Market Structure 2 Flashcards
What is a monopoly?
-Occurs when one firm
dominates a market
- The firm determines the price
in the market rather than
accepting the industry price
-
why monopolies arise?
- Monopolies arise due to barriers to entry (new firms
cannot enter the market) - Barriers can exist due to:
➢A key resource being owned by one firm
➢One firm has the legal rights to produce and sell a good or service
➢The costs of production make a single producer more efficient than a
large number of sellers (natural monopoly)
Importance of Barriers to
entry for monopolies
- The monopoly power of a firm or group of firms can only be sustained if there are
barriers to entry - It is because of this a monopolist may be
able to make abnormal profits in the long run
What is a natural monopoly?
❑When a firm’s average total cost
curve continually falls the firm is a
natural monopoly.
❑In the case of a natural monopoly,
if production were shared
amongst more than one firm
average total cost would rise, as
such the most efficient number of
firms is one.
what is a monopoly’s revenue?
- As a monopoly is the only firm in the market, if a consumer wishes to buy a product it must be bought from the monopoly, therefore the demand curve for the industry is the demand curve for the monopoly firm
What is abnormal profit earned by a monopoly?
- It can be seen from the Monopoly diagram that at the profit
maximising level of output the AR (price)>AC, the monopoly therefore
earns abnormal profit - The Monopoly is able to continue to earn abnormal profit in the long
run due to the existence of barriers to entry, these barriers prevent
new firms from entering the market - The size of these abnormal profits can be measured using:
Profit = (AR - AC) Q
What is a Long-run equilibrium in
monopoly
- A profit maximizing monopolist produces
where marginal revenue = marginal costs
(MR=MC). - It will be Productively inefficient because it
is not producing at the minimum of the
average cost - Allocatively inefficient because it is not
producing where price = marginal cost
Case against monopoly ?
- Higher price and less output than a
competitive market with same cost and
demand conditions. - Welfare loss
- X inefficiency: higher costs than a
competitive market - Productive/ allocative/ dynamic inefficiency
case for monopoly?
- Monopolists achieve monopoly position through innovation
- Encourages others to innovate (Schumpeter)
- Will invest profits or pay out as dividends
- Prevent wasteful duplication
- May offset another market failure e.g. negative externality
What is the UK Competition Policy
In the UK the Competition and Markets Authority has the
powers to:
* prevent takeovers or mergers that would lead to a
monopoly position if it can show that it would act against
the public interest
* investigate any firm with more than 25% market share
and force it to sell off parts of its business or reduce its
prices
What is price discrimination?
- Occurs when a firm offers the same product to different customers at different prices e.g. nightclubs
- By price discriminating a firm can increase its own
producer surplus and profits; at the same time it reduces the amount of consumer surplus (utility that is not paid for)
how can price discrimination be done effectively?
- To price discriminate effectively a firm must be able to identify different demand conditions, e.g. demand may be different between different groups of customers
- A higher price is charged where demand is price inelastic and a lower price when demand is price elastic. This leads to different prices in different market segments
Advantages and disadvantage of price discrimination?
- Price discrimination may enable
some products to be produced that
it would not be financially feasible to
produce otherwise - With perfect price discrimination
consumer surplus is reduced to
zero
Features of oligopoly
❑ An oligopoly occurs when a few firms dominate a market.
❑ This creates interdependence
❑ Firms have to decide whether to collude (cartel) or to compete
What is the kinked demand curve?
❑ This model introduces interdependence
among firms.
❑ It assumes that price increases by a firm
are not followed; price decreases are
followed.
❑ It is a pessimistic non-cooperative model
❑ Result? Sticky prices and a focus on nonprice competition
