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3.4 - Market Structures - Coggle Diagram

- - - - Some argue that monopolists have the best DE because they have more profit, resources tech, etc...
      - Some argue competitive markets have better DE because they have to innovate to gain customers
        
        In reality highly competitive markets have such low profits that they can't be as DE
  - - - The solution to this, like most problems with markets, is to add competition.
  - - - This causes some consumers who are willing to pay MC to drop out the market because they aren't willing to pay the inflated prices.
- - - - There are three main types of entry barriers
        
        Some are naturally occuring in the market
        
        EOS
        
        MES
        
        Some are imposed by the government. This is can be seen as government failure because it prevents competition
        
        patents
        
        licenses
        
        state-owned franchises
        
        Ones that are deliberately imposed by other firms, mostly in an oligopoly, to kick a new firm out.
        
        predatory pricing
        
        limit pricing
        
        Branding
- - - - If a firm discovers a way to decrease its MC, then it can charge market price while making the product for cheaper. The crates some AP
- - - - For example, a firm can make AP in the short run but will lose it in the LR because the entrance of new firms will compete it away.
        
        SR
        
        LR
        
        Here the firm would locate at A where P = MC = MR
        
        Then the price would increase to B, where P = AR = AC
        
        In the long run the firm settles at P = AR because there is some competition and some threat of new entrance so they want to stay with normal profit to deter any new firms.
- - - - There are two types of collusion (both are illegal)
        
        tacit - the most common form of collusion, its sly and difficult to identify and prove as there is no messages between the parties
        
        overt - where firms collude openly and send messages to each other about prices etc...This is much easier to prove
        
        Collusion can be looked at like the prisoner dilemma
        
        if they both collude they can get decent abnormal profit and share the customers. (W/W)
        
        if one breaks the collision they get all the customers and the other gets very little. However, even the firm with all the customers won't be making as much if an AP. (W/L)
        
        if the both break the collision then a price war starts and they may share the customers by the both won't make an AP. (L/L)
  - - - For this reason oligopolies try to keep firms out of the market in a few ways. (These are known as game theory)
        
        Limit pricing - (Happens once a new competitor has entered the market). This is where the collousing firms agree to reduce the price to below the new firms MC. Because of EOS, however, this new price will still above the colluding firms MC therefore causing the new frim to makes loss a forcing them to leave the market.
        
        This can also be done before a firm enters the market so less firms are intinced into the market.
        
        Branding - This is designed to build customer loyalty which makes their D curve more elastic and discourages some firms to enter the market.
        
        Predatory pricing - (Happens once a new competitor has entered the market). This is similar to limit pricing however, the colluding firms push the price to below the MC of any firms. This means they become a lost leader, however, because of EOS, the new firm will lose more money and have to leave the market sonner. When this happens the price can go back up again.
        
        Patents - patents act as entry barriers as new firm can't use some of the existing design in the market
        
        Patents are generally seen as good as they reward R+D and innovation (which we need to row as an economy). Pents allow the firm that makes an innovative product to get a return on the investment before new firms steel it and charge a lower price (because the other firms don't have the fixed cost of designing the profit)
        
        Some entry barriers are out of the control of the oligopolies. For example there could natural entry barriers in the market (such as the cost of building a petrol station). Also some government policies can act as entry barriers (regulations of what petrol stations can sell)
  - - - Over time oligopolies tend to decline as generally over time:
        
        more firms enter the market
        
        he concentration ratio decreases
        
        their power decreases
        
        The CR tends to decrease over because:
        
        the entry barriers lower (often through tech)
        
        AP attracts new competition
        
        Government policy may introduce new firms
        
        changes in trends and consumer tastes
        
        The CR may increase if there are mergers, patents or recessions.
      - oligopolies often break down because of the incentive for a firm to break the collusion (links becask to the prisoner dilemma). One firm break the alliance will cause a price hence breaking the oligopoly.
      - Oligopolies are always variable in dynamic markets. The decline in FC and entry barriers has made most markets dynamic and contentable.
      - In many markets there are often declines in brand loyalty as well. This often occurs when incomes are low or static
  - - - At A, the demand curve kinks from elastic to inelastic
        
        The ologists charge at A where that obtain a large AP
        
        When the MC falls the price stays the same as there is no incentive to change it
      - This model works when the oligopoly is table
        
        This is fairly realistic model, however extreme MC increase may cause the price to rise
- - - - Monopolies tend to get a bad image as they control the market and aren't allocatively efficient, however, they may have some economic benefits like in this example.
        
        Here the monopolist takes over all the firms in the market causing him to achieve massive EOS
        
        This means he can charge below the original market price and still make AP
        
        this is beneficial for the consumers and the monopolist.
        
        Schumpeter believes this is likely to happen as huge profits allows for innovation and EOS
        
        Hicks believes this won't happen as the lack of competition will cause the monopolist to have no motivation for innovation
        
        The government thinks this is unlikely so see monoposts as a negative
        
        If the monopolist can be discriminative (charge different prices to different people) then he can be socially efficient. However, this can only happen if:
        
        There is asymmetric information
        
        The monopolist prevent resale
        
        Customers all have different PEDs
        
        As shown above there are two types of markets in a monopoly
        
        market A where the demand is inelastic
        
        market B where the demand is elastic
        
        This means there is a kinked demand curve when the monopolist is being discriminative. First half market A and the second half market B
        
        Here the monopolist will charge different prices to different people depending on what they are willing to pay. This means there is no consumer surplus but almost always some producer surplus.
        
        This is great for the monopolist as they are now allocatively efficient and still can make some AP
        
        However it can't occur in all markets. The most markets this occurs in are; plummers, electricians, dentist, airplanes and car salesman
  - - - Common examples are; distribution networks, rail lines and power stations
    - - This market lends itself to one firm as a firm needs 90% to achieve MES. At 90% of the market share it can charge P0 while the other firm can only charge P1
        
        This huge price disparity will obviously kick the other firm out causing there to a natural monopoly
  - - - Corporation tax - tax on profits