Market Structures

ch4 micro

What is the spectrum of competition from many firms to one firm. and what are the factors that distinguish between different market structures

Perfect Comp → Monopolistic Comp → Oligopoly → Monopoly

Factors like: degree of product differentiation, barriers of entry are some things.

Perfect Competition Characteristics

1) Infinite number of suppliers and consumers and they are small enough so that no single firm or consumer has any market power

2) Each firm is a price taker so have to buy/ sell at current market price

3) Consumers and Producers have perfect information

4) Products are identical so can easily switch between products

5) No barriers to entry and no barriers to exit

6) Firms are profit maximisers MR=MC

FINALLY, THEY DON’T EXIST IN REAL LIFE

Explain how supernormal profits are competed away using the graphs in short run and long run

So TR occurs at QxP (at MC) and TC occurs where ACx Q. Profit is TR-TC so supernormal profit is the red bit. However, supernormal profit provides an incentive for firms to join the market, and since there are no barriers to entry, these firms join and supply increases. This causes market price to fall and so supernormal profit is competed away and a new long run equilibrium is reached

What happens if a firm is unable to make profit in the long run

If market price (AR) falls below a firms average cost (AC) They will leave the market

In the short run they either:

• if selling AR is still above the firms average variable costs then the firm may continue to trade temporarily

• if the selling AR falls below the level of the firm’s average variable costs then it will immediately leave the ,arket

Where do the efficiencies occur in the perfect comp

Productive eff: bottom of AC

Allocative eff: P=MC

Dynamic eff: no dynamic eff as there’s no rewards for taking risks

Static eff: if allo and prod are achieved at any particular point then its static eff. but it cant last forever since consumer taste and technology change a lot

What is a Monopoly and why is monopoly power a result of

A market with only one firm in it so it has 100% market share

or in a market with more than one seller, firms have monopoly power and can influence price so they price makers

Monopoly power comes as a result of:

• barriers to entry: preventing new comp entering market to compete away large profits

• advertising and product diff: firm can be price maker if consumers think their product is more desirable

• few competitors: if firm dominated by few firms its easier to differentiate products

Explain why Monopolies make supernormal profit in the short run and long run? using the graph

Profit maximisation occurs at MR=MC. If firms which is produce a quantity at Qm where profit max occurs, then the demand curve shows the price the firm can set, Pm. The average cost for producing to get Qm is shown at ACm. The difference between the TR and TC is the supernormal profit. Due to low barriers to entry, firms cannot enter the firm easily and so supernormal profit cannot be competed away. This is the long run equilibrium position

Why aren’t monopolies productively or allocatively efficient?

As seen on the supernormal graph, MC is not equal to AC at the lowest point on AC so not productively eff

The price charged by the firm is greater than MC so the market is not allocatively efficient and producers are being over rewarded for the products they are providing

Because of restricted supply, product is under consumed (consumers are not getting as much as they want) and consumer surplus is shown from Pm= Qm and the consumer surplus which is transferred to supernormal profit is from Pc= Qm, Pc= Qc is deadweight welfare loss, the potential revenue that the producer isn’t earning

Advantages and Disadvantages of Monopolies

ADV

• Its large size allows for it to gain EOS and if DisEOS are avoided it can keep its average costs low

• The security they have in the market means that it can take a long term view and invest in developing and improving products for the future and can lead to dynamic efficiency

• Inc financial security means that they can provide stable employment

DisADV

• Welfare Loss: Monopolies raise prices and reduce the quantity of goods and services supplied, leading to a deadweight welfare loss. Consumers face higher prices and reduced quantity, and less choice as only one main supplier of the good exists.

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• Income Inequality: Monopolies can worsen income inequality, as the poorer are hit hardest by higher prices.

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• Resource Misallocation: Higher prices mean consumers buy less of the good, leading to misallocation of resources.

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• Economic Efficiency: Monopolies can be inefficient, as they do not face the same pressure to minimize costs as competitive firms.

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• Regulatory Concerns: Regulation can prevent monopoly firms from abusing their market power by raising prices too much.

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  These disadvantages highlight the need for careful consideration of monopoly positions in economic policy and market regulation.

What is a Monopsony

Where a single buyer dominates a market and can act as a price maker and drive down markets

An example of one are supermarkets who are act as monopsonists when buying from suppliers

What is price discrimination and some examples

It is when a seller charges different prices for the same product

conditions include the seller to have some price making power so like in monopolies and oligopolies. They must also distinguish separate groups and their PEDS. The firm must also prevent seepage- someone buying and then selling at a higher price

E.g

concession tickets are cheaper at the cinema

off peak train tickets are cheaper than at rush hour

window cleaners charge more in smart neighbourhoods than lower income areas

How are price discrimination and consumer surplys related?

