Competition and Monopoly The impact of market structure

Competitive markets have a large numbers of sellers so… Prices…. Quality will… There will be a greater variety of products because… The best production systems will develop because… Businesses will be customer focussed so… Poor competitors will…

A large number of buyers helps the market because… Buyers will act rationally and choose…. New improved products…. Old out dated products…. Popular products attract investment and so… Consumers have power to demand things they like this signals to… Scarce products will increase in price so…

Interesting questions Easy Why do you think the government tries to promote competitive markets? Medium How does economies of scale fit in with competition? Hard What has the internet done to competition in markets? 3 things Are there any down sides to competition?

How many firms? Locate these on your scale line Perfect competition, monopoly, oligopoly, monopolistic competition, duopoly 2. Identify which are imperfectly competitive markets Milk from a dairy farm, the Royal Mail, Microsoft and Apple, DIY stores, Fashion retail. 3. Divide your page into 2, group these under more or less competitive Price maker, price taker, large market power, little market power, more efficient market, less efficient market, high barriers to entry, low barriers to entry, more incentive to reduce cost and price, less incentive to reduce cost and price

Types of Monopoly 1. Theoretical monopoly is said to exist in a situation where there is only one supplier. 2. The governments working definition a legal monopoly is a business with 25% market share. 3. A Natural monopoly is a case where it would be inefficient to have competing firms in the same market eg 2 post boxes on every street, 2 sets of water pipes in Cumbria.

Tesco – what’s the story? The nations favourite supermarket had a market share of 31% in 2007. In 2003 the competition watchdog used a ‘monopoly power’ to refuse Tesco and Asda’s bids for Safeway. By 2014 Tesco’s share had shrunk to 28% and in a market growing by 2.2% sales were falling. Morrison’s share was also down from 12% to 11% and experiences 3.2% fall in sales Sainsbury’s held on to sales and market share at 17%. Waitrose also does well with 3.6% growth in sales increasing share to 5% What happened?

Supermarket market gets more competitive! The oligopoly held by Tesco Asda Morrisons, Waitrose and Sainsbury had allowed strong profits and gave the authorities concern Aldi has seen sales grow 33.5% in 2014 and Lidl likewise saw a 20% gain. Although they are still only 4.8% and 3.6% respectively their growth has changed the market in the UK. So this oligopolistic market has become more competitive and profits are now being squeezed.

Barriers to entry Dominant or monopolistic firms tend to exist where there are barriers to entry ie….. High set up costs prevent entrants because… eg Brand loyalty can be a barrier because….eg Anti competitive practice eg collusion, destroyer pricing, price fixing all prevent new businesses as… Legal barriers such as licencing, patents and copyright help protect the strongest businesses because they… eg…

Monopoly and efficiency Productive efficiency – when a firm is producing at the lowest average cost. Which type of firm does this? It is debatable? C*q* The _______________firm has an incentive to reduce costs to MES C1q1 The _________firm has no incentive to reduce costs and is therefore p_______i______ On the other hand it could be argued……

Allocative efficiency – when a firm is producing at a level which maximises consumer welfare The consumer surplus when the market is operating freely is _____ The consumer surplus when a monopolist increases price to profit maximise is ____ ________ therefore are allocatively less efficient than __________

Any Benefits of monopolies? Economies of Scale As we noted – a monopolist might be the only market structure which allows a firm to achieve the scale required for lowest LRAC. In this case it will be more efficient than a firm that competes – productively or allocatively? Dynamic Efficiency – some argue that only monopolies can earn the profit required for investment in the industry. SO in the long run will provide customers with better goods and services and therefore more welfare. Eg Microsoft? Do you agree? Natural Monopoly – are often used as a case for state organised or regulated monopolies (Nationalisation) because… High set up costs of infrastructure mean…. Allocative efficiency would be less because…. Productive efficiency would be less because…

The Competition and Markets Authority decide- fair or unfair competition? The government has a tiered response to monopoly power CMA can prevent a take over when market share is above 25% Industries may be regulated by a ‘watch dog’ Eg Ofgem, Ofsted, ofwat, Financial Conduct Authority 3. Nationalisation – After the second world war the government took charge of many industries BT, BG, BA, BS, NCB all privatised by Mrs Thatcher’s government

How can price controls keep the market efficient How can price controls keep the market efficient? In this situation the monopolist will charge……?