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Market structures
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- 1What is welfare analysis?Welfare analysis quantifies and compares gains & losses to consumers, producers and society arising from different economic situations
- 2Economic surplus GRAPHCS is the difference between the willingness to pay for a good and the market price
PS is the difference between the market price and the minimum acceptable selling price, i.e. just covering MC
ES is the total sum of PS and CS, and is the difference between the willingness to pay and the cost of production - 3Perfect competition maximises ES GRAPHIn a perfectly competitive market, there's a large number of perfectly informed consumers and produced, free to enter and exit whenever, buy and sell a standardised good without influencing the price as they are price takers
ES is maximised when the market clears
No coercion
Q* is the optimal size of the market
Economic optimum since MC = MB when the last unit of output is exchanged - 4Allocative efficiencyProductive efficiency e.g. a firm's capacity to minimise costs
Dynamic efficiency e.g. a firms capacity to do so over time
Allocative efficiency is about how resources are put to their most valued uses
Freely adjustable prices lead to allocative efficiency
Most cost effective firms supply goods to consumers who value them most
Pareto optimality implies that any other allocation would make at least one agent worse off - 5DWL GRAPHNet loss of ES
A result of allocative inefficiency, some sort of over or under production
inefficient output levels lead to DWL that are borne by society - 6Market powerAny allocative inefficiency whether it be market failure, government intervention or missing markets, lead to adverse welfare effects i.e. DWL
Market power is the ability of firms to influence prices
Competition policy exists to prevent and curb the excess of market power
Oligpopsony, monopsony = buyer market power
oiligpoly, monopoly = seller market power
bilateral and perfect competition = neutral - 7Market concentrationThe Herfindahl index measures market concentration by comparing the size of the firms to the industry, i.e. market share, calculated as the sum of all market suppliers share squares.
Used by competition policy to see whether merger is likely to increase market power
High HHI indicates strong concentration and low competition i.e. high chances of market power and vice versa
Monopolist is sole seller of good with no close substitutes, has max value of HHI - 8Pure monopoly GRAPHMonopolist is a profit maximising firm, but it cannot charge any price it wants
It sets Qm where MR = MC
Pm is determined by the downward sloping demand curve
Monopoly profit given by Pm - AC
No supply curve for monopolist as this only for price takers
Monopolist does not set output that MC = P - 9Welfare cost of monopoly GRAPHSince monopolist sets Pm > MC not all consumers who value the goods more than its cost buy it
The quantity produced and sold by the monopolist is below the socially efficient level that would otherwise exist in a competitive market, Pm > Pc
DWL triangle ABC
Monopolist captures part of CS that would have existed under competitive conditions
Net gain for monopolist as this transfer is greater than the PS that would exist otherwise - 10Price markup and demand elasticities GRAPHSThe Lerner index measures monopoly power as L = P - MC / MC
Higher L means more monopoly power
L = 0 for competitive firms since P = MC depending on demand elasticises - 11Natural monopoly GRAPHExists due to a cost advantage, where one firm is able to produce at lower costs than 2 or more firms, due to continually falling AC caused by high initial sunk costs, economies of scale, e.g. network, rail, electric.
MC always below AC
Must be tolerated
If more firms then it will cause inefficiency and unsustainable - 12Rent seekingAny expenditure designed to acquire, maintain or exercise market power in order to generate above normal profits
Firms don't want competition so they create rents
Firms introduce monopolist elements into otherwise competitive situations, e.g. monopolistic competition due to product differentiation and branding
Firms also rent seek by lobbying to government and regulators for protective regulations, e.g. price controls, entry barriers and quality controls - 13Welfare capture pricing strategiesPricing strategies are designed to capture CS and transfer it to the producer
Price discrimination includes charging consumers their reservation price (first degree discrimination), mixed bundling (selling goods individually and in bundles), tying (requiring purchase of similar goods), peak load pricing (charging higher prices at peak periods) - 14Example of price discrimination GRAPH
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- (Market structures) Business/Economics Fichas sobre Market structures, creado por Omar Chaudry el 27/06/2017.
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- Omar Chaudry
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