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Competition & Market Power (Spectrum of Competition (Monopoly…
Competition & Market Power
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
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
Barriers to Entry - higher the barriers, easier it is for firms to maintain monopoly power. Examples include:
Owning a Resource
Early entrants to a market can establish their monopoly power by gaining control of a resource
Sunk Costs
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
Limit Pricing
Involves existing firm setting price of their good below production costs of new entrant, to make sure new firms can't enter profitability
Brand Loyalty
If consumers are very loyal to a brand, which can be increased with advertising, it's difficult for new firms to gain market share
Economies of Scale
Barriers to Entry - higher the barriers, easier it is for firms to maintain monopoly power. Examples include:
Set-up Costs
If it's expensive to establish the firm, then new firms will be unlikely to enter the market
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
Oligopoly
High Concentration Ratio
In an oligopoly, only a few firms supply the majority of the market - high concentration ratio makes the market less competitive
Interdependence of Firms
Firms are interdependent in an oligopoly - means that the actions of 1 firm affect another firm's behaviour
High Barriers to Entry & Exit
There's high barriers of entry to & exit from an oligopoly - high barriers to entry make the market less competitive
Product Differentiation
Firms differentiate their products from other firms using branding. the degree of product differentiation can change how fair the market is an oligopoly