3.1.4 Competitive and concentrated market structures

What are market structures

the characteristics of a market which determines a firms behaviout within the market

main characteristics of a perfectly competitive market

many firms

no product differentiation

no barriers

perfect knowldge

firms have no influence on price

What are market structures

the characteristics of a market which determines a firms behaviout within the market

main characteristics of a perfectly competitive market

many firms

no product differentiation

no barriers

perfect knowldge

firms have no influence on price

why do firms have no influence on price in a perfectly competitve market

there are so many firms that no single firm supplies sufficient goods to have an impact on the market supply and so no single firm has any influence on the equilibrium market price, so each firm is a price taker.

Factors to distinguish between different market structures

Number of firms and their relative market share

the degree of product differentiation

ease of entry to market

the extent to which suppliers and consumers in the market share the same knowledge

the extent to which the actions of one firm affects another

the extent to which a firm is a pricd taker or maker

what is market share

the percentage of the market in terms of a sales that a firm holds

How does the degree of product differentiation determine the market structure

more differentiated makes the market less competitive, increases brand loyalty and reduces elasticity. Products can be differentiated using price, branding and quality.

main characteristics of monopolistic competition

many firms

similar products

few barriers - difficult to ceate

imperfect but widespread knowledge

firms have low influence on price

main characteristics of oligopolies

few firms

relatively high product differentiation

many barriers

restricted knowledge

firms have quite high infliuence on price

main characteristics of monopolies

one firm

unique products

many barriers

restricted knowledge

firms have very high influence on price

why does monopolsitic competition have similar products

in order to gain competitive advantage, individual firms may try to differentiate their product but high levels of competition tend to lead to low profit margins in the short run, and only normal profit in the long run. Therefore, it is difficult for firms to achieve the funds and market share required to support the creation of barrier entry

why do monopolies have unique products

there is no alternative available from another firm in the same market

why do monopolistic competition have imperfect but widespread knowledge

due to there being many firms but having a good understanding of alternative products and their prices

How does the ease of entry determine the market structure

Barriers to entry are designed to prevent new firms from entering the market profitably, increasing producer surplus. Higher barriers make the market less competitive

What is an innocent vs artificial barrier to entry

innocent barriers are natural obstacles that make it difficult to enter market. Aritificial barriers are deliberately created by established firms through strategic actions to deter new competitors

Examples of barriers to entry

High capital costs - the intial cost of capital equipment needed to supply the good is hgih

internal economis of scale - existing firms may operate on a very large scale, enabling them to charge a competitive price. New entrants are likely to operate on a smaller scale so are unable to compete on price

sunk costs - costs that are not recoverable if a firm ceases to exist

legal barriers eg patents- legal right to produce a product for a number of years. Gives owner the exclusive right to prevent others from using the product, preventing competitors from producing similar products

Marketing barriers - high marketing expenditure is required to create a brand that is percieved to be unique

What is profit

the reward entrpreneurs receive from taking risks

How to calculate profit

Total revenue - total costs

what is normal profit

the minimum amount required to keep a factor employed in its present activity an the long run

when does normal profit occur

when total revenue = total costs, therefore normal profit = 0

what is the point of normla profit

it covers the opportunity cost of all the factors of production used

what is supernormal profi

the return above normal profit, so when TR>TC

what is the main objective if a firm

profit maximisation: when MR = MC

what is marginal revenue

the extra revenue earned from the sale of on eextra unit

what is marginal cost

the cost incurred from producing one extra unit

why do firms want to profit maximise

to give eomployees higher wages, sharegholders larger dividents, to reinvest the money into innvoation and lower costs, to gain greater efficiency and lower costs

why do firms not want to profit maximise

it may be difficult to work out MR and MC, greater risk of investigation from competition authorities, other objectives might be more important

what is short run profit maximisation

when firms try to maximise profit from every action they take, eg not offering refunds. But this may endager long run profit macimisation as consuers may not view this firm as favourably as others

what is long run profit maximisation

when firms are prepared to make lower profits or losses= in the short run in order to achieve the best possible level of long run profit. eg offering refunds to build up brand loyalty.

