Key Words (next slide to start revising Market Str
Economies of Scale: fall in unit costs that occurs when a firm expands, becomes more efficient - eg. technical, purchasing, managerial, financial...
Diseconomies of Scale: rise in unit costs that occurs when a firm gets too big, less efficient
Productive Efficiency: Minimal costs
Allocative Efficicency:price = marginal cost (sacrifice by customers=cost, optimum)
Basic Economic Characteristics of Monopoly
1 firm dominates the market.
Pure monopoly has 100% of the market share, but the UK government regards 25% market share as having monopoly power.
Firm Price Maker: they have economies of scale, high prices and a low output level (allocative efficiency not met)
Can make abnormal profit in both the long and short run (will not be competed away by new entrants to the market, high barriers to entry).
Aim is to profit maximise.
! DIFFERENT FROM MONOPOLY, DO NOT CONFUSE !
Many firms, small with low market share
Low or no barriers to entry
Firms aim for profit maximisation
If products are differentiated it is possible to make abnormal profit
This can only be short run because it will be competed away
Initially introduced into the transport market at privatisation, now moved away from it
Monopoly vs Monopolistic Competition (1)
Competition is better for consumers because:
Has to cost minimise or lose market share and profit (productive efficiency met)
Has to keep prices low or lose market share and profit (allocative efficiency met)
Has to respond to customers, offer choice and innovate
Monopoly vs Monopolistic Competition (2)
Monpopoly is bad for consumers: no incentive to cost minimise (X inefficiency)
No pressure from competition to keep prices low, not enough produced (Allocative Efficiency not met)
Cause of market failure,, price higher and quantity lower than in competitive markets
Monopoly is good for consumers: might choose to cost minimise anyway (in order to profit maximise)
Has economies of scale so can pass on these benefits to consumers
Natural Monopolies: having competition would lead to a wasteful duplication of resources (eg. Railway Track)
Basic Economic Characteristics of Oligopoly
Seen in the bus market: First Bus, Arriva, Stagecoach etc.
Market dominated by a few large firms, and a number of smaller ones
Large firms take over/merge with smaller ones
Can work out if it is an oligopoly by working out a concentration ratio - adding up market share of largest firms
Have a kinked demand curve, can't raise price (lose customers) or lower price (price war) - price stickiness or rigidity. So instead they compete with non price competition (excessive marketing, advertising, promotions etc.)
Profit Maximisers, Abnormal Profit, High Prices
Economic Characteristics of Oligopoly
Risk of collusion
Firms are interdependent
(Illegally) fix price above marginal cost
Price Leader/Follower situations
Market Share (agree not to directly compete on a geographical basis)
Unlikely because of trust issues