lecture recording on 10 March 2025 at 18.49.51 PM

Key Terms in Competition

Monopolist and Competition

Monopolist: A monopolist is a market participant that holds significant market power, allowing them to operate without competition. This lack of competition results in the ability to set high prices, as consumers have no alternative options. Monopolists can emerge in various industries, particularly those with high barriers to entry, making it difficult for new competitors to enter the market.

Imperfect Competition: This term refers to market structures that do not reflect perfect competition, where firms have some degree of market power. In situations of imperfect competition, the availability of substitutes may be limited, which can harm consumers, particularly low-income families, by keeping prices artificially high. Examples of imperfect competition include monopolist scenarios and oligopolies where a few firms dominate the market.

Impact of Competition on Prices

Less Competition: When competition is limited, businesses can exert greater control over pricing. This often leads to higher prices for consumers, as firms prioritize profit margins over affordability. Such market conditions can hurt low-income households, making essential goods and services less accessible.

More Competition: Conversely, increased competition typically results in reduced pricing power for businesses. A competitive market encourages firms to lower prices and improve services to attract customers, which ultimately benefits consumers through lower costs and better quality products and services.

Price Gouging

Definition: Price gouging is the practice of raising prices to exorbitant levels during emergencies or periods of high demand, often exploiting consumers' urgent need for goods and services.

Examples:

• Earthquakes: After natural disasters, some retailers may significantly increase prices on essential supplies like food and water, taking advantage of scarcity.

• Rugby World Cup: Hotels and accommodations may double or triple their prices in response to a surge in demand during major events, leading to accusations of unethical pricing.

• Uber Surge Pricing: Ride-sharing platforms often employ surge pricing during peak demand times, significantly increasing costs for consumers seeking transportation when there are fewer drivers available.

Types of Market Competition

Perfect Competition

• Number of Sellers: Characterized by a large number of sellers, each with minimal control over market prices.

• Barriers to Entry: No significant barriers, enabling new firms to enter freely and compete.

• Information: Consumers possess full knowledge of prices and products, facilitating informed decision-making.

• Products: Goods are homogeneous, meaning they are indistinguishable from one another.

• Price Control: Firms are considered price takers, meaning they accept the market price determined by supply and demand.

Imperfect Competition

• Number of Sellers: A few sellers dominate the market, allowing for some control over pricing.

• Barriers to Entry: Higher barriers make it challenging for new entrants to compete effectively.

• Mobility of Resources: Low resource mobility, leading to specificity in their use.

• Imperfect Information: Consumers may lack complete knowledge about products and prices.

• Product Differentiation: Products are heterogeneous, meaning sellers may offer unique product features.

• Price Control: Companies can exert influence over prices due to their market power.

Monopolistic Competition

• Overview: In this market structure, many sellers exist, each holding some monopoly power within a specific niche, affecting pricing and consumer choice. For instance, local restaurants may compete but each offer unique dish variations, making direct price comparison challenging for consumers.

Oligopoly

• Overview: An oligopoly is characterized by a few large companies dominating the market, leading to potential price collusion. This market structure results in limited competition and can lead to higher prices for consumers.

• Examples: Key industries such as telecommunications, airlines, and banking often find themselves in oligopolistic structures due to high barriers to entry that prevent new firms from emerging.

Duopoly

• Overview: A duopoly exists when two firms dominate the market. This environment significantly influences pricing strategies, often leading to competitive pricing or strategic cooperation.

• Examples: The airline industry in New Zealand is an example of a duopoly, as consumers have limited choices between a few major carriers.

Monopoly

• Overview: A monopoly features a single seller dominating the market, with substantial control over pricing due to significant barriers to entry for potential competitors.

• Types of Monopoly:

  • Statutory Monopoly: Created by law where a single entity has exclusive rights (e.g., TAB for gambling in NZ).

  • Natural Monopoly: Arises in industries where single-provider efficiencies exist due to high infrastructure costs (e.g., electricity networks).

Monopsony

Definition: A monopsony describes a market situation where only one buyer exists, granting them significant market power over suppliers, often leading to unfavorable conditions for sellers.

Examples: In the agricultural sector, exporting companies may control the market for products like kiwifruit, giving them the ability to dictate prices and terms to farmers.

Conclusion

Understanding competition is pivotal for grasping market functionality, pricing strategies, and their impact on consumers and businesses. Awareness of various competitive structures enhances comprehension of economic dynamics and consumer rights.