Ch 12 - Market power: Monopoly and oligopoly

Oligopoly

: market with few dominant sellers which together controls all or most of a markets share.

Profit

is equal to average total cost.

Oligopoly

market with few dominant sellers which together controls all or most of a markets share

Interdependence of firms

action of one firm affects the action of the other firms

Barriers to entry

market maintains its small number

Formal Collusion

exists when firms form an organisation or a group which prices the amount of output to be produced is decided

Tacit Collusion

type of collusion that exists when firms charge the same price on goods they produce without having a formal agreement

Monopoly

the exclusive possession or control of the supply of or trade in a commodity or service.

Formal Collusion

exists when firms form an organisation or a group which prices the amount of output to be produced is decided

Tacit Collusion

type of collusion that exists when firms charge the same price on goods they produce without having a formal agreement

Market efficiency in Oligopoly

Produces where marginal revenue is equal to marginal cost MR=MC

Non-collusive oligopoly

exists when firms in the market do not organise themselves to decide on the price and the quantity of outputs to be produced

Diseconomies of scale

It is possible that if a monopoly gets too big, it may experience diseconomies of scale. – higher average costs because it gets too big

Research and development

The supernormal profit can enable more investment in research and development, leading to better products.

Allocative inefficiency

A monopoly is allocatively inefficient because in monopoly the price is greater than MC. P > MC. In a competitive market, the price would be lower and more consumers would benefit

Good quality firm

A firm may gain monopoly power because it is very innovative and successful

Interdependence of firms

action of one firm affects the action of the other firms