market structures - microeconommics

• a monopoly refers to when there is only one firm in the market. but, it can also be used to refer to when there is one dominant firm as well as some smaller firms
• cost benifit approach is best practice when regulating monopolies: this is because monopolies can be good or bad so it makes sense to have a case by case approach
• compulsory breaking up of monopolies - many argue that markets work the best when they are as close to perfect competition as possible. this is only achiveable when all monopolies are broken up
• price controls to restrict monopoly abuse - governments may introduse maximum prices to restrict exploitation in the case of monopolies. BUT, this is rarely used
• taxing of monopoly proffits - the government can tax firms that are monopolies at special levels e.g. windfall taxes
• rate of return regulation - these essentially act as a price cap for the amount of profit a firm is allowed to make
• state ownership of a monopoly - it is suggested that the negaative externalities of a monopoly can be mitigated if taken under state control
• privatisation of monopolies - conservative governments argue that harm actually occurs at the point at which a monopoly is nationalised. this is because governments are protected from the market forces that would make private monopolies efficient
• deregulation - this can be used to encourage other firms to enter the market, by extension, out-competing the monopoly.
• the arguments for privatisation of monopolies: revenue raising, reduces government spending + borrowing, premotes competition, premotes efficiency
• because monopolies restrict output they often result in higher prices for consumers
• monopolies are allocatively inefficient. in a monopoly price isnt equal to marginal cost - making prices unnecicarily high
• monopolies are productively inefficient because they dont produce at the lowest point on the average cost curve
• monopolies suffer from X inefficiency. they dont have incentives to cut costs because they dont face competition
• overall, in monopolies average costs are higher than they otherwise would be
• monopolies make supernormal proffit at the expense of the consimer
• monopolies make use their market power to pay lower prices to suppliers
• monopolies may suffer from diseconomies of scale. if they are to big they may produce too much resulting in higher average costs
• the lack of competion faced by monopolies may result in poor product quality due to minimal pressure to innovate
• monopolies can take advantage of economies of scale which may allow a benevolent monopoly to charge lower prices and have greater output than under a competative market
• a natural monopoly is where it is more efficient to have one firm producing all the goods rather than many firms competing with each other
• in monopolies abnormal proffit can be made in the long run because of the fact that there are too many barriers to entry for competiton to arrise
• monopolies may not always want to maximise proffit. they may want to maximise sales, revenue or market share
• principle agent theory - the principle is the shareholder and the agent is the manager who actually runs the firm
• under principle agent theory there may be a divorce in shareholder interests and managerial interests causing firms to have non-proffit maximising objectives
• revenue maximisation occurs when marginal revenue (MR) = 0
• sales max (the point at which the highest output is made without a loss) occurs when average revenue = average cost (AR=AC)
• price discrimination - firms charge different prices to different consumers for the same good
• the conditions for price discrimination: downward sloping demand curve, sufficient price making power, firms must be able to identify and separate different consumer groups, must be able to prevent arbarage
• the end game of price discrimination is to dominate the market
• harms of price discrimination: most consumers will pay more than marginal costs = exploitation, the consumer surplus is extracted and turned into producer surplus, can be used as limit pricing to block competitors
• preditory pricing - when a new firm enters the market and sets its prices very low to force out competition
• price discrimination benifits: cross subsdidisation, using spare capacity, bringing new consumers into a market, using proffit for research
• first degree price discrimination takes place when there is bartering between buyers and sellers
• second degree price discrimination - involves buisesses selling of a product deemed to be surplus capacity at a lower price
• oligopoly - a market in which there are a small number of dominant firms. they are not pure monopolies but they do possess monopoly power
• perfect oligopoly - firms sell a uniform product
• imperfect oligopoly - firms sell diferentiated and imperfect substitutes
• competitive oligopoly - rival firms are interdependant (they must take into account other firms reactions when forming a stratergy)
• characteristics of an oligiopoly - market dominated by a few large firms, high market concentration ratio, each firm supplies branded products, barriers to entry and exit exist, interdependant strategic decisions made by firms