PC+&+Monopoly

This section of the syllabus is formally referred to as "Market Structures" in the Moynihan and Titley textbook. (pages 138-144). Be clear though that in the syllabus there is only reference to Perfect competition and Monopoly, and no reference to Oligopoly or Monopolistic Competition, although I think it is important to at least know what these market structures are.  The assumption is that the level of competition in an industry will affect the behaviour of firms in that industry.

Now watch this short video to explain the different market structures

media type="file" key="market structures.swf" width="360" height="270"

Perfect Competition: This is where there are many firms in the industry. Each firm has a very small market share, so small infact that they have no ability to influence the price at which they sell the product. The price is determined by the world market and the firm has to sell it at that "Market price". They are "Price Takers". Not only is this due to the amount of competition but also firms are selling an identical product.  Consumers often benefit from competition in that prices tend to be lower the greater level of competition.

Monopolies: In theory a Monopoly is where there is only one firm in the industry. In reality there are few industries like this. In practice we would call a firm a monopoly if it dominates the market. If it had say a 90% market share we would call this firm a monopoly.  Monopolies charge high prices, because they can! They want to make high profits. They can charge high prices because consumers if they want the product have no choice- they can't go elsewhere. Monopolies often reduce Supply on purpose to raise the price (remember S and D curves)



Problems of monopoly


 *  Consumers may pay higher prices due to the lack of competition (monopolies often reduce supply to keep prices high)
 *  Consumers may have less choice
 *  Firms may not be very efficient with their resources because there is no need to reduce costs. Equally levels of service may get worse because of complacency due to the lack of competition.

Benefits of monopoly
 * The firm should make higher profit. The firm may use these to invest in new products or improve existing products.
 * Monopolies due to their size can benefit from economies of scale. If these are very large it may mean that they can pass these lower average costs onto consumers in the form of lower prices.

 How do firms remain monopolies <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Barriers to entry are factors that prevent a new firm from entering the industry. Some examples are:
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Economies of scale: Larger firms generally have lower costs per unit. They can cut their prices to force out competition
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Large expenditure on advertising by existing firms may make it impossible for new small firms to compete and enter the industry.
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Legal barriers such as patents and copyright.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">TASK:Now look up barriers to entry in the textbook and make additional notes. Then attempt exercise 3 (make rough notes)

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Oligopolies and Cartel. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> An oligopoly is an industry where a few large firms dominate the market. Sometimes they join together to form a cartel. A cartel causes similar problems to a monopoly. In this case they could agree to keep the price at a high level in order to each make a healthy profit. They may eventually be investigated and punished by the Government if their actions are against the interests of consumers. Note that Cartels are illegal in most countries.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> Typical assessment question: <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">c What is meant by barriers to entry in an industry? <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">d In what ways could a monopoly be (a) more efficient (b) less efficient than several firms competing against each other.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Extension Activity

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">What price (High or low) would the following firms charge and why? <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px; line-height: 0px; overflow: hidden;">