Competitive and concentrated markets 3.1.4

• What is a market structure?

  The number and size of firms within a market for a particular good or service, and the extent to which they compete with one another
• Factors to consider when distinguishing between markets:

  -number of firms in the market

  -market share of largest firms

  -nature of costs incurred by firms in the market

  -nature of sales revenue earned by firms

  -sales revenue earned

  -ease of access to info

  -product differentiation
• Concentration


  The proportion of market share that's held by a few dominant firms
• What are the key assumptions of perfect competition?

  1. Homogenous products (perfect substitutes)

  2. Equal access to all factors of production

  3. Many buyers and sellers

  4. Sellers act independently

  5. No barriers of entry

  6. Perfectly elastic demand

  7. Perfect information
• What is perfect competition?

  An ideal and theoretical market structure
• Examples of perfect competition?

  — Sports bets on a race course

  — Flower sellers at wholesale market
• What are price takers?

  Firms that can't influence the price of the product they produce

  
  

  — in perfect competition firms are price takers, this is because they must accept the market price of their product —-> they can't charge more or less of the market price.
• What are the steps to go from short run to long run in perfect competition?

  1. Short run supernormal profits attract new firms into the market (they can do this because there's no barriers to entry)

  
  

  2. There's then a shift in supply, this means price drops from p1 to p2,

  
  

  3. Because these new firms cause the price to drop, firms must accept prevailing/dropping market price this is because they're price takers

  
  

  4. This causes a downwards shift in the AR=MR=D line

  
  

  Because there's more firms in the market, there's more competition, this means the supernormal profits of existing firms in the long run can only make normal profits now
• What does perfect competition lead to?

  Efficient allocation of resources
• In the long run, where do perfectly competitive markets produce?

  They produce at the lowest point on the average cost curve

  
  

  ——>Any firms not producing at the lowest AC will lose its market share to rival firms who can produce the same product more cheaply

  
  

  As a result, highly competitive markets help to achieve productive efficiency.
• When does allocative efficiency occur I perfect competition?

  When ———-> price=marginal cost
• Why does allocative efficiency occur at P=MC

  Consumers can maximise utility,

  
  

  this because the price they pay = cost of producing that last additional unit
• Why do firms produce at allocative efficiency?

  This is because its a highly competitive market, therefore they must produce what is demanded by consumers otherwise they'll lose market share

  
  

  ——> as a result, this creates consumer sovereignty (the power to influence what firms produce)
• Criticisms of a perfect competition model:

  — Information Asymmetries (perfect information is rarely a reality)

  
  

  — Externalities (unaccounted for costs or benefits e.g pollution)

  
  

  — Dynamic Considerations (focuses on static equilibrium- real markets are dynamic which innovation and changing preferences disrupting ideal state)
• What is a monopoly?

  A pure monopoly exists when there's a single supplier of a good or service, therefore meaning they have 100% market share
• Characteristics of monopolies:


  — Only one sole seller

  — Price makers

  — Profit maximisation (supernormal profit in long and short run)

  — High barriers to entry

  — Imperfect information

  — Heterogenous goods (no close substitutes)

  — Price discrimination
• What is monopoly power?

  The power of a firm to act as a price maker and set prices and production levels without worrying about competition from other firms.
• What is the downside of monopoly power for consumers?

  Consumers pay higher prices and have less choice since there's no competition to keep prices in check
• Key ideas to understand monopolies:

  — They have price making power which means that there is a downwards slope in the AR and MR curve

  
  

  — They can set price or quantity but not both

  
  

  — barriers of entry helps limit competition meaning they can maintain their supernormal profits

  
  

  — Profit maximisation is assumed, however the daily conducts of firms with market power is often different especially in an oligopoly .

  ——>this leads to the idea that some firms may not seek to profit maximise as their aims but to maintain existing market share
• What is a Working (Legal) Monopoly?

  A firm that holds over 25% market share and is therefore considered a monopoly by the CMA
• What is an example of a Working Monopoly?

  Tesco, this is because they hold 27.7% market share (from June 24) of the total UK grocery market

  
  

  ——> the CMA monitors them closely to make sure their market power doesn't harm customers
• What are natural monopolies?

  A monopoly that occurs through natural conditions in a free market, it occurs when the most efficient number of firms in the industry is one.

  
  

  ——> they have high fixed costs , therefore its impractical and inefficient to have more than one firm producing the good.
• Examples of natural monopoles:

  — Railway infrastructure

  — Gas pipe network

  — Electricity grid

  — National broadband network/phone lines
• What is concentration ratio?

  The combined market share of the top leading firms in a defined market

  (typically the top 3 to 5 firms)
• What do concentration ratios help with?

  Provides insight into how market power is distributed among firms in an industry and whether its highly concentrated in a few large firms or more dispersed among smaller firms

  
  

  ——> usually expressed as a percentage or ratio
• What are the advantages of Monopoly Power?

  — Profits can be used to fund extra capital investment and research

  
  

  — Natural monopoly's benefit from economies of scale

  
  

  — Domestic monopoly faces global competition.

  ——-> monopolies with economies of scale are needed to compete successfully on price and cost in international markets.

  
  

  — Monopolistic firms can be regulated via an industry regulator acting as a proxy consumer to keep prices down and standards of service high

  
  

  — Price discrimination helps some lower income families (some services might be provided free to consumers)
• What are the main business objectives?

  - profit maximisation

  
  

  - sales revenue maximisation

  
  

  - growth and market share maximisation

  
  

  - satisficing objective

  
  

  -improving quality

  
  

  -survival

  
  

  -environmental and social obligations

  
  

  -public interest objectives
• What is Market share?

  Percentage of sales held by a firm in a market
• Where is Profit maximisation?

  When MR=MC

  
  

  ——->this is where each extra unit gives no extra loss or revenue
• What is the profit maximisation rule?

  firms should produce additional outputs as long as MR exceeds the MC

  
  

  This means:

  if MR>MC, then selling an extra unit will increase profit.

  If MR<MC, the selling an extra unit will decrease profit.
• Where is revenue maximisation?

  Where MR=0

  
  

  —-> at this point each extra unit sold generates no extra revenue
• What is sales maximisation?

  Generating the highest level of sales within a given period.

  
  

  (Perhaps, part of a wider objective of growing market share and/or building a brand).
• Where is sales maximisation?

  When AC=AR (normal profit)
• Examples of environmental and social obligations

  — reducing carbon emissions (aiming to become carbon neutral)

  
  

  — minimising waste and promoting recycling, this improves sustainability.

  
  

  — Engaging with local communities through initiatives like funding education programmes building infrastructure etc...

  
  

  — Philanthropy : Businesses contributing to things like charities and social causes
• What are stakeholders?


  individuals or groups who can affect or are affected by the actions of a firm
• What are some examples of stakeholders?

  -Shareholders

  -Managers

  -Employees

  -Suppliers

  -Customers
• What is consumer surplus?

  when the price that consumers pay for a good or service is less than the price they're willing to pay
• What is the divorce of ownership and control?

  when the owners of a firm (shareholders) are not the same as the managers who make the day to day decisions
• Why is divorce of ownership a problem?

  Shareholders prioritise high dividends (the money paid to them) and stock price appreciation(the increase in the price of stocks over time) .

  
  

  ——> this may be achieved through short term profit maximisation.
• What are the consequences of divorce of ownership from control?

  1. Short-terminism

  2. The principle agent problem