Pros and Cons of Market Structures

What is a disadvantage of monopolies for consumers?

Monopolies produce at the profit maximisation point, which leads to a loss in consumer surplus.

What is a benefit of perfect competition for consumers?

Firms in perfect competition produce at allocative efficiency, which means that consumer surplus is larger. As a result, consumers are worse off in monopolies.

What is a benefit of monopolies to consumers?

Monopolies can produce cheap, high quality goods because they can reinvest supernormal profits and access economies of scale.

What is a disadvantage of perfect competition for consumers?

Perfectly competitive firms can’t reinvest as they only make normal profits. In addition, they are too small to access economies of scale.

What is a benefit of monopolies for producers?

• They are price markers so firms are able to set prices at the profit maximisation point. As a result, firms are able to exploit consumer welfare to gain large supernormal profits

• Can experience dynamic efficiency

How does dynamic efficiency affect the market position of a monopoly?

Dynamic efficiency enables firms to drive down prices and keep new firms from joining the market. As a result, reinvesting large profits can lead to a strengthening of a firm’s monopoly position.

What is a disadvantage of monopolies?

Monopolies can exploit their position to drive competitors out of the market. However, this may lead to complacency and an increase in x- inefficiency. As a result, firms' costs may rise. This in turn could lead to higher prices and the potential loss of the firm's monopoly position.

What is a disadvantage of monopolies on firms?

Firms can suffer disadvantages when they supply a monopoly firm because monopolies are the only buyer of these firms' goods. As a result of this monopsony position, monopolies are able to set very low prices. Therefore, many small firms will suffer losses and be driven out of the market.

The Advantages of Perfect Competition

Firms are able to achieve static efficiency. This means that they achieve both allocative efficiency and productive efficiency

Consumers benefit in a perfectly competitive market because consumer surplus is maximised. This is something which does not happen in monopoly markets.

The Disadvantages of Perfect Competition

In perfectly competitive markets, firms aren’t able to achieve dynamic efficiency. They are also unable to access economies of scale. As a result, prices may remain relatively high in the long run than they would if firms could innovate or reduce costs through large-scale production.

Consumers may also lose out over the quality of goods. Since firms must accept the market price, some may cut corners to reduce their costs of production and maintain profit.

Positives of Oligopoly

If firms in an oligopoly compete, then prices for consumers will fall, the quantity of goods supplied will increase and consumer surplus is maximised.

Negatives of Oligopoly

Consumers are worse off when firms collude. That’s because they will pay higher prices, with lower quantity supplied and a non-maximised consumer surplus.