Perfect Competition, Imperfectly Competitive Markets and Monopolies Flashcards
Market structure
refers to the number and size of firms within a market for a particular good or service
Perfect competition
market structure that has large number of buyers and sellers who have perfect information about the market
imperfect competition
any market structure that isn’t perfect competition
pure monopoly
when only one firm supplies the market, least competitive form of market
what is the main objective of firms?
-profit maximisation
why firms want large profits?
- reinvest funds into developing new products
- pay out higher returns to shareholders- encourage more people to buy shares
other obj of firms?
- sales maximsation (can benefit from EoS)
- Survival
- Growth
- increasing market share (can get benefits of monopoly power)
Perfect competition - price taker
a firm that is unable to influence the ruling market price therefore has to accept it
Assumption of perfect competition
- few B2E
- perfect knowledge
- products are homogenous
Advantages of perfect competition
productive efficiency - goods and services produced at minimum average cost
allocative efficiency - produce what consumers demand
monopolistic competition
- imperfect competition
- large number of firms producing slightly differentiated products
- low b2e
Characteristic of monopolisitc competition
1) Large number of producers
2) similar products differentiated
3) low B2E
Oligopoly
market structure dominated by a small number of powerful firms
Concentration ratioa
measurement of how conentrated a market is- the total market share held by the larger firm in a market- add their percentages
collusion
firms work together to determine price / output
Tacit collusion
no formal agreement between firms
overt collusion
formal agreement
what happnes when collusive agreements are made
- consumers are presented with effective monopoly and benefits and drawbacks
- allow inefficient firms to survive
Non price competition
- product differentiation
- customer service
- loyalty products
Monopoly power
the power of a firm in a market to act as a price maker
characteristics of monopoly power
- high B2E
- restrict output and raise price- boost supernormal profit
- because of high B2E, can maintain these profits low comp
Advantages of monopolies
1) economies of scale
2) innovation - firms make supernormal profit- more funding available to invest in research and development leading to innvotion
Price discrimation
where firms with monopoly power charge different groups of consumers different prices for the same product
- increases producer surplus at the expense of consumer surplus
conditions necessary for price discrimination
1) must have a degree of monopoly power
2) consumers being charged higher prices cant access cheaper prices
3) different sub markets of consumers with different elasticities of demand
Consumer surplus
the difference between what a consumer would be prepared to pay for a good or service and the price they actually pay
Producer surplus
the difference between what a firm would be willing to accept for a good or service and what they actually receive
Advantages of price discrimination
- supernormal profits may be reinvested by price discriminating firm - better qual productus
- those on lpwer incomes may now be able to access servics
Disadvantages of price discrimination
- if firm with monopoly power is able to increase supernormal profit- inequitbale
- increases producer surplus at the expense of consumer surplus
price competition
reducing the price of a good or service in order to make it more attractive against competitors
leads to dynamic efficiency
dynamic efficiency
- improvements in productive effiency over time
- reduces firms costs therefore they can reduce price
x- inefficiency
the lack of willingness of firms with monopoly power to control their costs of production
When does a firm profit maximise?
MC = MR
Satisficing
making do with a satisfactory suboptimal level of profit
Perfect competition in the short run
- firms may make supernormal profit
- encourages firms to join the industry due to competitive market and low b2e
- shifts supply to the right
- increase in supply, reduction in price - normal profit
Perfect competition in the long run
- can only make normal profit in the long run
- productively efficient
- allocatively effiicient (P = MC)
Why is monopoly curve downward sloping?
product differentiation- price makers
Long run monopolistic competition
can only make normal profit
Cartel
a collusive agreement among a group of oligopoly firms to fix prices and output between themselves
Interdependent
firms in oligopoly take into account the likely actions of other firms in the industry when deciding how to behave
Interdependent
firms in oligopoly take into account the likely actions of other firms in the industry when deciding how to behave
Why oligopolies have stable prices (kinked demand)
- firm perceives demand curve as being elastic if raises its price and inelastic if cuts
- this is because the firm expects rival firms not to follow a price rise
- if firm increase price and rivals don’t follow suit = lose market share
- if firm cuts price, others follow no increase in market share for individual firm
Disadvantages of monopolies
- productively inefficient
- allocatively inefficient
- x inefficient
Monopolistic competition in the SHORT RUN
- brand loyalty = downward sloping demand curve
- firm maximises profit when MC = MR
- make supernormal profit
Monopolistic competition in the LONG RUN
- only make normal profit
- low B2E = new firms enter the industry relatively easily, attracted by supernormal profits made by some firms
- effect of this is to reduce the demand (D=AR) for the individual firm as new entrants take some market share
- result : D=AR curve is tangential to the firm’s ATC curve, meaning normal profit is made at the the profit maximising output q1
Examples of monopolies
Tesco = 30% market share in groceries market Google = 90% market share of internet traffic
Examples of barriers to entry
- natural
- economies of scale
- legal barriers
- product differentiation
- sunk costs
B2E EoS
- firm’s average cost of production fall as output rises
- large firms can set prices below potential new entrants an still make snp
- PURCHASING ECONOMIES OF SCALE
B2E legal barriers
patents, copyrights and trademarks give a single firm the right to have a monopoly over a new product
EG James Dyson holds many patents over original designs for household appliances, cannot be legally copied
B2E product differentiation
-existing firms spend considerable sums of money over many years on advertising and branding - build up consumer loyalty and marketing profile
EG Coca Cola and PepsiCo spent billions of dollars on advertising- sponsorship of major sporting events such as football World Cup
Productive inefficiency monopolies
- firms produce at a minimum average total cost
- monopolies do not have to be competitive to survive, because they dont face the threat of firms taking their market share therefore little incentive to cut cost to the minimum
Allocative Inefficiency Monopolies
- monopolies don’t have to produce the ‘best’ goods and services because few competitors
- consumers have little choice
X inefficiency monopolies
lack of willingness of firms with monopoly power to control their costs of production
- operate with higher costs than necessary
Natural Monopoly
a market where a single firm can benefit from continuous economies of scale
- it is productively efficient for just a single firm to supply the market, as several individual firms could never achieve the low costs of the single firm
Natural Monopolies Economies of Scale
- experience continuous economies of scale
- implies that if the market were broken into more than one firm, average costs would be higher than for a single firm, meaning that prices might have to be higher.
Contestable markets
a market with freedom of entry and exit
Impact of a contestable market
- leads to incumbent firms behaving in economically desirbale ways with regard to pricing and static efficiency
- due to the threat of new entrants taking a share of any supernormal profits that might exist if the firms did not act as if they were in a perfectly comptetitve industry
Static efficiency
productive + allocative efficiency
