Market Structures

Market Structures

1. Monopoly

   • 1 single seller
     • Pure/natural monopoly = 100%
       • Northumbria water
       • high fixed costs
       • large economies of scale
     • legal monopoly= 25%
       • Tesco
   • Price maker
     • objective: profit maximisation
   • high barriers to entry
   • unique product
   • Drawbacks
     • Productively inefficient (MC doesnt = AC in long run equilibrium position, so not operating at lowest point on the AC curve)
     • Allocatively inefficient (price charge is greater then MC- producers over rewarded and restricted supply meaning product is underconsumed
     • no need for innovtion to respond to changing consumer preference to make a profit
     • consumer choice is restricted
     • monoponistic power may exploit suppliers causing them to make a loss
   • Benefits
     • economies of scale, low AC and possible prices
     • security - LT view and invest in developing products = dynamic efficiency
     • financial security = stable employment
     • Intellectual property rights
   • SUPERNORMAL PROFITS

2. Oligopoly

   • few but large firms
     • high concentration ratio
   • high barriers to entry
   • differentiated products (similar but not identical)
   • independent firms ( action of each firm will have some kind of effect)
   • Collusion with oligopolies
     • similar results to a monopoly
     • agreement to restrict output to maintain high prices
     • Illegal and temporary
   • price competition
     • price taker
     • price war (ST benefits)
     • KINKED DEMAND CURVE
   • Benefits
     • high levels of efficiency (competition)

3. Monopolistic competition

   • large number of small firms
   • product differentiation
     • some price making power
     • smaller the difference, more elastic D
   • non price competition
   • No or low barriers to entry
   • SR monopoly behaviour
     • barriers to entry/ product differentiation/ supernormal profit (profit maximising level MC= MR)
       • but D more price elastic - more product
     • SUPERNORMAL
   • LR perfect competition
     • barriers to entry low - D shift left (overall D split)
       • normal profit (P = AR= AC). AC and AR touch but don't cross (quantity - MR=MC)
         • not productively efficient - not at lowest point on AC curve)
         • not allocatively efficient - equilibrium point is greater then MC
         • more efficient then a monopoly
     • Prices in monopolistic are higher then perfect competition (not at lowest point on AC) money is spent on differentiating - ads
     • PERFECT COMPETITION
   • not dynamically efficient- risky investement and unlikely due to low barriers
     • LR - little money for investment due to new firms entering and incumbent firms making normal profit

4. CONTESTABLE markets

   • how firms behave and their efficiency = potential competition
   • William Baumol 1982
   • contestable market: no barriers to entry and exit and cost facing incumbent and new firms are equal
     • potential competiton can influence the conduct of firms currently in the market
     • potential firms must assess the extent to which likely gains from market entry will excced costs
     • pool of potential entrants
     • entry and exit are costly (no barriers)
     • all firms are subject to some regulation and state of technology
     • enter market for abnormal profit. exit if not
       • incumbent firms vulnerable to hit and run competition
         • drive down price and efficiency
     • productively and allocatively efficient
       • keep costs low and not rise price above MC
         • so don't attract new firms
       • number of firms irrelevent
         • potential competition more important for efficiency
       • all markets can be contestable as long as they are efficeint
   • in reality don't exist but all markets may be slightly (potential competition)