Dominant Firms (Legal Monopoly)

Question 1

Define dominant firm

Answer 1

Firm that has a large market share (40% market share or more)

Question 2

What are the benefits of dominant firms

Answer 2

EoS —> reduces unit costs, price charged is lower than the price charged in a competitive market

EoS —> UK goods and services more internationally competitive —> improvement in balance of payments —> positive multiplier effect

Use of retained/abnormal profits —> improvements to g/s and production processes —> improves productivity

Question 3

What are the problems of dominant firms

Answer 3

Fail to be efficient —> productively, allocatively and dynamically Lack of competition/contestability—> no incentive to pursue EoS, efficiency, improve quality of g/s or invest in R&D

Artificial barriers to entry —> e.g. branding/advertising increases costs Anti-competitive practices —> predatory pricing, full line forcing, price fixing.

Price discrimination —> increases price for consumers (lower CS) and revenue for firms

Question 4

Evaluation of the case and against dominant firms

Answer 4

Strong regulators —> must be effective in cracking down anti-competitive practices (CMA)

Public sector —> no profit motive but maximise welfare to society objective

Nature of market —> high contestability can force a dominant firm to always pursue competitive objectives Impact on macro environment —> EoS leads to improvement in the balance of payments

Question 5

How can price discrimination occur

Answer 5

Charging different prices along the demand curve

Price discrimination occurs –> 0-q2 units purchased –> q1 - q2 units purchased off peak –> peak revenue 0P2cq2 –> off peak revenue q2q1be –> consumer surplus reduced by P1P2ce –> new CS P2Qc + ecb