Price discrimination attempts to turn consumer surplus into additional revenue for the seller

What are the different degrees of price discrimination

First degree: perfect pd

• where each individual is charged the maximum they are willing to pay so all consumer surplus is changed into extra revenue

Second degree:

• where lower prices are charged to people who purchase large quantities (in wholesale like costco). People who buy less are charged higher and this area is the additional revenue

Third degree:

• when a firm charges different prices for the same product for reasons like different ages, different times and different countries/ shops

• they profit maximise where MC=MR so it will charge a higher price to group with more elastic PED and charge less to those with more elastic PED

advantages and disadvantages of price discrimination

adv

• some or all consumer surplus is converted into revenue for the seller so it increases revenue at the expense of the consumers which could be used to improve products of investment into production

disadv

• does not lead to allocatively eff as AR is greater than MC as allocative eff occurs at P=MC

• consumers are not treated equally but often people who end up paying more have higher incomes

What are the 2 ways to define and Oligopoly

A market which is dominated by a few firms that have high barriers to entry and firms offer differentiated products

OR

A market in which firms are interdependent (so the actions of each firm will have some effect on the others) and they use competitive or collusive strategies to make this work to their advantage.

Competitive vs Collusive Behaviour

Competitive:

• various firms do not cooperate but compete with each other mostly on price

• more likely to happen when: one firm has lower costs than the others, relatively large number of big firms in the market (making it harder to see what everyone is doing), products are similar and BOE are low

Collusive:

• when various firms cooperate especially over what prices are charged

• formal collusion (illegal): a formal agreement between firms

• informal/ tacit collusion: without an agreement but firms know its in their best interest not to compete

• more likely to happen when: firms all have similar costs, relatively few firms, theres brand loyalty so customers are less likely to buy from another brand even when prices are lower and BOE are high

How do oligopolies bring similar outcomes to a monopoly

collusive oligopolies lead to higher prices and restricted output so allocative and productive inefficiencies. They have the resources to invest and achieve dynamic eff but they have no incentive to so it can lead to market failure

Because they dont lower prices even though they could, they make sp profit at consumers expense

Colluding firms have an agreement to restrict output to maintain high prices and set price at Po and output Qo where profit is maximised. costs are where AC= Qo and the difference between is sp profit

adv and disadv of oligopolies

they are unstable and unlikely to last long

formal collusion is illegal and tacit is temporary, if a firm cheats and lowers its price it can trigger a price war

firms are unlikely to raise prices to very high levels as higher prices provide an incentive for new entrants to join the market

What are the assumptions for the Kinked demand curve and what does it explain

It explains price stability

2 assumptions

• if a firm increases its price other firms will not

• if a firm decreases its price, other firms will also decrease

So when price is increased, demand is elastic

• people will buy from firms with lower prices so firms who upped their price lose out even if their higher price gets some profit

When price is decreased, demand is inelastic

• given that all firms have lowered its price, the firm will not gain any market share and the firm that reduces will lost out as the price of their product has decreased

inelastic steeper

Conditions of Monopolistic Comp

• some product differentiation

• sellers have some degree of price making power

• sellers demand curve slopes downwards

• smaller the product differences, the more price elastic the demand for each product will be

• there are either no or very low barriers to entry

Monopolistic comp in short and long run

Short run like a monopoly,

supernormal profit and profit max at MC=MR at a quantity and price is set at this quantity where demand is. costs is where AC= Q and difference is sp profit

Long run like perfect comp

low BOE means firms enter market and demand decreases to left as its split between more firms and so AR is tangent to AC and at this point is normal profit and is P. supernormal profit is competed away and driven down to normal profit unlike monopolies.

not allo or product eff

Why are prices higher in mono comp than perf comp

unlike in perf comp, mono comp do not allocatively eff and do not produce at the lowest point on the ac curve

meaning that prices are higher in mono comp

as firms in mono comps spend money on advertising as they have some product differentiation and they have chosen to restrict output to maximise profit

What is Contestability and low contestability

refers to how open a market is to new competition. if barriers to entry are low and sp profit can be potentially made by new firms

High barriers to entry/ exit mean low Con

• patents so cant copy other brands

• advertising creates strong brand loyalty

• trade restrictions

• sunk costs are high: costs are sunk if they cannot be recovered when a firm leaves an industry, these costs might include investment in specialised equipment or expenditure on advertising

What are hit and run tactics

this means entering a market whilst sp profits can made and then leaving the market once prices have been driven down to normal profit