Why might survival be an objective

• for start up firms as they may be vulnerable as they need to buy capital but are likely to receive less revenue than established firms

• when market conditions are challenging during a reession, many firms will suffer losses

• changes in trends affecting demand in a specific market

• inefficient use of resources or poor management

why might growth be an objective

a firms success can be clearly demonstrated by its expansion. Gorwth can easily be measured by sales revenue, sales volume or number of outlets. This can be compared to the achievements of competitors or overall growth of market. growth helps secure jobs, profit and market share but may impact environment negatively

growth - why and why not revenue maximise

to increase output and benefit from economies of scale or gain some monopoly power. Profit is reduced compared to profit maximisation but revenue is increased

growth - why sales maximise

Firms will produce at a point where if it expanded output any further, it would make a loss (where AR = AC). By doing this, firms can sell as much as they can regardless of the cost. Managers may want this as their salaries may be linked size and they will want to increase salary. Often occurs when there is a divorce of ownership and control in the firm

Profit satisficing

firms seeking to make a satisfactory level of profit to keep shareholders happy. Allows time to pursue other objectives, such as a better work-life balance

Price determination in a perfectly competitive market

Supernormal profits may occurs through a fall in costs of production or an outward shift in demand. This moves the equilibrium point , increasing market price. At this new price, existing firms will extend their supply and enjoy supernormal profits. However, these supernormal profis only exist in thes hort run because new firms will enter the market to obtain these high levels of profit, and so market supply will increase (outward shift of supply). As a result, the equilbrium point shifts to a lower price so supernormal profit falls back to nromal profit levels.

Supernormal profits in concentrated markets

High barrers of entry prevent new firms from entering so any supernormal profits can be enjoyed by existing firms and there is a much greater scope for abnormal profits to be maintained and even increased. High product differentiation means firms can charge prices that exceed costs without the fear of new firms entering. However, competition may come from product quality, innovation and advertising.

perfect competition definition

a form of market structure that provides allocative and productive efficiency in the long run equilibrium

pure monopoly definition

exists when there is a single firm in the market

monopoly power

arises when firms exert considerate influence in a market because of their relatively large size. In the UK, a legal monopoly is any firm with a market share >25%

Natural monopoly

A monopoly with no subsitutes, where it is practical for there to be only one firm supplying a product as another firm in the industry would be wasteful

barriers to entry influencing monpoly power

economies of scale- as a firm grown, the AC of production falls so existoing firms have a cost advantage over new entrants, making them unnable to compete

Limit pricing - existing firms setting price of their good below the production costs of new entrants to make sure they cannot enter profitably

Owning resources - Existing firms gaining control of a scarce resource so new entrants cannot access them

Sunk costs - high unrecoerable costs eg advertising means new firms do not get the value of the costs back

Brand loyalty- eg from advertiisng makes it difficult for new firms to gain market share

Set up costs - high start up costs deter new firms

how do the no of competitors influence monopolies

fewer competitiors means fewer substitues meaning easier to gain large market share

how does advertising influence monopolies

more advertising means higher brand loyalty so demand is inelastic, creating a barrier to entry

how does the degree of product differentiation influence a monopoly

more differentiation, through quality price or branding, makes it easier to gain market share because ewer competitiors the firm faces

Advantags of monopolies

Research and development - more money to invest into R&D, promoting creativity and advances in tech. This can yield positive externalities and make the monopoly more dynamically efficient in the long run

Market stability - can ensure long term investments and reduce price fluctuations in specific industries

Example of a monopoly

Royal mail is a monopoly for postal services and this allows for more consistent pricing and investment in the industry, increasing postal servuce quality overall

Disadvantages of monopolies

Lack of competition means monopolies limit customer choice as they price higher and have a smaller selection of products

Reduced economic efficiency- monopolies may lack motivation to function as efficiently as possible in the absence of competitions. They are allocatively and productively inefficient as there is a loss of consumer surpus and a gain in producer surplus

Potential for exploitation - they may abuse their market dominance by setting high prices and engaging in anti-competitive behaviour like predatory pricing or limit pricing. High prices may exploit consumers as the good is under consumed so needs and wants are not fully met, losing allocatively efficiency and disproportionately affect lower income countries.

Limit pricing

firms deliberately set their prices low to prevent competition from entering the market in the first place li

predatory pricing

existing firms set prices low to force competition out of business