productive efficiency
What is perfect competition
characteristics
This is where the information is perfect no assymetric information, homogenous products are sold they are price takers and barriers to enter and exit do not exist so a business may leave and enter the market whenever. Very high number of sellers and demand is perfectly elastic. Due to very high levels of competition firms will try to reduce costs in order to push onto consumers the lower price to gain competitive advantage. This can be done through aiming to increase productive efficiency
unrealistic model
Explain why hit and run firms are so common in perfect competion markets?
Perfect competition markets have no barriers to enter or exit thus hit and run firms are incentivised to enter the market and try to benefit from supernormal profits in the short run. Although the no barrier to enter means this will rntice many firms to do this increasing the output of the good/service in the market causing price to fall where supernormal profits are no longer made. Price falls and AR falls meaning profits fall. Firms will leave the market after obtaining the supernormal profits.
Advantages and disadvantages of monopoly
- Will benefit from economies of scale such as purchasing, technical and managerial so costs will be reduced.
- However due to no competition the monopoly firm is not incentivised to be prodctively effiecient and reduce costs as much as possible thus will not be operating at the MES (lowest point on LRAC curve).
- Supernormal profits made can be reinvested into the business such as machinery.
- Consumer exploitation will be common in monopoly markets.
