economics
- Created by: katier1234
- Created on: 17-11-19 13:10
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- Monopoly and Monopoly Power-2
- Barriers to entry which influence monopoly power
- Economies of scale barriers
- Existing firms can produce at lower average cost
- Firm A has a big cost advantage over firm B- because it has vertical integration, buying power and customers get lower prices
- Existing firms can produce at lower average cost
- Artificial or Strategic barriers
- These are as a result of deliberate action by firms already in the market to block the entry of new firms
- e.g limit pricing so pricing low enough to discourage new entrants to the market. Predatory pricing - dropping pricing below cost price to force competitors out of the market. Collusion- a few large firms get together so that they can operate a single industry monopoly and keep other firms out
- These are as a result of deliberate action by firms already in the market to block the entry of new firms
- Statutory or legal barriers
- It is the law for example to have license to drive a taxi cab
- Patents- are legal property rights to prevent the entry of rivals e.g new drugs they can last for up to 20 years
- It is the law for example to have license to drive a taxi cab
- Brand loyalty barriers
- Firms with dominant brands in their industry e.g apple make it very difficult for other firms to enter and compete
- Products differentiation- is making a particular product different from other products provided by rival firms- through the design, method of producing for example quality, through the characteristics of the product and its ability to function
- Firms with dominant brands in their industry e.g apple make it very difficult for other firms to enter and compete
- Vertical integration barriers- This is when companies can become more dominant in the market by merging with other companies higher up or lower down in the supply chain
- Firm distributors and cinema chains
- record labels and online music station
- Firm distributors and cinema chains
- Economies of scale barriers
- Monopoly and market demand
- In a pure monopoly the demand curve for the monopolists output is the market demand curve. if there is only one firm in the market, demand for a monopolists output and market demand are the same
- If a monopolist is a quantity setter rather than a price maker the demand curve dictates the maximum price at which the chosen quantity can be sold
- The downward sloping demand curve means the monopolist faces a trade off they cant set price and quantity independent of each other
- Monopolists try to escape the choice of being either a price market or quantity setter by using advertising and other firms of marketing to shift the demand curve for their products to the right
- In a pure monopoly the demand curve for the monopolists output is the market demand curve. if there is only one firm in the market, demand for a monopolists output and market demand are the same
- Concentration ratios and market structure
- A concentration ratio indicates the total market share or a number of leading firms in a market, or the output of these firms as a percentage of total market output
- a five firm concentration ratio shows the percentage of output produced by the five largest firms in the industry
- Example
- In the uk retail petrol industry, there is a five-concentration ratio of 66% (5:66)
- There is three-firm concentration ratio of 44% (3:44)
- The growth of supermarkets selling petrol has made the market more competitive especially because supermarkets are willing to sell petrol at a competitive pressure to attract customers to shop at the supermarkets
- Example
- a five firm concentration ratio shows the percentage of output produced by the five largest firms in the industry
- A concentration ratio indicates the total market share or a number of leading firms in a market, or the output of these firms as a percentage of total market output
- Barriers to entry- A fixed cost must be incurred by a new entrant of a market, regardless of production or sales activities
- Monopoly, market failure and government intervention
- Should the government intervene to break up or control the monopoly power of firms in the market?
- The main case against a monopoly is that it can earn higher profits at the expense of allocative efficiency. this means that monopolists will seek to charge a price that is above the cost of resources used in making the product. higher prices mean that consumers needs and wants are not being satisfied and the product is being under-consumed
- Should the government intervene to break up or control the monopoly power of firms in the market?
- Higher costs - loss of productive efficiency
- Businesses may allow the lack of real competition to cause a rise in costs and a loss of productive efficiency
- When competition is tough, businesses must keep firm control of their costs because otherwise they risk losing market share
- inefficiencies can lead to a waste of scarce resources
- When competition is tough, businesses must keep firm control of their costs because otherwise they risk losing market share
- Businesses may allow the lack of real competition to cause a rise in costs and a loss of productive efficiency
- Barriers to entry which influence monopoly power
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