Comparison of Market Structures

Long-run Equilibrium In the long-run, only monopolists can earn supernormal profits because they have significant barriers to entry. Monopolistic competitors and Pure competitors will achieve only normal profits in the long-run. Profits will be competed away by new entrants and attrition reduces losses over the long-run

Efficiency Pure competition is the only market structure that achieves both productive and allocative efficiency in the long-run. Productive Efficiency: the production of a good in the least costly way (P = Min ATC) Allocative Efficiency: the mix of goods and services produced is the most highly valued by society (P = MC or MB = MC)

Monopolistic competition and monopoly achieve neither allocative nor productive efficiency P > MC (Allocative inefficiency) P > Min ATC (Productive inefficiency) Both market structures lead to a welfare loss for society

Monopolistic producers gain at the expense of consumers Consumer surplus shrinks from A to V in the monopoly Producer surplus expands from B under perfect competition to W+Y under the monopoly Triangle X represents the welfare loss to the consumer and Z the welfare loss to the producer (loss of surplus for producers)

Production under monopoly benefits the welfare of a single producer This comes at the expense of, Consumers who pay a higher price and receive a lower equilibrium quantity Other producers that would otherwise exist in a more competitive market The monopolization of a particular industry may result in a loss of the incentives that make markets efficient Lack of innovation: monopoly firms are unlikely to innovate to improve product quality or to reduce costs Incentive to avoid competition: monopolies may choose to preserve their market share by using aggressive tactics or lobbying

Product Diversity and Innovation The main advantage of monopolistic competition is product differentiation This provides consumers with a wider range of choices than perfectly competitive firms There are also several advantages of monopoly, Economies of scale: cost-savings of economies of scale are more likely under a monopoly Monopolistic competitors are unlikely to grow large enough to see these benefits In some cases, high fixed costs of production mean that lower costs can only be achieved through massive runs of output

Research and Development: while a monopolist has little incentive to invest in R & D it has a greater capacity to do so because of its long-run profits These firms may yield even greater profits with new products and services They may be able to entrench their position with even more significant barriers to entry

Summary of Market Structures Market Model Characteristic Pure Competition Monopolistic Competition Oligopoly Pure Monopoly Demand curve Horizontal Downward-sloping Kinked Marginal revenue curve Discontinuous Output rule MR = MC Price in the short-run P = MC P > or < or = AC P > MC P > or < or = AC Profit in the short-run +/ - / 0 Price in the long-run P = AC P > or = AC Profit in the long-run (Normal Profit) +/0 + (Supernormal)