4.1.1 Spectrum of competition Flashcards
Monopoly
One business operating in the market
Monopoly power
Ability to affect price levels → can restrict output to dictate what happens in the market (charge higher prices or set low ones to drive out competition)
Duopoly
Two large firms dominate the market (samsung and apple)
Oligopoly
Several large firms dominate the market and compete with eachother → specific number of firms own more than 60% of the market
Perfect competition
Perfect competition
Many buyers and sellers interacting with eachother → theoretical benchmark
why do economists like competition
- Economists like competition as it reduces prices and increases quantity output for consumers
- As we move forward competition becomes more unfair → MARKET FAILURE
- This is why competition is needed
monopoly
- Pure monopoly unlikely, one firm may dominate however and possess alot of market power
- Legal monopoly when firm has 25% or more of market
- Natural monopoly: wasteful to have more than one business providing services (eg water and rail)
- Regulated by government bodies
- Only one firm can fully exploit the economies of scale
characteristics of a monopoly
- Have the ability to set price/output levels
- Prices are higher with a monopoly
- high barriers to entry
- Consumer choice is restricted
- Profits are higher
- No freedom of information
why are monopolies not beneficial
- Earn abnormal profits and are not economically efficient; set prices above competitive markets
1. Demand = inelastic due to no subs
2. Increase prices, rev and profit → abnormal profits
3. More than break even made with very high profs - Firm sells at prices higher than market price (higher than costs)
- Consumer not satisfied, as product cannot be consumed to satisfaction as it is more expensive → decreased allocative efficiency
1. Little incentive to be efficient as if they need to increase revenue they can just increase prices - Higher average costs of production means firm is not making best use of scarce resources → decreased productive efficiency
why are monopolies beneficial
- EOS: consumers benefit from lower prices
- R+D: faster rate of tech development with abnormal profits, reduces cost and increases quality
- Natural monopolies: more efficient if there is one supplier
- Competition threat: if the market is open to new competition then a monopoly still has an incentive to keep prices down as they can be put out of business by an innovator
oligopoly
- May have monopoly power
- Characterised by non price competition (branding and promotion)
- Competing on price is avoided as price war is damaging to profits
- Can have large dominant firms and smaller niche firms
- Danger of collusion between firms
- High barriers to entry
- Abnormal profits made
imperfect competition
- Refers to situations where competition exists but is not as strong → due to distortions kin the market that prevent it from being fully competitive
- Includes oligopoly and monopolistic competition
- Monopolisitc competition: where there are firms in the market, each offering a slightly differentiated product and all competing with eachother
- Many firms producing similar but differentiated products
- Many producers and consumers in the market that act independently
- Consumers are aware of both price/non-price differences among competitors products
- Barriers to entry/exit are low/non-existent
- Producers have some control over prices (firms eg)
perfect competition
- theoretical idea that defines the greatest possible version of competition
- Products are homogenous
- Factors of production are homogeneous
- Many buyers and sellers and none of them can dominate the market → no differentiation between firms so no firm has market power
1. Firms are price takers → cannot choose the prices they charge → they must sell at the price prevailing in the marketplace because of strong competition - Freedom of information
1. Consumers and suppliers have perfect knowledge on all aspects of the market - No transport costs
- Freedom of entry and exit with the market → no barriers to entry
- Perfectly elastic demand → market price is equal due to homogenous products
is perfect competition realistic
- Government knows when to intervene when market failure becomes apparent
- Currency trading and commodity products come close to perfect competition
But
- Most markets are imperfect and market failure is common
- Businesses respond to market forces according to M power
- Market imperfections distort prices
- Advertising distorts consumer preferences
profits in perfect competition
- Firms make normal profits and do not break even → amount of profits needed for a firm to stay in business
- They have enough to remain in the market but not tempt an entrepreneur to enter the market due to the profit incentive
Short run
1. Increase demand, increase rev and prof
2. Sends profit sig to entrepreneurs: incentive to produce
3. Easy for other firms to enter due to no barriers to entry, so supply increases
4. Price drops due to increased competition
- In long run: firms will decrease profit to making normal profits (equilibrium)
- This is good as they listen to consumer tastes and keep prices low
competition in perfect competition
- Due to intense competition (lack of barriers to E), there is high competition
- Producers must be efficient with resources to be price competitive
- Market is responsive to change in consumer tastes
- Creative destruction for firms quick to adapt leads to allocative efficiency
- Little to no waste and consumers get prices that reflect costs of P
pricing strategies and market structure
- Perfect C: competitive pricing → otherwise will make a loss due to homogeneous nature of market
- Monopoly: premium pricing / price skimming for high price
- Penetration pricing if entering new markets to increase revenue and achieve EOS
- Predatory pricing to drive out competitors
market structures and impact on consumers
- Consumers want low prices and firms want higher revenues
- Strong competition keeps pricing down so consumers can maximise the value they get from a given income
- Businesses: like to differentiate with non price factors so they can increase prices (avoid competition)
- Especially with monopolistic competition → differentiated products but prices are still kept reasonable due to competition in market
- Oligopolisitc markets: market power to control prices → charge more what the product is worth
- Regulations needed eg CMA
