4. 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

Efficiency of Monopolies

Allocative: No

Productive: No

X: No

Dynamic: Yes

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

Efficiency of Perfect Competition

Allocative: Yes

Productive: Yes

X: Yes

Dynamic: No

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

Efficiency of Monopolistic Competition

Allocative: No

Productive: No

Dynamic: No (but yes in short run)

Evaluation of Efficiency in Monopolistic Competition

Allocative: Pretty decent competition so price making ability not as bad as monopoly, consumer exploitation (loss in CS) not as bad as monopoly. Differentiatied goods unlike homogenous in perfect comp which is more desirable

Productive: Good subs and cannot afford to sacrifice economies of scale as much as monopoly. There may not be as many economies of scale in perfect comp so greater exploitation of eos in monopolistic comp. Product differentiation demands may cause productive inefficiency due to it being harder to exploit full eos

Dynamic: Short-run SNP may be enough to reinvest in the long-run. Reinvestment could be a part of the competition so can reinvest normal profits even if it’s small contributions

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

Efficiency of Competitive Oligopoly

Allocative: Yes

Productive: Yes

X: Yes

Dynamic: No

Efficiency of Collusive Oligopoly

Allocative: No

Productive: No

X: No

Dynamic: Yes

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)

Conditions for Price Discrimination

Price Making Ability

Information to Seperate the Market

Prevent Re-Sale (Market Seepage)

Pros of Price Discrimination

Dynamic Efficiency

Economies of Scale

Some Consumers Benefit

Cross Subsidisation (Using increasing profits to subside loss making goods and services)

Cons of Price Discrimination

Allocative Inefficiency

Inequalities

Anti-Competitive Pricing (lower prices drives out other firms and reduces competition)

Conditions for Market Contestability

Low Barriers to Entry/Exit

Large Pool of Potential Entrants

Good Information

Incumbent Firms Subject to Hit and Run Competition

Pros of Market Contestability

Allocative Efficiency

Productive Efficiency

X Efficiency

Job Creation

Cons of Market Contestability

Lack of Dynamic Efficiency

Cost Cutting in Dangerous Areas

Creative Destruction

Anti-Competitive Strategies

What is Invention

Creation of a new idea without it necessarily becoming a commercial reality

What is Innovation

Transforming an invention into commercial reality