Market power

Market power

The degree to which a firm is able to raise their prices without losing a significant amount of consumers. The amount of power a firm has determines their power

Perfect competition

Market structure where there is an incentive degree of competition, with no individual firm having enough power to control the market

Perfect competition characteristics

• Price takers

• Homogenous products

• Many firms

• No barriers to entry and exit

• Perfect information

• Perfect resource mobility

Monopoly

A market structure where one large firm is controlling the supply and price of one particular good.

Monopoly characteristics

• Price makers

• Single/dominant firm

• No close substitutes

• Control of resources

• Inelastic demand

• High barriers to entry (BLADE)

Oligopoly

Market structure where a few large firms dominate the industry

Oligopoly characteristics

• Few large firms

• High barriers to entry

• Interdependence

• Price rigidity

Monopolistic competition

Market structure in which many firms exist but each firm has a small degree of power

Monopolistic competition characteristics

• Large number of firms

• Product differentiation

• No barriers to entry

Total cost

Total fixed cost + total variable cost

Average fixed cost

Total fixed cost/ quantity

Average total cost

Total cost/ quantity

Average variable cost

Total variable cost/ quantity

Marginal cost

change in total cost/ change in quantity

Profit

Total revenue - Total cost

Why is market power considered a type of market failure?

They don’t need to produce at their allocatively efficient levels rather they will produce at a level that maximizes profits. This means they will always produce at a level lower than their efficient level/ underproduce

How does the level of competition and product differentiation relate to market power?

The higher the competition the lower the market power. For example, in perfect competition there are a large number of firms meaning there will be high competition. However the higher the market power the more product differentiation.

For any type of market, what is the profit maximizing quantity

MR=MC

Perfect competition making abnormal profits

Perfect competition making losses

Perfect competition breaking even

Limitations of perfect competition

• Unrealistic assumptions

• Firms are too small to take advantage of economies of scale, which means they can’t lower their average costs.

• All products are the same, there is no product variety

• They are unable to engage in research and development to make new product

Advantages of perfect competition

• Always allocatively efficient because the profit maximizing quantity is always MC=AR

• Lower prices for consumers in the long run

• No inefficient firms because all high cost firms are forced to leave the market

Monopoly making abnormal profit

Monopoly making normal profit

Monopoly making losses

Does the monopoly change from the short run to the long run?

No, because they are the only firm in the market

Is the monopoly allocatively efficient?

No because the underproduction results in a deadweight loss

Disadvantages of monopoly

• Allocative inefficiency

• Productive inefficiency

• Deadweight loss

Advantages of monopoly

• Finance in R&D

• Economies of scale

• Incentive to innovate

Monopolistic competition making abnormal profits in the short run

Monopolistic competition making short-run losses

Monopolistic competition making normal profits