Market Structures

Market Structures

1. Monopoly

   • Evaluation
     • Even if PI - still exploiting greater EOS than smaller comp firm...
     • Price Discriminate
       • Perfect price discrimination is unlikely to occur
         • Problems with nationalisation and Regulation
           • Minimises CS - unethical producers are benefitting at the expense of consumers - uncertain whether profits would be reinvested
     • Hevaily regulated (comp policy)
       • E.g. Price control, quality measures or forced reinvestment
         • Ensure public interests are protected and outcome is closer to allocative efficiency
           • w/o handicapping m severely or causing them to shutdown
     • No gurarantee profits used to reinvest
       • may be given to shareholders in the form of dividends / saved / used to delverage
         • No incentive due to little competition
     • Natural Monopoly
       • Characteristics
         • Huge fixed costs
           • sig costs of infratstructure and machinery
         • Overwhelming cost advantage due to massive EOS
           • increased output creates lower prices
         • Competition is not desirable
           • wasteful duplication of resources
             • allocative inefficiency
               • EOS not being exploited fully
           • may use predatory pricing or short term pricing to outcompete new firms
       • Evaluation
         • more efficient to have one firm
           • Comp may promote waste duplication of resources and allocative inefficeny
         • Nationalised
           • Gov needs to get involved as main aim is social welfare and NM provide necessity
             • Gov would operate at P=MC - natural firms would make a loss - forced to leave unless
               • As long as they are subsidised for their loss - efficient outcome
               • X-inefficiency as gov is not profit max - slack - AC would be higher than attainable AC
               • Do not know allocative efficient point
                 • inaccuracy may occur as they do not know correct Pn (reg cap)
                 • Gov may not act independently to the firm
                   • FE/ A gov official may have invested heavily into stakes - firm may be too big - may give leeway to set high prices
         • Private sector but regulate them
           • Would produce at Pn and subsidise loss and remain in the industry
         • High prices for necessity goods
     • Existence of domestic firms beneficial (UK)
       • More effective to compete with large foreign firms in global market and pass costs to international cons
     • Profit max not objective for all firms
       • promote public interest, sales max allocative efficiency ... might be followed instead promoting productive eff that benefit consumers (low P and high Q)
         • Maybe true only in the SR however in the long run - use these objectives to strengthen position in industry - truly dominate and profit max in LR
     • Little incentive to be efficient in the first place
       • If M knows that the Gov will step in
         • X-inefficiency
   • Efficiency
     • Dynamic Efficient
       • SNP can be reinvested - in the form of technology advances, innovative new products and R&D
         • beneficial for con - brand ew, better quality products overtime (Increased choice)
           • Price could be lower over time if costs reduces
         • For M - new product dev can maintain MP - esp if products are patentable and better technology can reduce COP increasing profits making potential of the firm over time
     • X-inefficient
       • Are complacent and lazy in their production process allowing waste (excess AC at Qm)
         • Than if excess cost was eradicated
           • However the reality of minimising waste might be tedious and against the interest of managers and workers
             • May need to change their work habits or the production process - time consuming and requres high effort
     • Productively inefficient
       • Alternatively if they become too large and suffer from DEOS (due to high AC)
         • Than if the monopolist was a small firm and benefit from low AC
       • Can get away due to lack of comp
       • Do not produce at MES
         • voluntary forgo EOS
           • Output could be increased further with lower AC but doesn't correspond with profit max
             • Then if EOS was exploited
     • Allocative Inefficent
       • Consumer choice restricted
         • Quality of products sold may suffer given lack of competition
       • Exploit consumers by high prices at profit max level
         • Restriction of output (below social opt)- leading to misallocation - lower quantity than they desire
           • DWL for both cons and pro
   • Characteristics
     • Profit Max
     • Differniated product
       • Price Makers
       • No subs given unique nature of product
     • 1 dominant firm
       • No worry of competition
       • High MP
     • High barriers to entry and exit
       • Entry is difficult and potentially expensive
         • SNP can be sustained in the LR
           • Heavy investment in R & D

2. Oligopoly

   • Characterictics
     • Few firms dominating the market
       • supply industry is concentrated in the hands of a few firm
     • High barriers for exit and entry
     • SR Profit max
     • Interdependent
       • Make decision based on the expected reaction of rivals
       • Fight for MS + MP
     • Differeniated Product
   • Features
     • Collusion
       • Formal
       • Informal
       • Strategic
     • Price War
       • Game Theory
     • NPC
     • Price Rigidity
   • Evaluation
     • Dynamically efficient
     • Productively ineffient
     • Allocative ineffienct

3. Monopolistic Competition

   • characteristic
     • Many sellers - must compete strongly on NPC to survive
     • low barrier to entry and exit
       • SNP will not be sustained in the LR
     • Slightly differeniated
     • Firms =Profit Ma\X
       • Cons = utility max
   • Evaluation
     • Allocatively inefficient
       • Consumer welfare
         • High level of choice
           • No exploitation of con due to comp nature
             • greater satisfaction despite
           • If cons want to pay higher they can
         • better con service and product quality due to NPC drive
     • Productively inefficent
     • Dynamic Inefficient
       • in the LR - since no SNP in LR
         • Restricts ability to reinvest - overtime loose out w/ no tech advances
           • Reduces choice and price fall in future
     • Dynamic Efficient