market structures

• N- firm concentration ration measures:

  How much market share the N largest firm in market share
• Monopoly characteristics:

  • market share over 25%
  • one firm dominates
  • MC=MR
  • high barriers to entry
• Barriers to entry

  1. Legal barriers ( copyrights)
  2. Sunk costs (advertising)
• Barriers to entry ( sunk costs)

  Cannot be recovered, increase cost of failure, deter new firms.
• Internal economies of scale

  new firms cannot compete with low prices
• Brand loyalty:


  Strong branding from incumbent firms makes it hard for new firms to enter
• Incumbent firm:


  Firm already in the market
• Productive efficiency 


  MC=AC
• monopoly 


  p
• Monopoly 


  P- productively inefficient

  A-allocative inefficient

  D-dynamic inefficient (possibly)
• Natural monopoly: 


  A firm is naturally most efficient if only one firm is in the market
• Example of Natural monopoly

  Thames water/ national railways
• natural monopolies:


  High sunk cost

  High economies of scale
• Price discrimination


  High income - inelastic

  Low income- elastic
• Example of price discrimination 


  TFL, bus fares
• Price discrimination conditions

  • market power
  • information
  • limit reselling
• Pure monopoly 


  One large firm dominates the market
• monopolies are price makers
• Perfect competition:

  • many small buyers and sellers
  • no barriers to entry
  • homogenous goods
  • perfect information
• Perfectly competitively firm = perfectly elastic demand curve = price takers
• Perfect competition:


  long run: no barriers to entry, new firms enter increasing supply, decreasing AR till it reaches AC then no supernormal profit - no new firms will enter market
• Perfect competition


  P- efficient

  A -efficient

  D - can be
• Short run perfect competition:

  • leave market
  • price increases
  • no supernormal profit
  • normal profit
• short-run same as profit max but normal profit in long run
• dis of monopoly

  • high prices
  • inequality
  • DEOS
  • lack of choice
• adv of monopoly

  • EOS
  • supernormal profit
  • regulation
• monopolistic competition 


  minimum loses in short run
• Monopolistic competition


  P- inefficient

  A-inefficient

  D- possible
• Oligopoly

  • few large sellers
• Oligopoly

  • few large sellers
  • high barriers
  • differentiated goods
  • interdependence
• Overt collusion


  formal agreement between firms hidden due to the CMA shutting it down
• whistle-blowing example of overt collusion
• Tacit collusion:


  Unspoken agreement between firms

  • same prices
• Price leadership = Tacit collusion
• Pricing strategy = over collusion
• supernormal profit is possible for oligopoly in long run
• GAINERS Price war:

  • consumer surplus
  • gain market share
• lOSERS in price war:

  • lose profit in all places ( supply, firm, shareholders)
• oligopoly may use


  non - price competition ie advertising marketing, loyal schemes
• The kinked demand curve explains

  Stable prices