Micro Topic 5: Market Structures

Pros of Profit Maximisation

Re-Investment (Dynamic Efficiency)

Dividends for Shareholders

Lower Costs and Lower Price for Consumers

Reward for Entrepreneurship

Cons of Profit Maximisation

No Knowledge of MC=MR (cannot use it)

Greater Scrutiny (CMA)

Key Stakeholders Harmed

Other Objectives may be More Appropriate

Examples of Stakeholders

Shareholders

Managers

Consumers

Workers/Trade Unions

Government

Environmental Groups

Reasons for Revenue Maximisation (MR=0)

Economies of Scale

Predatory Pricing

Principle Agent Problem

Divorce Between Ownership and Control

Reasons for Sales Maximisation (AC=AR)

Economies of Scale

Limit Pricing

Principle Agent Problem

Divorce Between Ownership and Control

Flood The Market (Gain Market Share Fast)

Features of Monopoly

One Seller Dominating The Market

Differentiated Products

Firms are Price Makers

High Barriers to Entry and Exit

Imperfect Information

Firm is a Profit Maximiser

Features of Perfect Competition

Large Number of Buyers and Sellers (infinite)

Homogenous Goods

Firms are Price Takers

No Barriers to Entry/Exit

Perfect Information

Firms are Profit Maximisers

Features of Monopolistic Competition

Many Buyers and Sellers

Slightly Differentiated Goods

Firms are Price Makers

Low Barriers to Entry/Exit

Good Information

Non-Price Competition

Firms are Profit Maximisers

Features of Oligopoly

Few Firms Dominate The Market

High Concentraton Ratio

Differentiated Goods

Firms are Price Makers

High Barriers to Entry/Exit

Interdependence (Price Rigidity)

Non-Price Competition

Profit Maximisation is Not The Sole Objective

Factors promoting Competitive Oligopoly

Large Number of Firms

New Market Entry Possible

One Firm With Significant Cost Advantage

Homogenous Goods

Saturated Market

Factors promoting Collusive Oligopoly

Small Number of Firms

Similar Costs

High Entry Barriers

Ineffective Competition Policy

Consumer Loyalty

Consumer Inertia (not willing to switch suppliers)