Dominant firms

The pros and cons

What is market failure?

Occurs when free markets fail to deliver an efficient allocation of resources.

What is productive efficiency?

Producing at the level of output that results in lowest average unit cost.

What is dynamic efficiency?

When resources are allocated efficiently over time.

Why do markets fail?

• The existence of externalities, impacts outside the market 

• Imperfect information 

• Factor immobility 

What is a dominant firm?

A firm that has a large market share, 40% +

Why do large firms tend to be inefficient?

• Lack of competition

• Diseconomies of scale

• Costs of maintaining barriers to entry, advertising etc.

For price discrimination to be successful, what are the four conditions?

• The firm must be a monopolist

• Monopolist must be able to split the market into easily distinguishable groups of buyers 

• Monopolist must be able to keep the market segments separate 

• Each market segment mist have different PEDs

What are the benefits of dominant firms?

• Economies of scale  

• Natural monopolies

• Use of supernormal profits 

What government policies can be used to deal with the market failure of dominant firms?

• Tax supernormal profits 

• Price controls

• Nationalisation 

What is regulation?

Controlling the quality and quantity of products in a particular market through legal means.

What are the objectives of regulation?

• Reduce barriers to entry

• Introduce contestable markets 

• Prevent abuse of monopoly power 

What are the problems with regulation?

• Monitoring costs 

• Regulatory capture, where the regulator comes to identify with the interests of the firm it regulates

• Credibility of regulators