Ch 12 - Market power: Monopoly and oligopoly 

  • Revenue and cost curves in a monopolistic competition:

     1. Each firm is able to differentiate to some degree, it can reduce its price and increase its net revenues   2. The demand curve for this market will tend to have a sloping downward demand curve

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  • Monopoly: the exclusive possession or control of the supply of or trade in a commodity or service.
  • Characteristic of demand curve of the monopolistic competitive firm:

     1. Market faces a relatively elastic demand   2. For every addition output to be sold, the firm will need to sell its output at a lower price

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  • Short run and long run profits of MC firms:   * Economic profits made in short run attract new firms to enter the market   * Demand for goods reduced as competition increases   * Firms are more likely to make a profit since they maximise their profits at a level where MR=MC   * Profit is equal to average total cost   * Firms in the market can easily make losses due to reducing demand

 Monopoly diagram

 \n }}A firm’s monopolistic market cannot achieve both productive efficiency and allocative efficiency (produces at a point where MC curve cuts the AR curve). Despite firms in this type of market being profit maximisers, in the long run, they are neither allocative efficient nor productive efficient.}}

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  • Oligopoly: market with few dominant sellers which together controls all or most of a market share.   * Interdependence of firms: action of one firm affects the action of the other firms   * Barriers to entry: market maintains its small number   * Non price competition

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  • Formal Collusion: exists when firms form an organisation or a group which prices the amount of output to be produced is decided
  • Tacit Collusion: type of collusion that exists when firms charge the same price on goods they produce without having a formal agreement

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  • Market efficiency in Oligopoly:   * Produces where marginal revenue is equal to marginal cost MR=MC

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  • Non-collusive oligopoly:   * exists when firms in the market do not organise themselves to decide on the price and the quantity of outputs to be produced

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  • Disadvantages of monopoly:   * Higher prices Higher price and lower output than under perfect competition. This leads to a decline in consumer surplus and a deadweight welfare loss   * Allocative inefficiency. A monopoly is allocatively inefficient because in monopoly the price is greater than MC. P > MC. In a competitive market, the price would be lower and more consumers would benefit   * Diseconomies of scale – It is possible that if a monopoly gets too big, it may experience diseconomies of scale. – higher average costs because it gets too big

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  • Advantages of monopoly:   * Research and development: The supernormal profit can enable more investment in research and development, leading to better products.   * Good quality firm: A firm may gain monopoly power because it is very innovative and successful, e.g. Google, Amazon, Apple. Therefore, monopoly does not always lead to inefficiency.

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