Zusammenfassung der Ressource
3) Perfect Competition, Imperfectly
Competitive Markets & Monopoly
- Contestable &
Non-Contestable Markets
- Contestable Market; A market in which the potential
exists for news firms to enter the market. Perfectly
contestable market has no entry/exit barriers + no
sunk costs. Incumbent firms & new firms have access
to same level of technology
- Assumptions
- Firms are short run profit maximisers,
producing where MC=MR
- Number of firms in industry can
vary from one to many.
- No single firm having big share of market
- Firms compete & do not collude. Freedom of entry/exit
- In contestable market theory, monopoly
power is not dependant upon the number of
firms/concentration ratio's but the difficulty
of which new firms can enter the market
- For a market to
be perfectly
contestable there
must be no
barriers to
entry/exit hence
no sunk costs.
- Sunk Costs;
Costs incurred
when entering
a market that
are
irrecoverable
- Because of ease of entry
making a market contestable
the threat of hit & run
competition is sufficient to keep
prices & profits at lowest levels
- Hit & Run Competition;
Occurs when a new entrant
can 'hit' the market, make
profits. then 'run; given
no/low exit barriers
- Objectives of
Firms
- Other objectives: 1) Providing good
quality & service especially
important for socially minded
owners/managers 2) Growth
maximisation through achieving
economies of scale. Growth can
mean a gain in monopoly
power/managerial prestige 3)
Survial = fear of losses & closure,
survial being a primary objective 4)
Revenue Maximisation occurs
through the level of output at
which managerial revenue is zero
through managerial pay linked to
revenue rather than profit 5)
Satisficing Principle = Satisfactory
outcome may help to resolve the
conflict between manager &
shareholders objectives,
attempting to satisfice aspirations
of many groups for a firm means
compromise & achieving minimum
rather than maximum targets
- Profit Maximisation
- Profit maximisation,
the firm produces the
level of output that TR -
TC is maximised
- MR = MC means a firm's profits are greatest
when the addition to sales revenue from last
unit sold equals addition total cost from
production of last unit of output
- MR > MC Profits rise when output increases
- MR < MC Profits rise when output decreases
- If succeeds in producing & selling the output
yielding the biggest possible profit, no incentive to
change level of output
- Firms in all market structures can only maximise profit when MR = MC
- Divorce of Ownership From
Control
- Divorce of Ownership From Control; The owners & those who manage the firm are
different groups with different objectives
- Conflicts may occur between the
agents & principals when the
incentives which effect their
behaviour are not the same. Agent
does not usually receive the full
benefit of their actions, destroys the
incentive for the agent to put same
effort into tasks
- Reasons why an agent can
get away with not acting in
best interest of principle 1)
cost of sacking/punishment is
too high relative at any
benefit 2) information
asymmetry, the agent knows
more than the principle
- Various methods
can be used to
realign the
incentives facing
the owners of
businesses &
managers, Profit
related pay, giving
company shares
etc...
- Oligopoly
- Concentration Ratio; Measures
the Market Share of the biggest
firms in the market
- Good indicator of an
oligopolistic market.
Measures the market
structure % of the
biggest firms
- Concentration
Ratio of 5=80,
largest five firms
possess 80% of
market share
while 20% is
smaller firms
- • Competitive
oligopoly exists
when rival firms
are
interdependent
in the sense
they take into
account of other
firms reactions
when forming a
market strategy,
as result
uncertainty
occurs can
never be sure
how rivals react,
they are
non-collusive
- Cartels
- Collusive agreements to fix
prices, restrict output & deter
entry of new firms
- Cartel agreements
enable inefficient
firms to stay in
business, while
more efficient
members enjoy
abnormal profits.
- Some forms of co-operation or cartel may be justifiable, including
joint product development i.e. Ford & Volkswagen + improving health
& safety or to ensure product & labour standards are maintained.
- Kinked Demand Schedule
- Developed by Paul Sweezy in the late 1930's, model
assumes there will be asymmetric reaction
- Criticisms:
1. Doesn’t explain
where market
clearing prices
come from
2. Theory only
deals with price
competition
3. No guarantee
that firms will
react the same
- Cartel agreements
ensure the
protection of
inefficient firms &
to enjoy an easy
life protected from
competition
- Price leadership
can occur in an
oligopoly when
a firm becomes
market leader
& other firms in
the industry
follow its
pricing example
- Price Leadership;
Setting of prices
in a market
usually y a
dominant firm
which other
firms follow
known as
benchmark
- Members of
a cartel
often fix the
prices that
all members
of cartel
charge,
these price
agreements
- Price Agreement; An
agreement between
a firm and other
firms e.g. supplier
or customers
regarding the
pricing of a
good/service
- Price wars take
place both in
monopolistic
competition &
oligopoly which
may be started
accidentally or
deliberate to
damage
competitors
- Price Wars;
Occurs when
rival firms
continuously
lower price to
undercut each
other
- Another
feature of
oligopoly is
the desire to
keep other
firms out of
industry, so
entry barriers
emerge
- Firms in oligopolistic
market are observed to
keep prices at a
constant level this
known as price rigidity,
as prices are relatively
stable (Sticky Prices)
- Most industries in
the UK are
oligopolistic since
dominated by few
firms
- Oligopolstic Firms also compete using non price competition
- Marketing
strategy
used to
distinguish
between
firm's
products &
services
- Likely to increase expenditure for firms e.g. marketing as trying to promote its own product above competition
- e.g. a supermarket issuing loyalty cards is a form of non price competition
- Price Discrimination
- Both monopolists & oligopolists may be in
a position to price discriminate
- Firms who sell a product
at one price realise that
their profit could
increase if they could
appropriate more
consumer surplus
- Conditions
- The resale can be prevented from
one buyer to another
- Different elasticity's of demand some buyers
prepared to pay more than others
- The vendor can control whatever is
offered & no others firms present that can
sell at lower price in the area
- Methods
- Age
- Time
- Geographical
- Types
- First Degree
- Known as perfect price
discrimination, each unit
sold at maximum price
- Second
Degree
- Consumers are charged different
prices for blocks of consumption
- Third
Degree
- Same product/service sold
at different prices to
different consumers in
different markets
- Advantages
- Price Discrimination allows firms to
increase profits by taking away
consumer surplus and converting into
abnormal profit
- Allows firms to use up
spare capacity
- Monopoly & Monopoly
Power
- Disadvantages: Market
Failure & Resource
Allocation: Output falls,
price rises & under
consumption of the good
the monopoly produces
- Advantages:
Economies of scale:
Because of limited
market size, there is
insufficient room for
more than one firm
benefitting from
economies of scale.
