Market Structures - Positives and Negatives

Question 1

What are the positives of monopoly?

Answer 1

1. Supernormal Profits allow for reinvestment and dynamic efficiency + research and development
2. Greater protection of ideas incentivises firms to innovate
3. Exploits economies of scale - minimises wasted resources
4. Natural Monopoly = best structure for market because of very high fixed costs
5. Generate high gov tax revenue

Question 2

What are the negatives of monopoly?

Answer 2

1. Higher prices and inefficiencies leads to misallocation of resources
2. Exploitation of consumers (high price and restricted quantity) results in lower consumption and lower consumer surplus - market failure
3. No incentive to become efficient = X-inefficiency and higher production costs
4. Less consumer choice

Question 3

What are the positives of oligopoly?

Answer 3

1. Supernormal Profits allow for reinvestment and dynamic efficiency + research and development
2. Collaboration results in improved industry standards
3. Can exploit economies of scale
4. High profits = higher gov tax revenue

Question 4

What are the negatives of oligopoly?

Answer 4

1. Less competition results in less efficiency and higher costs
2. Higher prices and inefficiencies results in the misallocation of resources
3. Collusion (implicit and tacit) = lower consumer welfare

Question 5

What are the positives of monopolistic competition?

Answer 5

1. Consumer choice
2. Supernormal profits in the short run = innovation and investment
3. Low barriers to entry = downward pressure on prices

Question 6

What are the negatives of monopolistic competition?

Answer 6

1. Inefficiencies means firms do not fully exploit available resources
2. Limited dynamic efficiency as no long-run supernormal profits
3. Some X-inefficiency
4. Firms cannot exploit economies of scale

Question 7

What are the positives of perfect competition?

Answer 7

1. Long-run allocative and productive efficiency
2. Perfect information = no consumer exploitation
3. No sunk costs

Question 8

What are the negatives of perfect competition?

Answer 8

1. No supernormal profit so not dynamically efficient
2. No economies of scale
3. Rarely applicable to real-life markets