Competitive and Concentrated Markets

Market morphology is the term that’s used for different types of markets. A monopoly market is where there are one seller and a large number of buyers. A duopoly market is where there are two sellers and a large number of buyers are known as. An oligopoly market is where there are few sellers and a large number of buyers. A bilateral monopoly is where there are a single buyer and one seller in the market. Perfect competition is where there are a large number of buyers and sellers. They are price takers (have no pricing power), where as in a market where firms become more monopolistic, they become price makers (they influence the price that the goods are sold at - less to do with competition and demand)

Competitive markets are industries where the intesnity of competition of suppliers is high

• many sellers none of whom has a dominant monopoly position
• sellers produce slightly differentiated products giving consumers plenty of choice - leading to high cross-elasticity of demand 
• the barriers to entering the market are low, allowing new firms with new products to come into the market on pursuit of profit 
• each seller has good access to the prevailing industry technology
• consumer loyalty to establish businesses is fairly weak
• consumers and sellers have full information about prices so that its easy for buyers to find the seller offering the best value for money

The more competitive the market is, the more likely that an allocativley efficient outcome is achieved 

• profit maximisation - when a firm's total sales revenue is furthest above total costs of production. (usually firms ultimate objective - firms grow because their owners believe that growth leads to higher profits. even charitable organisations need profits to invest in their aims and developing new projects)
• sales maximisation - when sales revenue is maximised (this occurs at the level of output at which the sale of one extra unit of output would yield no extra revenue)
• growth maximisation - decision makers in a firm decide to grow as fast as possible (may conflict with profit maximisation). Growth will increase sphere of influence

Basic theory assumes that the main aim of businesses operating in the private sector is to maximise profit, but in reality there are many objectives:

• revenue                                                    survival
• growth                                                      cash flow
• market power                                           managerial aims
• social aims                                               share price
• reputation

The importance of profit:

Finance for capital investment and research: retained profits are a key source of finance for businesses undertaking investment and funds for aquisitions 

Market entry: raising profits sends signals to producers within a market 

Demand for and flow of factor resources: resources flow where risk-adjusted rate of profit is highest

Signals about health of the economy: rising profits might reflect improvements in supply-side performance. They are also the result of high levels of demand 

• large number of buyers and sellers
• perfect information about what is going on in the market (price of goods/COP ect)
• able to buy and sell as much as is desired at the ruling market price 
• unable to influence the ruling price (price takers)
• uniform, identical or homogenous products
• no barriers to entry or exit in the long run 

A pure monopolist is a single supplier that dominates the entire markets - 100% concentration. In reality the UK competition and markets authority (CMA) deems that:

• a working monopoly is any firm with greater than 25% of the industries' total sales
• a dominant firm is a firm that has at least 40% of their given market 

Price setting power: is available to any business with market power. Businesses where demand is price inelastic can change higher prices because consumers are less responsive to higher prices.

Monopoly power can come from the successful organic (internal) growth of a business or through mergers and aquisitions (also known as the integration of firms)

Horizontal integration - is where two firms at the same stage of production in one industry. For example two car manufacturers may decide to merge 

Vertical integration - where a firm integrates with different stages of production eg buying suppliers or retail outlets eg oil industry having retail networks 

Forward vertical integration - merges with a business further forward in the supply chain

Backward vertical integration - merges with a business at a previous stage of the supply chain eg suppliers 

A pure monopolist in an industry is a single seller. It is rare for a firm to have a pure monopoly - except when the industry is state owned and has a legally protected monopoly.

A working monopoly is any firm with greater than 25% of the industries total sales. (some markets allow businesses to enjoy some degree of monopoly power even with <25% share)

An oligopolistic industry is characterised by the existence of a few dominant firms, each has market power and seeks to improve its position over time

In a duopoly, two firms take the majority of demand.

Monopoly power can come from the successful organic (internal) growth of a business or through mergers and aquisitions (also known as the integration of firms). Monopoly power is not a complete monopoly, but are able to enjoy the benefits of a monopoly - price makers and products are less elastic 

Barriers to entry are designed to block rival businesses from entering a market profitability. If successful, they protect the power of existing firms and maintain high profits and increase producer surplus. Barriers make a market less contestable and reinforce the market power of well established businesses. In competitive markets, barriers to entry are low so new firms can come and go depending on expected rate of profit.

Barriers to entry:

• economies of scale in the long run (^costs unless ^ output)
• vertical integration to control supply
• brand loyalty among customers (eg apple)
• control of important technologies
• expertise, goodwill and reputation
• patent protection

Natural barriers that result from inherent features of the industry, such as economies of scale or high research and development costs are not barriers that have been artificially erected (by firms)

Atrificial barriers are erected by the firms themselves such as high levels of advertising expenditure or predatory pricing (establishing firms setting prices below costs to force new entrants out)

Avertising and monopoly power: informative, persuasive and saturation advertising

Product differentiation: the marketing of generally similar products with minor variations or the marketing of a range of different products

 For a monopoly DC=AR. They can be price makers or quantity setters. As the curve is downward sloping, the monopolist faces a trade off. If firm wants to increase quantity to q1, they have to lower price to p1, they can't choose both the price and the quantity

Concentration ratio is calculated as the sum of the market share percentage held by the largest specified number of firms in an industry. The concentration ratio ranges from 0% to 100%. An industry's ratio indicates the degree of competition in the industry