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

  

  \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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