Market structures and economic efficiency Flashcards
One example of a duopoly
Apple (52%) and Samsung (29%) are a duopoly.
Market share for other phone companies like Huawei, Sony and Xiao mi have near to 0% market share
What does the highly concentrated phone industry mean to market competition?
In a highly concentrated industry, firms such as Apple and Samsung have market power to set prices above competitive levels which results in loss of consumer surplus and deadweight welfare loss. Price is nearly always above marginal and average costs and barriers to entry maintain this in the long run
Policies tp Limit to market power:
- Trade liberalisation
- Policies:
- CMA- M&A
- European competition policy
- Industry regulation- OFGEM
-price cap
- Windfall tax- tax on
- supernormal profit
- Trade liberalisation- freer trade makes markets contestable
- Industry deregulation- liberalisation in many UK markets include water services
Characteristics of a natural monopoly
- Huge economies of scale
- Enormous potential for economies of scale
- Rational for 1 firm to supply the entire market
- competition would result in a wasteful duplication of resources and allocative/productive inefficiency
Natural monopoly daigram
- LRAC curve above LRMC
- Supernormal prof at MC=MR
- With regulation it will produce at AD=D=LRMC
- AC will now be above the LRAC curve, making subnormal profit
How does monopoly power damage consumer welfare?
- Loyalty to brands such as Nike and Lululemon leads to low PED and low XED- Gives increased pricing power- P>MC which leads to deadweight loss of consumer surplus
Market share of Nike- 25%, Addidas 20%, Puma 10%
-
EoS in monopoly example
harmaceuticals- EoS in prodution leads to falling LRAC and lower real prices of products such as vaccines and painkillers. It could leads to R&D leading to innovation and invention, increasing dynamic efficiency along the way too
Patents in a monopoly example
Social tariffs such ad BT offering fibre broadband at less than half price to households in the UK receiving universal credit
For privatisation and nationalisation examples
- Social equity- when industries owned and operated by the state, the benefits generated can be more evenly distributed. This can include control of prices such as water bills to achieve greater allocative efficiency.
- Funding of infrastructure as public good- once water is treated and distributed or sewage collected and treated, its accessible to all residents connected to the grid, this means the the characteristics of the common good for water now becomes non rivalrous.
Against the nationalisation of the water industry:
- Innovation and incentives- strong incentive to operate efficiently and innovate
- Without the discipline of market forces, nationalised industries may allocate resources inefficiently, leading to overstaffing or under utilisation of assets- this might be reflected in a loss of productive efficiency.
- Sewage pollution does not end with nationalisation £260bn needed (HoL)
-Without the discipline of shareholder and stock markets, there is the risk of X-ineffectiveness due to the lack of competition in the industry
-Some blame attached to past/current regulatory failures by OFWAT
Natural monopoly diagram
- With a natural monopoly there are high fixed costs involved in supplying a good or service such that the long run average cost curve may fall continuously as output increases in the long run. Marginal cost is less than the average cost. This helps to drive down average cost as output increases. With a natural monopoly, it may be efficient only to have one firm supplying the market to achieve productive efficiency. They procuce at MC=MR
- If a state owned natural monopoly prices where AR=MC, then this business will make a loss since price is lower than average cost (monopoly diagram with a
subnormal loss)
