* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download 8. Efficiencies and Market Structures
Survey
Document related concepts
Resource-based view wikipedia , lookup
Market analysis wikipedia , lookup
Marketing channel wikipedia , lookup
Global marketing wikipedia , lookup
Darknet market wikipedia , lookup
Grey market wikipedia , lookup
Product planning wikipedia , lookup
Market penetration wikipedia , lookup
Service parts pricing wikipedia , lookup
Segmenting-targeting-positioning wikipedia , lookup
Price discrimination wikipedia , lookup
Dumping (pricing policy) wikipedia , lookup
Pricing strategies wikipedia , lookup
Marketing strategy wikipedia , lookup
First-mover advantage wikipedia , lookup
Transcript
Hand-out 8: Efficiencies and Market Structures Specification -The concept of an efficient market structure in terms of costs, prices, output and profit -The models of market structure: monopoly; oligopoly; monopolistic competition. Key Concepts You need to be able to: Define the different efficiencies and apply to 3 market structures Explain the impact of competition / concentration on efficiencies Draw each of the market structures diagrammatically Explain each market structure diagram analytically Evaluate the impact that more or less competition will have on a market in terms of efficiency Allocative Efficiency Allocative efficiency occurs when consumers pay a market price that reflects the private marginal cost of production. The condition for allocative efficiency for a firm is to produce an output where marginal cost, MC, just equals price, P. We can show it on a diagram where MC = AR. Productive Efficiency Productive efficiency occurs when a firm is combining resources in such a way as to produce a given output at the lowest possible average total cost. Costs will be minimised at the lowest point on a firm's short run average total cost curve. This also means that AC = MC, because MC always cuts ATC at the lowest point on the ATC curve. Dynamic Efficiency The concept of dynamic efficiency is commonly associated with the Austrian Economist Joseph Schumpeter and means technological progressiveness and innovation. Firms that are highly protected are more likely to undertake risky innovation, and generate dynamic efficiency. Firms can reinvest supernormal profits to cement their dominant market position. Firms can benefit from two types of innovation: 1. Process innovation occurs when new production techniques are applied to an existing product. For example, this is common in the production of motor vehicles with firms constantly looking to develop new methods and production processes. 2. Product innovation occurs when firms generate new or improved products. For example, this is common in many consumer product markets, including electronics and communications. X Efficiency X efficiency can be applied specifically to situations where there is more or less motivation of management to maximise output, or not. X efficiency occurs when the output of firms, from a given amount of input, is the greatest it can be. It is likely to arise when firms operate in highly competitive markets where managers are motivated to produce as much as possible. Monopoly A pure monopoly is a single supplier in a market. For the purposes of regulation, monopoly power exists when a single firm controls 25% or more of a particular market. Monopolies can maintain super-normal profits in the long run. Monopolies are profit maximisers and produce where MC = MR. Monopolies are the single sellers of a product, There is a lack of close substitute goods Hence in a pure monopoly there is zero competition. At profit maximisation, MC = MR, and output is Q and price P. Given that price (AR) is above ATC at Q, supernormal profits are possible (area PABC). High barriers to entry and exit prevent competitors from entering the market They are not allocatively efficient (production is not where MC = AR / P) They are not productively efficient (Q is lower than where MC = AC) Not X efficient There is an argument to say that monopolies may be dynamically efficient Evaluation of monopolies The advantages of monopolies: Monopolies can be defended on the following grounds: 1. They can benefit from economies of scale, and may be ‘natural’ monopolies, so it may be argued that it is best for them to remain monopolies to avoid the wasteful duplication of infrastructure that would happen if new firms were encouraged to build their own infrastructure. 2. Domestic monopolies can become dominant in their own territory and then penetrate overseas markets, earning a country valuable export revenues. This is certainly the case with Microsoft. 3. According to Austrian economist Joseph Schumpeter, inefficient firms, including monopolies, would eventually be replaced by more efficient and effective firms through a process called creative destruction. 4. It has been consistently argued by some economists that monopoly power is required to generate dynamic efficiency, that is, technological progressiveness. This is because: High profit levels boost investment in R&D. Innovation is more likely with large enterprises and this innovation can lead to lower costs than in competitive markets. A firm needs a dominant position to bear the risks associated with innovation Firms need to be able to protect their intellectual property by establishing barriers to entry; otherwise, there will be a free rider problem. Why spend large sums on R&D if ideas or designs are instantly copied by rivals who have not allocated funds to R&D? However, monopolies are protected from competition by barriers to entry and this will generate high levels of supernormal profits. If some of these profits are invested in new technology, costs are reduced via process innovation. This makes the monopolist’s supply curve to the right of the industry supply curve. The result is lower price and higher output in the long run. The disadvantages of monopoly to the consumer: Monopolies can be criticised because of their potential negative effects on the consumer, including: 1. Restricting output onto the market. 2. Charging a higher price than in a more competitive market. 3. Reducing consumer surplus and economic welfare. 4. Restricting choice for consumers. 