Market Power Flashcards
characteristics of perfect competition
- Large number of small firms.
- All firms produce identical/homogeneous products, ie no product differentiation
- There are no barriers to entry or exit.
- There is perfect information.
- There is perfect resource mobility.
characteristics of a monopoly
- One firm dominates the market
- Significant barriers to entry and exit
- The dominant firm is a price maker
- Information asymmetry in the market
- No need for product differentiation
characteristics of an oligopoly
- Differentiated or Undifferentiated
- Difficult barriers to entry
- Significant market power
- Some competition
characteristics of monopolistic competition
- Differentiated
- Low barriers to entry
- Low market power
- Good amount of competition
meaning of market power
The ability of firms to decide the price of a good/service.
profit maximization for perfect competition in the short-run vs the long-run
It is possible for a perfectly competitive firm to earn economic profits in the short run. However, in the long run these are competed away.
profit maximization for a monopoly
A profit-maximising firm will always produce where marginal revenue equals marginal cost, and this remains true for a firm operating in a monopoly.
Allocative inefficiency in a monopoly
A monopoly doesn’t need to be allocatively efficient and there is no threat from competition to force it to allocate resources better.
welfare loss in a monopoly compared with perfect competition due to restricted output and higher price
High monopoly prices lead to a deadweight loss of consumer welfare because output is lower and price higher than a competitive equilibrium. High prices mean some consumers are priced out of the market because of a fall in effective demand.
what is a natural monopoly?
A natural monopoly exists in a particular market if a single firm can serve that market at lower cost than any combination of two or more firms. This is because of the large investments needed to provide this good or service, so economies of scale won’t be achieved until much greater levels of output are produced.
collusive vs non-collusive oligopolies
Non-collusive:
Because a decision by one firm to change its price will have consequences for the decisions of other firms (e.g. lowering prices means other firms will follow suit and also lower prices), firms tend not to compete with each other on prices as the risk of a price war is too great. Instead, we tend to see large advertising campaigns, and other promotional activities like loyalty programmes. We call this non-price competition.
Collusive:
In a collusive oligopoly, businesses operates essestially like a monopoly, with the ultimate aim of maximising profits for each participant. Firms will all set output deliberately lower, at the point where marginal revenue equals marginal cost.
simple game theory payoff matrix
(oligopolies)
Let’s imagine two supermarkets that are both considering launching expensive advertising campaigns featuring famous celebrities. Acting in self-interest alone means that the firms will both advertise, in the hope that the other firm does not. However, if they do, then consumers will probably not be able to decide between them and so there will be minimal impact on profits. Instead, firms should anticipate each other’s behaviour and the better outcome would be not advertising to save themselves the cost of the ad campaign.
Although the firms could be better off by cooperating, each firm, trying to make itself better off, ends up making both itself and its rival worse off.
price and non-price competition in oligopolies
Price competition occurs when a firm lowers its prices to attract customers away from rivals, thus increasing sales at the expense of other firms.
Non-price competition occurs when firms use methods other than price reductions to attract customers from rivals. The most common forms of non-price competition are product differentiation, advertising, and branding.
measurement of market concentration (concentration ratios) in an oligopoly
If five or fewer firms together have a market share of more than 50 per cent , we can safely say the market is an oligopoly. If fewer firms achieve a market share of 50 per cent then it is an even less competitive market structure.
profit maximization for monopolistic competition in the short-run vs the long-run
In the long-run, profit-making industries attract new entrants, and in loss-making industries some firms shut down and exit the industry. The process of entry and exit of firms in the long run ensures that economic profit or loss is zero and all firms earn normal profit.