- By assumption monopoly
able to produce output Q1
at a LRAC of AC1, whereas
competitive firms are
unable to produce this
output without destroying
the competitive market
- Monopoly & Economic Efficiency
- Assuming an
absence of
economies of
scale,
monopoly
equilibrium is
productively &
allocatively
effiecient
- Monopoly is
also
allocatively
inefficient
since profit
maximising
price is above
marginal cost
- Advantages: Dynamic
Efficiency:
Improvements in
productive efficiency
especially resulting
from technical
progress & innovation.
Monopolies can make
abnormal profits in
short & long run. This
profit invested in R&D
- Monopoly
is often
used in a
much
looser way
to
describe
any
market in
which
there is a
dominant
firm
- Monopoly; One firm
only in a market
- A monopoly is
protected by
barriers to entry
which prevent new
firms entering the
market to share
abnormal profit.
Barriers enable the
monopolist to
preserve abnormal
profits in long run &
short run
- Perfect Competition
- Short Run Profit Maximisation
- Each firm in a
perfectly
competitive
market
accepts the
ruling market
price, which
becomes each
firm's
average
revenue &
marginal
revenue curve
- A perfectly
competitive
firm can sell
as much as
it wishes at
the
market's
ruling price
- Lon Run Profit
Maximisation
- Too many new
firms enter the
market since
abnormal profits
can be made,
supply curve shifts
to the right. Price
falls to P1. Firms
make a loss
(Supernormal
Profits) so firms
leave market
- When firms
start leaving
the supply
curve shifts to
the left,
eventually the
price settles so
surviving firms
only make
normal profit
- Perfect Competition &
Economic Efficiency
- Productive efficiency & allocative efficiency occurs only if; 1) All the firms in market beenfit from all available economies of scale at low levels of output,
MES has to be small in relation to market size 2) Perfectly competitive Markets for all goods & services where P = MC in every market 3) No externalities
- Market Structures
- Market Structure;
the organisational &
other characteristics
of a market
- Important features of Market
Structure include; *number of firms
in market, *market share of largest
firms, *Nature of the costs incurred
by the firms, *nature of sales
revenue earned by firms, *barriers
to entry/exit, *ease of access to
information about what is going on
in market, *price-setting & product
differentiation *how buyer's
behaviour effects firms
- Distinguishing between different
market structures
- Number of Firms -
a requirement for
a firm to be
perfectly
competitive is
large number of
buyers/sellers
whilst Monopoly
there is just one
firm. In oligopoly
there are only a
few firms in the
market
- Market Entry Barriers - In the short run, where at least one factor of production is fixed (usually capital) firms cannot
enter or leave the market whatever the market structure. In the long run when all the factors of production are
variable firms can enter/leave competitive markets.
- Market Entry Barriers (2) - Pure monopoly is protected by entry barriers in long & short run, in
Oligopolistic markets there may be significant barriers in long run
- Market Entry Barriers (3) - An entry barrier is a cost of production which must be carried by a firm
that seeks to enter an industry. Not carried by businesses already in the industry. Closely related
to entry barriers are exit barriers
- Limit Pricing/Predatory Pricing - when natural barriers to market entry
low/non-existent firms already in the market use limit prices to deter new firms
entering market, firms already in the market sacrafice short run profit
maximisation with this method but instead seek to maximise long run profits
- Limit Pricing;
Prices set low
enough to make
it unprofitable
for other firms
to enter market
- Limit Pricing/Predatory Pricing (2) - Predatory pricing occurs when a firm deliberately sets prices below
costs to force new market entrants out of business, once new entrants left the market, the firm may
decide to restore prices
- Predatory Pricing; Prices set
below average cost with the
aim of forcing rival firms out
of business
- Product Differentiation - Most firms large, medium or small engage in varying degrees of
product differentiation. Firms often produce a range of relatively similar products some of
which compete with each other but others aimed at different market segments
- Product Differentiation; The marketing of
generally similar products with minor
variations or marketing of a range of
products
- Monopolistic Competition
- Monopolistic markets
resembles perfect
competition; Large
number of firms, no
barriers to entry/exit,
entry of new firms
attracted by short run
abnormal profits brings
down the price of each
firm can charge.
- Monopolistic
markets also
resemble
monopoly;
Each firm
faces a
downward
sloping
demand curve
as each firm
produces a
slightly
different
product, Each
firm's MR
curve is below
AR curve
- Short Run Profit
Maximisation
- Average revenue curve
represents demand for
goods produced by just
one firm within market
rather than demand for
the output of whole
market
- Profit Maximising
level of output, Q1
located below
point A where MC
= MR & abnormal
profits made
- Long Run Profit
Maximisation
- Absence of barriers to
entry/exit, new firms enter
causing AR curve to shift inward
- Long Run profit maximisation occurs when AR curve
touches firm's ATC curve removing abnormal profit