Spectrum of Competition
Monopoly
Monopolies can be characterised by:
High barriers to entry
Price Maker
Sole seller in a market (pure monopoly)
Price Discrimination
Profit maximisation - monopolist earns supernormal profits in both the short run & the long run
In UK, when 1 firm dominates market with more than 25% market share, the firm has monopoly power
Monopoly power can be gained when there's multiple suppliers. if 2 large firms in an oligopoly have greater than 25% market share, they're said to have monopoly power
Monopoly power is influenced by factors such as:
The Number of Competitors - fewer number of firms, lower the barriers to entry, & harder it is to gain large market share
Advertising - can increase consumer loyalty, making demand price inelastic, & creating barrier to entry
Barriers to Entry - higher the barriers, easier it is for firms to maintain monopoly power. Examples include:
The Degree of Product Differentiation - more the product can be differentiated, through quality, pricing & branding, the easier it is to gain market share. Is because the more unique the product seems, fewer competitors firm faces
Brand Loyalty
Sunk Costs
Owning a Resource
Set-up Costs
Limit Pricing
Economies of Scale
As firm grows bigger, average cost of production falls because of ECONs - means existing large firms have a cost advantage over new entrants to the market, which maintains their monopoly power. Deters new firms from entering the market, because they aren't able to compete with exiting firms
Involves existing firm setting price of their good below production costs of new entrant, to make sure new firms can't enter profitability
Early entrants to a market can establish their monopoly power by gaining control of a resource
If unrecoverable costs, like advertising, are high in an industry, the new firms will be deterred from entering the market, because if they're unable to compete, they don't get the value of the costs back
If consumers are very loyal to a brand, which can be increased with advertising, it's difficult for new firms to gain market share
If it's expensive to establish the firm, then new firms will be unlikely to enter the market
Oligopoly
High Concentration Ratio
Interdependence of Firms
High Barriers to Entry
Product Differentiation
There's high barriers of entry to & exit from an oligopoly - high barriers make the market less competitive
In an oligopoly, only few firms supply the majority of the market - high concentration ratio makes the market less competitive
Firms are interdependent in an oligopoly. This means that the actions of 1 firm affect another firm's behaviour
Firms differentiate their products from other firms using branding. The degree of product differentiation can change how far the market is an oligopoly
Imperfect Competition
Firms in a monopolistically competitive market compete using non-price competition
There's no barriers to entry to & exit from the market
The model is based on the assumption that there's a large number of buyers & sellers, which are relatively small & act independently - each seller has the same degree of market power as other sellers, but their market power is relatively weak
Since firms have a downward sloping demand curve, they can raise their price without losing all of their customers. This is because firms have some degree of price setting power
Firms sell non-homogeneous products due to branding (there's product differentiation). However, there's a lot of relatively close substitutes.
Buyers & sellers in a monopolistically competitive market have imperfect information
A monopolistic competitive market has imperfect competition - firms are short run profit maximisers
Examples of monopolistic competition include: hairdressers & regional plumbers
Perfect Competition
In a competitive market, profits are likely to be lower than a market with only a few large firms. This is because each firm in a competitive market has a very small market share. Therefore, their market power is very small. If the firms make a profit, new firms will enter market, due to low barriers to entry, because the market seems profitable. The new firms will increase supply in the market, which lowers the average price. This means that the existing firms' profits will be competed away
In this market, price is determined by the interaction of demand & supply
A perfectly competitive market has the following characteristics:
Perfect knowledge
Homogeneous goods
Free entry to & exit from the market
Firms are short run profit maximisers
Sellers are price takers
Factors of production are perfectly mobile
Many buyers & sellers
Advantages
Disadvantages
Since firms are small, there are few or no economies of scale
The assumptions of the model rarely apply in real life. In reality, branding, product differentiation, adverts & positive & negative externalities, mean that competition is imperfect
In the long run, dynamic efficiency might be limited due to the lack of supernormal profits
Since firms produce at the bottom of the AC curve, there's productive efficiency
The supernormal profits produced in the short run might increase dynamic efficiency through investment
In the long run, there's a lower price. P = MC, so there's allocative efficiency