5. Reducing consumer sovereignty. Oligopoly An oligopoly is a market structure in which a few firms dominate. When a market is shared between a few firms, it is said to be highly concentrated. Interdependence: Firms that are interdependent cannot act independently of each other. A firm operating in a market with just a few competitors must take the potential reaction of its closest rivals into account when making its own decisions. Barriers to entry: Oligopolies and monopolies frequently maintain their position of dominance in a market might because it is too costly or difficult for potential rivals to enter the market. Collusion: Another key feature of oligopolistic markets is that firms may attempt to collude, rather than compete. If colluding, participants act like a monopoly and can enjoy the benefits of higher profits over the long term. Competition: When competing, oligopolists prefer non-price competition in order to avoid price wars. A price reduction may achieve strategic benefits, such as gaining market share, or deterring entry, but the danger is that rivals will simply reduce their prices in response. Firms face a kinked demand curve Price rigidity/stickiness Non-price competition being used Evaluation of Oligopolies: Oligopolies are significant because they generate a considerable share of the UK’s national income, and they dominate many sectors of the UK economy. The disadvantages of oligopolies High concentration reduces consumer choice. Cartel-like behaviour reduces competition and can lead to higher prices and reduced output. Firms can be prevented from entering a market because of deliberate barriers to entry. There is a potential loss of economic welfare. Oligopolists tend to be allocatively and productively inefficient. The advantages of oligopolies Oligopolies may adopt a highly competitive strategy, in which case they can generate similar benefits to more competitive market structures, such as lower prices. Even though there are a few firms, making the market uncompetitive, their behaviour may be highly competitive. Oligopolists may be dynamically efficient in terms of innovation and new product and process development. The super-normal profits they generate may be used to innovate, in which case the consumer may gain. Price stability may bring advantages to consumers and the macro-economy because it helps consumers plan ahead and stabilises their expenditure, which may help stabilise the trade cycle. Monopolistic Competition The model of monopolistic competition describes a common market structure in which firms have many competitors, but each one sells a slightly different product. Many small businesses operate under conditions of monopolistic competition, including independently owned and operated high-street stores and restaurants. In the case of restaurants, each one offers something different and possesses an element of uniqueness, but all are essentially competing for the same customers. Monopolistically competitive markets exhibit the following characteristics: 1. Each firm makes independent decisions about price and output, based on its product, its market, and its costs of production. 2. Knowledge is widely spread between participants, but it is unlikely to be perfect. 3. There is freedom to enter or leave the market, as there are no major barriers to entry or exit. 4. A central feature of monopolistic competition is that products are differentiated. There are four main types of differentiation: Physical product differentiation, Marketing differentiation Human capital differentiation, Differentiation through distribution, including distribution 5. Firms are price makers and are faced with a downward sloping demand curve. Because each firm makes a unique product, it can charge a higher or lower price than its rivals. The firm can set its own price and does not have to ‘take' it from the industry as a whole. 6. Firms operating under monopolistic competition usually have to engage in advertising. 7. Monopolistically competitive firms are assumed to be profit maximisers 8. There are usually a large numbers of independent firms competing in the market. Diagram: In the short run supernormal profits are possible, but in the long run new firms are attracted into the industry, because of low barriers to entry, good knowledge and an opportunity to differentiate. The diagram is the same as a monopoly. Monopolistic competition in the long run Super-normal profits attract in new entrants, which shifts the demand curve for existing firm to the left. New entrants continue until only normal profit is available. At this point, firms have reached their long run equilibrium. Clearly, the firm benefits most when it is in its short run and will try to stay in the short run by innovating, and further product differentiation. Evaluation Monopolistic competition can bring the following advantages: There are no significant barriers to entry; therefore markets are relatively contestable. Differentiation creates diversity, choice and utility. The market is more efficient than monopoly but less efficient than perfect competition - less allocatively and less productively efficient. However, they may be dynamically efficient, innovative in terms of new production processes or new products. There may be the following disadvantages: The disadvantages of monopolistic competition: Some differentiation does not create utility but generates unnecessary waste, such as excess packaging. Advertising may also be considered wasteful, though most is informative rather than persuasive. As the diagram illustrates, assuming profit maximisation, there is allocative inefficiency in both the long and short run. This is because price is above marginal cost in both cases. In the long run the firm is less allocatively inefficient, but it is still inefficient. There is a tendency for excess capacity because firms can never fully exploit their fixed factors because mass production is difficult. This means they are productively inefficient in both the long and short run. However, this is may be outweighed by the advantages of diversity and choice. Past Paper Questions Topic The concept of an efficient market structure in terms of costs, prices, output and profit. The models of market structure: monopoly; oligopoly; monopolistic competition. Questions Discuss the extent to which a monopoly provider of transport will always increase economic efficiency. (20 marks) (Jan 2010) Analyse, using a diagram, the market structure of a monopoly. (15 marks) (June 2010) Analyse the difference between the short run and long run equilibrium of the firm in monopolistic competition. (15 marks) (Jan 2011) Analyse the main characteristics of an oligopolistic market. (15 marks) (Jan 2012) Analyse the characteristics of monopolistic competition. (15 marks) (June 2012)